Opportunities and headwinds for financial sponsors in 2025

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John Burns: You are listening to What's the Deal, our investment banking series here on J.P. Morgan's Making Sense podcast. I'm your host, John Burns, head of J.P. Morgan's Mid-Cap Financial Sponsors Group. And today I am joined by Ray Raimondi, head of North America Strategic Investor Group M&A and Adam Schwarzschild, co-head of North America Financial Sponsors Group. And today we’ll be discussing the evolving landscape of financial sponsors, the impact of recent market changes, and strategies for navigating the current investment environment. Adam and Ray, welcome to the podcast.

Adam Schwarzschild: Thanks, John. Good to be here.

Ray Raimondi: Excited to be a part of the conversation, John.

John Burns: So, before we dive in to today’s conversation, I just want to let our listeners know that we’re recording this episode on Monday, May 12^th. To get us started, I think it's important that we set the stage for the environment we are in and understand why financial sponsors have become such a trending topic, not only in boardrooms, but all over the press in recent months. At the start of 2025, I think everyone in the financial sponsors business felt like 2025 was going to be an incredible year. Due to some things happening toward the end of 2024, everything was pointed up and to the right. A few things have happened such as tariffs to slow that trajectory. But there's still a ton of activity and we're still very hopeful for an improved remainder of 2025. And just this past week in Austin, Texas, we hosted our third annual Mid-Cap Financial Sponsors Conference, which was the coming together of about 50 companies on a one-on-one basis meeting with about 80 of our Mid-Cap financial Sponsor clients. It was a great opportunity for us, not only to serve our sponsor clients by allowing them to meet our commercial banking clients, but by also meeting with these same clients and getting some feedback from them. It was imminently clear regarding their desire that they have, and the need they have, to continue to put dollars to work and to monetize their assets, and this feedback and optimism on the part of our clients was consistent. So, first I'll ask Adam. Adam, how do you see financial sponsors influencing and operating in the current market environment?

Adam Schwarzschild: Sure, thanks John. Taking a step back, and this won't be news for those who are in and around private equity, but the last three years have clearly been quite challenging for our private equity clients. In each of the last three years, sponsors have both under deployed and more importantly, under monetized their portfolio. And as a result, LPs aren't receiving distributions at the same levels, which has in turn put pressure on fundraising. I think most private equity firms, as well as bankers, came into 2025 with the sense of optimism and expectation that this would be the year to get the fly wheel going again. Of course, tariffs happened on April 2nd, which sort of derailed that optimism, at least momentarily. I think everyone was a little bit of shell shock, and has certainly has slowed down deal activity...including monetization plans. I would say the shell shock though, was momentary and since then our clients have really dusted themselves off and are now very much focused on how to operate successfully in the current environment. Albeit maybe with some more caution than previously. There is the same pressure to deploy and monetize, if not more so. But the great thing about our client base is they are highly adaptable and the conversation now is how to pivot the playbook quickly to find opportunities in a shifting economic landscape.  

John Burns: That was great, Adam, thank you. And what about you, Ray? What are you seeing from an M&A perspective?

Ray Raimondi: I would start with it's an interesting day to be having this conversation with the China tariffs, at least for the moment temporarily resolved and the market's up pretty significantly on the heels of that. I think the conversations that I've had with financial sponsor clients really have centered around when you're thinking about going forward with either a buy side or a sell side, what are you really waiting for? Because there is not gonna be some magical moment that is gonna resolve everything permanently in markets that we're living through, where there's a good amount of uncertainty, that creates both positives and negatives for M&A opportunities. I think what we're seeing a lot of with public market clients is a lot of questions in the boardroom that lead to potential take privates, and on sell size for private companies, we're having a lot of conversations that center around how impacted are you by tariffs? How certain are you of the impact of tariffs? There's a lot of hand ringing, but there's not a lot of concrete negatives. So from the standpoint of sentiment in action, people are moving forward with processes. I've spent a good amount of time drawing concentric circles on a piece of paper. At the center of the circle is North American services companies. And on the outer edge of the circle would be companies that look something like metals and mining companies. And where you fit on that concentric circle tells you a lot about what your options are from an M&A perspective, whether you're a buyer or a seller. Does that resonate with you?

John Burns: It definitely does. And frankly, the thing that I keep coming back to and that I keep telling a lot of our partners throughout the firm, the great thing about financial sponsors is they have to transact. They're in the business of buying and selling companies. So Ray, to your point, there are parts of the business that are further away from imminent activity because of some of the effects. But there are parts of the business that are unaffected and there will be activity.

Adam Schwarzschild: Yeah, totally agree. I mean, the key to our industry as a whole in private equity is we have a flywheel and it has to keep going, and to keep that going, you're always putting capital to work, you're always selling companies. And in last couple years, that's broken down. So they have to get it going again. So to that end, Ray, what are you seeing right now, and especially in terms of just M&A generally with sponsors. What has changed over the past number of months and what do you see for the rest of '25?

Ray Raimondi: So I think there's really two things that I would call out that I would go to first. First is I spend a lot of time talking to clients about defining what “now” means in the context of launching an M&A process. There's a good amount of lead time for any process that we're launching. And so in that specific context, it takes months to get ready. And so do we see people pausing that readiness? Absolutely not. People are moving forward with preparation. They're moving forward with early education for potential buyers, whether those are strategic buyers or sponsor buyers. I can think of one situation very specifically, where we were on the right end of advice about proceeding in that early education process. The news again today, shines a positive light on that advice that we gave, but that was the right advice regardless of what happened in Switzerland with the tariff conversation with China. And so, uh, our message to clients is the financing markets are wide open. It's always better to sell a company than take it public. And so you should begin thinking through your exits right now. Now, the exits themselves are very complex. I mean, Adam, you and I have done quite a few meetings recently, where we're talking about it's not a one size fits all approach. The way that we think about sell sides at J.P. Morgan is, it is a very bespoke process. It's not write a big book and send it out to 110 people. It's really more akin to selling a public company, even if it's owned by a private company or sponsor owned company.

John Burns: I'd like to connect back to something that Adam said earlier. He used the term flywheel. And one of the things in my role heading up the Mid-Cap Financial Sponsors Group is to focus on J.P. Morgan strategy with Mid-Cap Financial Sponsors, which is all about just starting the flywheel earlier with smaller financial sponsors and smaller companies. The interesting connection around the whole sponsor ecosystem is the fact that now, we are starting with smaller companies, with smaller sponsors, and then hoping to sell them to larger financial sponsors, or take them public down the road. The strategy is basically, instead of starting when an asset gets to 75 in EBITDA and owned by a sponsor, why not start when it starts at 25 in EBITDA and start the business and the flywheel? Ray and Adam, how do you look at the the Mid-Cap strategy and how that interrelates with the entire financial sponsor ecosphere?

Adam Schwarzschild: I think you've hit it on the head. I mean, one, it's an ecosystem and it starts small, works its way up. What has floored me is when we talk to clients about this, they are so surprised that we even have this Mid-Cap strategy and how robust it is. When I think when most people think of J.P. Morgan, they think of really mega-cap, Large-Cap deals, even in the sponsor universe. And so when we go in and we describe to 'em, if you look at our Mid-Cap effort between Mid-Cap sponsors and Mid-Cap coverage and M&A, we are probably bigger than most of the boutiques out there which I think blows our clients away. It is a critical part our serving all of our sponsor clients, right? In terms of being around these companies earlier and selling them to the larger sponsors, financing them for the smaller sponsors, then the larger sponsors. And so, you know, the earlier we can get in, it benefits us, it benefits our clients. And I would say at J.P. Morgan, we have the platform to do all of that. We can do ARR loans, we can do direct lending loans, we do syndicated finance. So we can actually be there on the advisory side and the financing side from day one.

Ray Raimondi: I think, Adam, just to pick up on that, I think there's a lot of time spent thinking about the Mid-Cap ecosystem as kind of a discrete ecosystem, but it's really not. The Mid-Cap ecosystem is an opportunity for us to show what we can do for our Large-Cap clients. And that takes a lot of different forms. For example, if you're working with one of our larger clients showing them some buy-side ideas that live in your world, John, or your client's world, is super impactful. Because that is really the core piece of connecting the different groups across a continuum. And the lines between Mid-Cap and Large-Cap are frankly, somewhat blurred. We do say that it's 2 billion enterprise value above is Large-Cap and 2 billion below. But there's a lot of situations depending on the particulars of the industry, the particulars of the growth rates of the company, where there's a lot of overlap. And sometimes with the same partner that sits in a technically Large-Cap financial sponsor is gonna be looking at some smaller activities. You've seen a bunch of specific Large-Cap clients go down market and you've seen some Small-Cap clients go up market. So it's a very fluid ecosystem in both directions.

John Burns: It's a fluid ecosystem. Back to your comment, Adam, regarding what the perspective from the outside sometimes is of J.P. Morgan.

Ray Raimondi: I think just to pick up on that piece just for a second, the very large deals get a lot of attention. One or two large tech companies come to mind. And so I think it's a real distinction and balance to think about the M&A market in totality. There's 29,000 sponsor-owned private equity companies, which dwarfs the amount of public companies that are out there. And so when you think about what historically the M&A market was focused around, sponsor activity being about a third, I think from my perspective, one of the reasons why this part of the market is exciting for me personally, is that that percentage of the overall M&A market is only gonna grow over time. I would not be surprised to see that move in the future further towards 40 or even approaching 50%. On top of that, what we're even talking about from an M&A market is, has changed as well. We haven't touched on the amount of secondary business that there is out there. How do LPs think about getting liquidity when sell-sides take longer? You know, we spent a lot of time talking about ecosystem, but there's not just a Mid-Cap and Large-Cap ecosystem. There's a Mid-Cap, Large-Cap alternatives ecosystem out there. That is something that we're focused on as well.

John Burns: And not to overuse the ecosystem comment, but in that term, frankly, it's not just types of sponsor, it's also we're trying to create an ecosystem of support for these guys. The direct lending is a huge part of that. The fact that we can bank all of their assets right down to $10 million EBITDA assets, the fact that we have world-class, the best investment banking capabilities that go right up to the largest companies in the world with relationships in every geography, in every industry, I think we all believe that we have a pretty good hand in any market, and especially in a market where we're in now, where it's poised for a lot of upturn in success. But we're seeing some of our competitors get a little bit cautious, especially in the debt side.

Adam Schwarzschild: So John, that's a good point. Going back to capabilities. One of the things I've seen, and you've been on the front line of this, is just our ability to originate for our sponsor clients of all sizes, using our business development team. And I know you've been working very closely with them. I'm just curious your thoughts on the evolution of that, how it started and where you see that going.

John Burns: I am highly optimistic that that is going to be a significant part of our idea generation over the next few years, both for Mid-Cap sponsors, but also for Large-Cap sponsors. The bottom line regarding our transaction development capabilities, we have this incredible asset that not many people have. We have 30,000 plus clients within the commercial bank. 30,000 clients within the commercial bank that are covered locally and regionally. Our transaction development efforts are specifically focused on supporting those commercial banking clients with discussions about strategy, next steps if it's a founder owned business, and potential introductions while also serving our sponsor and strategic clients to make introductions, high impact introductions, not just a name on a page, but a relationship that a J.P. Morgan banker has in a locale with a company that is open to those discussions. We've already been very successful with very small introductions. So business development in the past was focused on, in my Mid-Cap group, $10 million EBITDA below, and now we're just increasing the size of asset that we're going to introduce and we're opening it up to Large-Cap financial sponsors and strategics. That's going to be an incredible boost for our overall idea generation going forward.

Ray Raimondi: And I've seen that in action a couple times, because there's many times you find yourself in a meeting with a financial sponsor and you have three or four main ideas that you're talking about and then another page of 10 more ideas. And at prior firms, I've struggled to explain some of those situations, but I've seen the amount of connectivity we have into that world. And it's always nice when you're sitting across the table from a sponsor who in theory, for their portfolio company has a very fulsome knowledge of what is available out there to come up with one or two ideas that they haven't thought of before. So it's very differentiated.

Adam Schwarzschild: I couldn't agree more. This is just flipping it. On the other side, this is also opening up that aperture for our commercial banking clients as well, and actually introducing them to our sponsor universe where they probably haven't been connected previously and can find that to be hugely valuable.

John Burns: Exactly. It's a service to our commercial banking clients and it's a service to our investment banking clients who are going to be seeing highly actionable new ideas, to Ray's point, that they probably may not have had access to before. So I'm very optimistic about the, frankly, the strategic alignment and strategic support at the highest leadership levels to continue to push that business development effort out to more and more clients. I'd like to hear from each of you how you are thinking about the next 12 months. Where do you see the opportunities or potential headwinds? Are there any specific that you believe may be the game changers over the next 12 months? Adam, let’s start with you.

Adam Schwarzschild: So I think if I look at where we are today, sponsors are going to be increasingly focused, I think this year on take privates, carve-outs. And I think deploying what they would call structured equity or capital solutions. Many of our clients on the larger cap side have raised hybrid value capital solutions, structured equity funds that really kind of start as a blank piece of paper. And in this environment, what we're seeing is the number one, I think, hindrance of deals getting done is buyers and sellers agreeing on price to do a full transaction or majority buyout. That piece of paper is really kind of what I think of is almost like bridge capital that helps facilitate getting a deal done. And it can take a lot of shapes and forms. And so as I look at the rest of the year, thinking about one, how do we engage that type of capital and introduce that into the transactions that we do will be very important, how we think about with our clients the whole theme around take privates and carve-outs, because I think you can continue to see pressure with public companies and strategics and, and them wanting to achieve some sort of monetization and especially in this equity environment. And then lastly, I think we're gonna continue to see pressure on sponsors to monetize And if plan A at the beginning of the year was IPO or full cell side, plan A might not be there currently, but that doesn't mean they're not gonna try to achieve plan B, C or D. So our focus really has to be thinking about what are plan B, C, and, and D going to be and being in front of our clients with those type of creative solutions.

John Burns: Ray, what about you over the next 12 months, what are you focusing on for our clients?

Ray Raimondi: I would pick up on Adam's response. When you think through plan A, B, C or D, or maybe E&F as well, the real advice that we're providing is to be strategically flexible. Which means in M&A context, to be open-minded to structure. It means being open-minded to rolling a piece of your company into the next owner's ownership. It means deferring a decision around whether or not I'm gonna go public or whether or not I'm gonna sell it. I think the other thing that is worth circling back to a little bit is the take private conversation that we had at the outset, in markets that are volatile, board members of public companies start asking tougher questions of their management teams. And those tougher questions result in many times multiple differing views of where the company's fundamental performance is going to go. And in those moments, that is an opportunity for take-privates to happen. And also given the volatility that we've seen, people's viewpoints on where their stock price is gonna be is less certain than it was before. You put all that together with what remains a very ebullient financing market. And that is the recipe. And we're hearing this both, specifically and generally from our clients, that people are dusting off every single take-private list that they've ever looked at and having their teams go through it. And we're doing the same.

John Burns: And regarding the Mid-Cap space, one thing we do have to remember is that there are sectors that are somewhat immune from some of the challenges today. So business services, industrial services, healthcare services, and pockets of technology are still quite healthy and moving in the right direction with deal activity. Ray, how do you see these sectors? You have a broad purview into our M&A pitches and backlog. How would you look at those sectors?

Ray Raimondi: Yeah, well, and when I mentioned earlier that kind of concentric circles of activity you hit it right on the head. It, it starts with North America, then it extends to services. Services as you said is industrial business services, white collar and blue collar, healthcare services is a big piece of it. You add tech on top of that, all of a sudden you convince yourself certainly with a North American centric lens that kind of 60% of the M&A market is healthy and functioning, which is our view of what exactly we're seeing day to day. All of the internal data that we have access to, which is pretty extensive from an M&A market. Whether that's announced deals, whether that's mandated deals, whether that's signed engagement letters, signed CAs, all of this data that we capture that helps us manage our business. When you look at all of that, there was a real inflection point in the last couple of weeks from the initial shock and awe of that April 2nd liberation day.

John Burns: Thanks for that, Ray. Well, that brings us to the end of today's episode. Thank you to Adam and Ray for sharing their valuable insights and expertise. And thank you to our listeners for tuning into another episode of What's The Deal. We hope that you found this conversation insightful and be sure to tune into upcoming episodes as we stay up to speed with the markets. I'm your host, John Burns. Until next time. Goodbye.

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