Jordan Tate is a co-managing partner of Montage Partners, a people-first private equity firm founded in 2004 with offices in Scottsdale, Arizona and Salt Lake City, Utah. Montage Partners is one of the oldest and most successful investors in the lower-middle market and invests in the technology, professional services, and industrials sectors in companies with $1.5 million to $7 million in EBITDA. The firm has made 20 investments to date (11 successfully exited, 9 active investments).
Since Jordan founded Montage Partners 20 years ago, much has changed in the private equity landscape. We talked to Jordan about what to expect in 2025.
Q: As we head into 2025, what are some challenges private equity firms will face in the next few years?
A: There are now more than 4,500 private equity firms in the U.S. To put that in context, the total number of companies traded on the New York Stock Exchange and Nasdaq combined is on the order of 5,700. So, 4,500 is a big number. There are too many undifferentiated private equity firms with indistinguishable track records. That’s a challenge for the industry overall, and it can make things daunting for a founder trying to be thoughtful about choosing the right partner to align with for liquidity, their legacy, and the next phase of growth for their company and its team members.
2023 was a tough year for the private equity industry, generally. Capital deployed was down something like 30% in 2023. Exit value was down something like 25% in 2023. 2024 was an improvement. Most people expect further improvement in 2025.
However, the aggregate stats don’t apply uniformly. Some firms did very well over the past two years and some firms will perform better than others in 2025 and beyond.
Q: What are some of the factors that will determine which firms perform better?
A: First, it’s important to acknowledge that private equity isn’t a single monolith. The 4,500 private equity firms operating in the U.S. compete for different size companies, focus on different sectors, different stages of a company’s lifecycle, gravitate toward different situations, and have dramatically different cultures and personalities among their investment teams.
In general, though, whether we’re talking about large cap buyouts, the middle market, or the lower middle market (which is where we invest), sector experience is important. The most successful investors are focused on certain sectors and have experience investing in those sectors. That translates into more efficient due diligence processes, speed to closing, ability to add value post-closing, and generally more fun for a founder and management team to work with because they speak your language and may bring useful relationships to the company.
Second is track record. A founder’s decision to sell to or partner with a private equity firm is an important and emotional life decision given the years of work spent building the company and the high stakes in getting the decision right. Successful companies gravitate to private equity firms with successful track records. This creates a positive flywheel effect for firms with an established track record which are better positioned to invest in the best companies and poses a challenge for newer firms without a track record.
Lastly, we’re seeing culture as increasingly important to the best companies. Whereas, decades ago, a founder may have viewed a private equity investor as a robotic source of cash, the best founders and management teams are increasingly focused on private equity as a people decision. Just as successful companies in any industry often have great cultures that help them attract the best talent, so it applies in private equity. Founders and management teams are increasingly clued into this. Private equity firms with a differentiated culture and great people (not just smart people) will be better positioned in the coming years.
Q: How are interest rates impacting the private equity market?
A: The direction of the rate cycle (down) is a net tailwind for transaction volume. However, the pace of rate reduction has been slower than many people expected. We think the pace of reduction may continue to disappoint those that are dependent on rapid rate reductions. Macroeconomic data going into 2025 remains reasonably good. For example, the unemployment rate is around 4%. There is still some risk of resurgent inflation despite the progress that has been made. Therefore, it’s certainly possible that the downward trajectory of rates continues but is at a more measured pace than some expect. The impact of this could be that companies with upcoming term debt maturities with rates from 2019 or 2020 may be disappointed when they need to refinance even though the direction of travel is favorable.
Q: Beyond what’s been discussed, what else are private equity firms expecting in 2025?
A: We expect exit activity to increase. This applies both to private equity firms bringing companies to market and founders who have been on the sidelines bringing companies to market in 2025 as the M&A market in 2025 will likely be seen as stronger and more favorable as compared to 2023 and 2024.
Private equity firms will continue to invest in business development roles and portfolio operations support. Add-on acquisition strategies will continue to be popular. Companies with double digit organic growth profiles will command a premium as compared to those that are dependent on add-on acquisitions to meaningfully grow their business.
In some ways, at the most basic level, private equity as an industry is evolving like many other industries evolve. Increasing competition spurs innovation, requires investment in being a better investor and a better partner to management, and culture matters. Like any other industry, people want to work with people they like and trust.
