RSM’s M&A Insights

Unlocking value through AI-ready deals

Amid the rush to acquire and integrate artificial intelligence solutions as part of a mergers and acquisitions strategy, it is concerning that 95% of generative AI pilots at companies are failing to deliver measurable returns, according to a new report published by MIT’s NANDA initiative. This statistic suggests that many acquirers are diving into AI without clear outcomes and subsequent planning to achieve those outcomes—an especially risky move in M&A, where missteps can erode deal value and/or derail integration. 

At RSM, we’ve seen our clients’ internal AI projects go awry when AI readiness was not where it should have been. The most common issues we’ve come across include insufficient data readiness activities to enable a specific AI use case, poor organizational change management practices and a “plug and play” mentality with AI, where the processes and people surrounding an AI technology solution aren’t prepared to adopt the new AI-enhanced methods.  

The lesson we can take away from the failed AI deployments we’ve seen is that AI success requires taking a step back to define what a practical AI adoption looks like. This includes identifying the critical assumptions with each AI adoption and how it will deliver measurable benefits and return on investment before proceeding. Dealmakers should consider strategic factors such as clean data, scalable infrastructure, skilled talent, governance guardrails, cultural openness and aligned use cases. While all these factors are important, data quality and change management can be viewed as the most critical. 

Before AI, fix the data

Data is the lifeblood of AI, and in M&A, it can make or break your value-creation thesis. The RSM Middle Market AI Survey 2025 shows that data quality is the top concern for AI adopters. Before AI can deliver insights, automate processes or uncover hidden efficiencies, it needs clean, well-structured and accessible data to work with. That’s why assessing a target company’s data landscape should be a top priority during due diligence and integration. 

A thorough review should go beyond surface-level data availability to examine data quality, consistency, lineage and governance policies, as well as the technology infrastructure supporting them. Weak data practices can lead to costly surprises post-close, from delayed AI initiatives to flawed analytics that steer decisions in the wrong direction. 

Conversely, companies with strong data management capabilities provide a foundation for faster AI adoption and sharper business intelligence. By prioritizing data health early in the deal process, acquirers position themselves to accelerate AI-enabled value creation and reduce execution risk after the deal closes. 

AI success depends upon the vision, the culture and the people

AI adoption should be treated as an organizational transformation. The most sophisticated AI tools can fail if the people who use them aren’t aligned, engaged and prepared for change. Successful AI integration hinges on an awareness of organizational culture and the best path forward within it, effective training, strong change management that brings leadership, employees and stakeholders along for the journey and a clear understanding of the assumptions inherent in AI adoption—from shifting roles and processes to evolving technology and vendor needs. 

During due diligence, it’s critical to evaluate a target company’s readiness for change, assessing executive sponsorship and governance structures, as well as employee engagement and communication practices. Companies with mature change management capabilities are more likely to overcome resistance, embed AI into workflows and sustain adoption over the long term. 

Post-close, active change management becomes a value lever, accelerating time to impact and ensuring AI initiatives translate into measurable business results rather than stalled pilots or abandoned projects. 

AI readiness solutions for M&A

AI acceleration programs offer a structured program and strategic pathway for private equity sponsors and their portfolio companies to move faster and smarter with AI. Guiding organizations through discovery, analysis and continuous improvement helps assess AI readiness, surface high-ROI use cases and develop actionable deployment plans. This approach enables a consistent AI strategy across funds—supporting practical, value-driven initiatives, aligning stakeholders and tracking measurable outcomes. Leveraging technology partner programs, such as Microsoft Azure Accelerate, can reduce implementation risk and support a repeatable, scalable framework for AI adoption that unlocks value and maximizes technology ROI across the portfolio.

As the age of megadeals pauses, private equity firms are leaning into add-on strategies to drive value in today’s high-rate, tight-credit market. This edition explores how sponsors are shifting from sweeping integrations to more tactical, finance-focused approaches to enhance efficiency and accelerate ROI across their portfolios.

As add-ons dominate PE deal volume, firms shift to tactical integration

The golden age of megadeals is on pause. In today’s private equity landscape, where interest rates remain stubbornly high, and credit is tight, add-ons have become the deal of choice. They now account for nearly 75% of U.S. buyouts, according to Pitchbook, signaling a decisive shift toward incremental growth and a new playbook for integration.

But as the volume of add-ons rises, so does the complexity of managing them. Increasingly, private equity sponsors are shifting from sweeping, transformational integrations to more tactical, targeted strategies, particularly in finance and accounting, where the return on integration investment is clearest and quickest.

Why add-ons are dominating

Add-ons offer a compelling path to scale within existing platforms, sidestepping the risk and capital intensity associated with launching new ones. In a high-rate environment, smaller deals are more digestible, often financed through existing credit facilities. These transactions, whether carve-outs, tuck-ins or bolt-ons, fit neatly into roll-up strategies designed to drive operational efficiency and boost valuation multiples. The logic is simple: grow smarter, not just bigger.

The integration gap

Yet many firms underestimate the operational lift required to make these deals work. Full-scale integration management offices (IMOs) are often deemed excessive for add-ons, leaving internal teams to shoulder the burden. The result? Fragmented finance and accounting systems, delayed reporting and stale data that hinder timely decision making. It’s not uncommon to find portfolio companies juggling multiple general ledgers, relying on manual consolidations and operating without unified KPIs, which are conditions that breed reactive rather than strategic management.

Tactical focus: Finance and accounting integration

To bridge this gap, a growing number of PE sponsors are turning to targeted integration support, particularly in finance and accounting, while leaving other functions to platform leadership. This shift reflects a broader service gap: traditional IMO providers may be overlooking demand for leaner, more modular offerings.

The value proposition is clear: streamlined accounting integration accelerates close cycles, enables real-time KPI tracking and enhances visibility into portfolio performance. In a low-growth environment where every basis point counts, clean financial data becomes a competitive advantage. It empowers sponsors to make faster, data-driven decisions and unlocks stronger ROI from each add-on.

Broader implications

This operational shift is not limited to firms with a reputation for hands-on management. Across the board, PE sponsors are engaging in integration planning earlier and more strategically. Tactical, modular integration support aligns with how deals and budgets are being structured today.

The takeaway for PE leaders is to reassess where focused integration services can unlock real value, especially in finance and accounting. In a market that rewards precision over scale, integration is no longer a back-office afterthought; it’s a front-line lever for value creation.

The outlook

As the market continues to favor add-ons, PE firms must evolve their approach to scaling platforms. Tactical integration, particularly in finance, offers a high-impact, cost-effective alternative to full-blown IMOs. The firms that succeed will be those who seek out advisors who understand how to deliver targeted, high-ROI integration support in fast-paced roll-up environments.

A more cautious approach to deal activity

Following the sentiment outlined in our January 2025 edition, we have observed a growing sense of caution in the M&A market. Recent policy developments have introduced uncertainty, leading many buyers to adopt a wait-and-see approach. While our M&A transaction services have experienced an uptick in due diligence activity, the number of closed deals has declined. Buyers remain hesitant due to fluctuating tariffs, interest rates and other macroeconomic factors that impact operational performance.

Despite steady transaction volume, the market’s focus has shifted toward policy decision makers, with investors closely monitoring regulatory changes that could influence dealmaking strategy.

Key market indicators to watch

Trade and tariff developments. Recent changes in trade policy have introduced potential risks for industries reliant on global supply chains. Manufacturers and distributors face uncertainty as supply-side pricing is expected to rise. While the full impact on companies’ purchasing power remains unclear, early indicators suggest that import-reliant businesses—especially in manufacturing and consumer goods—may experience increased cost pressures. The ability of businesses to pass these costs on to consumers remains an open question.

Interest rate environment. Interest rates remain a focal point for M&A professionals. The Federal Reserve’s decision to hold rates steady in January signals a cautious stance, but renewed inflationary pressures could prompt adjustments in future committee meetings. We expect PE firms with less leveraged funds and more access to capital may capitalize on this environment by utilizing private debt instruments. Meanwhile, firms that rely more heavily on traditional lenders may continue to delay acquisitions, waiting for more favorable market conditions.

Fundraising dynamics are also evolving, with firms adapting their strategies to align. We will continue to monitor how firms raise and deploy capital amid the current administration’s policies and economic outlook.

Potential impact on dealmaking, closures and exit strategies

The current uncertainty has led to a shift in M&A strategies. While activity remains strong, dealmakers are exercising greater precision and selectivity. For the first time in several years, we have seen the PE market contract slightly as fundraising has slowed, and firms are holding onto their investments for longer periods.

Instead of aggressive dealmaking, PE firms are focused on optimizing existing investments, improving operational efficiencies and identifying transformative strategies to enhance value. Given the factors outlined above, buyers are taking a more measured approach, leading to fewer finalized transactions.

We anticipate PE firms will continue to prioritize strategic improvements and operational adjustments to navigate the current climate and position themselves for more lucrative exit opportunities.

The outlook

Despite macroeconomic headwinds, we remain cautiously optimistic about the M&A market’s ability to adapt and evolve. While challenges such as shifting tariffs, fluctuating interest rates and regulatory uncertainty persist, they also present opportunities for firms to refine their strategies and leverage competitive advantages.

We will continue to monitor market trends and provide insights into how firms can best position themselves for success in this evolving environment. Expect further updates in our next edition as we track how the landscape develops in response to key economic and policy changes.

As we write this quarter’s newsletter in mid-December 2024, we are excited about what the new year may bring! RSM’s transaction professionals are tracking a slow and steady increase in M&A activity and sensing renewed optimism from our private equity clients and investment banking contacts.

This shift was influenced by several factors: the clarity following the presidential election, anticipated reductions in Federal Reserve interest rates, macroeconomic tailwinds and expectations of a more business-friendly regulatory environment.

Key M&A activity to watch

• Market sentiment: Optimism is growing as firms expect a rebound in deal-making.
• Interest rates: M&A lending rates will drop as the Federal Reserve continues lowering interest rates. As rates tick downward, the bid/ask spread between buyers and sellers will narrow, easing enterprise value discrepancies and bolstering deal financing.
• Continuation vehicles: Continuation vehicles, which regained popularity in 2024, will likely remain a vital liquidity tool. These vehicles provide flexibility for private equity sponsors holding assets longer than usual and for portfolio companies not yet ready to transact.
• Longer hold periods: PE firms face elongated holding periods for portfolio company assets but expect a surge in sales as these investments eventually hit the market.
• Regulatory environment: While heightened regulatory scrutiny and antitrust pressures present challenges, they also create opportunities for private equity firms to step in where corporate strategic buyers may hesitate. However, if the regulatory environment becomes more business and M&A-friendly, it may produce another catalyst for increased deal activity, including more competition between PE and corporate acquirers.
• IPO resurgence: Exit activity is another dam that is expected to break. We have heard from many private companies analyzing the potential for an initial public offering (IPO) exit in the coming quarters. This includes larger PE-owned assets that may utilize the public markets as an exit avenue in 2025.
• Private credit: We have seen a significant uptick in private credit fundraising in recent periods and expect this activity to continue, regardless of where interest rates land.
• Platform acquisitions: Middle market deals have increasingly focused on add-ons and tuck-ins, but platform acquisitions are also expected to grow. These platform acquisitions will enhance deal volumes, reinforcing positive market sentiment.
• Tax policy: The market will be closely watching the new administration’s tax policies, and business-friendly changes could favor profitability (and cash flow), incentivizing domestic investment.

The outlook

2025 presents a dynamic landscape for private equity and M&A. With optimism spurred by improving economic conditions and evolving market dynamics, the stage is set for a potential surge in activity. Challenges remain—such as regulatory scrutiny and market volatility—but opportunities abound for firms ready to adapt. As these trends unfold, 2025 could mark a pivotal year of growth and transformation for the M&A market.

In today’s private equity (PE) landscape, trends in dealmaking are evolving rapidly in response to economic pressures. As a firm deeply immersed in this space, RSM is seeing a heightened emphasis on profitability and a growing reliance on granular data to substantiate profitable growth assertions in mergers and acquisitions (M&A) and refinancing events. These trends are shaping the strategies of PE investors, lenders and portfolio companies.

Profitability and margin focus

Investors are diving deeper into data to validate claims of operational improvements. No longer satisfied with high-level diligence, they demand a full revenue and gross margin bridge, examining everything from price impacts to cost-per-unit impacts, volume changes, and sourcing and labor efficiencies. For example, in consumer products or industrials companies, PE firms are going down to the stock keeping unit (SKU) level to ensure real margin improvement, not just growth in sales, accounting pricing variability and SKU customization for different customers.

This diligence extends to proving that any price increases won't result in a decline in volume or market share. Investors look closely at backlogs, pipelines and customer behaviors to assess what sustainable price changes might be. Before, when capital was more readily available, firms were willing to accept high-level anecdotal stories. Now, in this constrained market, everyone wants the most granular data available to validate a portfolio company's equity story.

Refinancing and debt management

Another significant trend we're seeing is a rise in refinancing activities. Many portfolio companies, especially those that have grown through acquisitions, are now facing debt maturities from loans secured in 2020 or 2021. With market conditions tightening, PE firms and portfolio companies are preparing to refinance these debts.

Additionally, dividend recapitalizations are popping up as a means for PE firms to extract value from their investments. These transactions allow financial sponsors to generate liquidity while maintaining their ownership stakes. In today’s environment, where profitability is prioritized, these recapitalizations often focus on ensuring that any distributions don’t jeopardize the company’s operational or financial stability.

Deeper reliance on data

Data has become a cornerstone of modern PE dealmaking, particularly in the current economic climate. Gone are the days when investors were content with broad overviews and anecdotal stories about a company's growth potential. Now, data-driven diligence is paramount. Investors want access to transactional-level data as early as possible to validate claims of growth, profitability and operational improvements. Whether it’s assessing the success of a product launch or the validity of management’s claims, PE firms now demand concrete data to back up the narrative.

Moreover, data is no longer something requested toward the end of the deal process. It’s now a critical component from the very start, often forming the foundation upon which investment decisions are made. This level of diligence, which once might have been seen as overkill, is now table stakes in PE dealmaking.

The outlook

Expect these trends to continue shaping the PE landscape into 2025. The focus on profitability and margin sustainability will likely intensify, particularly in sectors where inflationary pressures and rising input costs pose significant challenges. Refinancing will remain a key theme as companies look to manage their debt loads in a more constrained lending environment.

Data will only become more central to the deal process, with investors requiring more granular and earlier access to validate the investment thesis. In an era where anecdotal evidence no longer suffices, data-backed insights will separate the winners from the losers in PE dealmaking.

For investors, staying on top of these trends is crucial. It’s not just about identifying the next big growth story; it’s about ensuring that the story is backed by solid fundamentals, sustainable margins and real operational improvements. As the environment grows more challenging, the ability to drill down into the details will be what sets successful investors apart from the rest.

We would love to hear your questions, concerns and comments on the role of granular data in deal analytics and due diligence. Please reach out and let us know your thoughts.

In this quarter’s newsletter: A midyear check-in on our 2024 forecast and an updated outlook for the remainder of the year. 

How did our predictions hold up?

As we entered 2024, we observed that merger and acquisition (M&A) deal activity was returning to its normal growth trend and made several predictions about where the market was likely headed. Now that we are halfway through the year let’s see if our predictions are still on track. 

Ahead of 2024

What we said: Three major themes surfaced in RSM’s 2024 Private Equity Outlook. Namely, carve-out transactions would remain strong, roll-up strategies would keep on rolling, and technology and health care deal volume would rebound.

What occurred:

• Carve-outs: According to PitchBook’s Q1 2024 US PE Breakdown report, for the past four years, carve-outs as a percentage of total PE buyouts have ranged between 5% and 11%. In Q1 2024, this share increased to 12.6%. RSM has seen an increase in carve-out engagements so far this year, although many of these deals have yet to close.
• Roll ups: PitchBook also reported that PE add-on transactions ranged from 60% to 69% of total PE buyout deal volume from 2014 through 2020 but skyrocketed to the 75% range in the past couple of years. This share remained consistent in the first half of 2024, at approximately 75%. As a testament to this trend, approximately 65% of RSM’s deal volume is PE add-ons.
  
• Technology and health care: As we reported in our outlook, technology deals have increased in 2024 when compared to 2023, albeit not at the pace we were estimating. We believe this is primarily due to the Fed’s delay in interest rate cuts. Health care deals seem to have stagnated due to higher interest rates and the complex regulatory environment.

January 2024

What we said: There will be a surge in corporate energy-sector deals.

What occurred: So far this year, energy-sector transactions are tracking with 2023 deal counts, reads PitchBook. Two major deals in the corporate (non-PE) space completed in recent months are ExxonMobil’s $60 billion acquisition of Pioneer Natural Resources, and Sunoco LP’s $7.3 billion acquisition of NuStar Energy L.P. Renewable energy appears to be the new M&A darling, as we continue to see an overall increase in deal activity for the sector.

April 2024

What we said: An expected drop in interest rates will lead to more PE-backed portfolio company sales. Also, we expected to see a surge in continuation funds due to longer investment hold periods.

What occurred: While RSM’s transaction advisory practice has experienced an uptick in sell-side inquiries, it is not at the expected volume. We believe macroeconomic headwinds and higher interest rates have deterred many middle market fund managers from initiating the sell-side readiness process.

A recent article in Private Equity International discussed the wall of assets that need to change hands and how sellers face an exit plan dilemma amid an emerging buyer’s market. Indeed, current market conditions have led managers to consider new liquidity solutions and exit offramps, such as continuation vehicles, as more funds approach the end of their lives.

Continuation fund-related exit count increased substantially in Q1 2024 and is on pace to reach about 100 exits in 2024, more than any other year in the recent past, according to PitchBook’s 2024 US Private Equity Outlook.

While this surge of continuation funds is expected to continue, it is not a long-term solution for the industry. In this higher-for-longer interest rate environment, buyers and sellers are getting used to the fact that the PE market is shifting. As valuations are right-sized, M&A activity will normalize with a renewed focus on dealmaking.

The outlook

After appearing to bottom out in 2023, the overall M&A marketplace is on the upswing; however, an increase in deal activity depends on whether interest rates get cut and if the industry can steer clear of major headwinds. Ironically, these two factors are inversely related: The more headwinds the market faces—such as an economic slowdown that leads to job losses and a drop in consumer purchasing power—the more likely the Fed will start cutting rates.

While the timing of rate cuts remains uncertain, we are cautiously optimistic about the M&A forecast, barring any drastic changes in the macroeconomic and geopolitical landscape. Even with the upcoming election season, we don’t expect any material changes to market activity, regardless of who wins.

RSM’s transaction advisory services practice continues to grow, our pipeline is strong, and we remain committed to helping clients navigate the opportunities and challenges ahead. We would love to hear your questions, concerns and predictions for the M&A market in the coming months. Please reach out and let us know your thoughts.

In this quarter’s newsletter: Key considerations ahead of increased merger and acquisition (M&A) activity, the rise of continuation funds, plus access to insights to help you get ahead of opportunity.

Two years of pent-up supply

As we forecasted back in December 2023 and in RSM’s 2024 Private Equity Outlook, deal activity is on track to return to its normal growth trend. We are cautiously optimistic about the second half of 2024 when an expected drop in interest rates may help to spur M&A transactions, in addition to the overall macroeconomic environment. The question is, will pent-up demand incite a wave of portfolio company sales?

Just the possibility of that happening should get fund managers thinking about how to prepare for the opportunities to come. From the RSM perspective, sell-side readiness helps accelerate the marketing process and shrink timelines for more efficient dealmaking. Considerations should include not only performing a quality of earnings analysis (now a common practice) but also assessing all functional areas of the business and aligning the portfolio company management team with your strategy.

Sell-side readiness facilitates a more efficient transaction and offers a better understanding of a company's strengths and weaknesses. Getting ahead of the game 12 to 18 months in advance of taking a company to market will facilitate working with key stakeholders and instill confidence in potential buyers.

Here are potential workstreams that a PE-backed portfolio company could perform as part of preparing for sale. Keep in mind this is not meant to be an all-encompassing list.

Commercial assessment of the business: Can you clearly articulate where and how the business operates and what upside exists for the future buyer?

Back-office functional area assessment: Accounting, finance, IT, operations, human resources, etc.—where are there areas for improvement, and are there any “quick wins” that can be accomplished prior to the sales process?

Data strategy: Buyers request a ton of data; are you ready for this? Consider a practice session and/or going through a sell-side diligence “Phase I” type of process to understand how fast you can produce data and the accuracy of the data supporting the historical financial statements.

Management preparation: Who from management will be answering questions from buyers? Are they ready to answer the voluminous questions that will be asked? Consider a practice session for this, especially around finance and accounting matters.

Longer holding periods but no time to waste

Investment hold periods increased during the lull in M&A deal activity over the past two years. Buyers sought to drive prices down or hold off making offers, while sellers were reluctant to sell in anticipation of better market conditions. The result of all this watching and waiting is an excess supply of portfolio companies. One interesting trend that has occurred due to these longer hold periods is the increased usage of continuation funds. A continuation fund in private equity is a strategy allowing fund managers to hold onto investments longer than the original fund's term. Typically, this involves setting up a new fund vehicle (the continuation fund) by the same sponsor to acquire one or more assets from an existing fund. This allows sponsors to continue managing strong assets beyond their original fund's life cycle, potentially maximizing value creation.

Investors from the existing fund are often given the choice to either exit by selling their interests or to roll over their interests into the new continuation fund, which may also involve committing additional capital. For the investors, this provides an option for liquidity or continued investment, which can be particularly attractive in volatile markets or when the assets have not yet reached their full exit potential.

The popularity of these strategic vehicles has been growing, as they offer liquidity for existing investors or the ability to remain invested in high-performing assets. By extending the timeline of an asset, stakeholders aim to increase the potential upside of its eventual sale. Continuation funds also buy time for managers to realize their investment thesis by making operational improvements to maximize value creation.

While the current fundraising environment is challenging, we’ve heard from middle market private equity firms that they expect to exceed their hard cap based on prior deals surpassing expectations, which has resulted in new and existing LPs clamoring for a spot in the new fundraise.

What are your thoughts on the current private equity market? Please feel free to reach out to us to discuss.