How Fed Rate Cuts Are Shaping LMM M&A: Insights From Axial Dealmakers

The Federal Reserve’s recent 0.25% rate cut marks a meaningful shift in the cost of capital, lowering the federal funds rate to a target range of 3.75%–4.00%. This adjustment reflects the Fed’s response to easing inflation and a cooling economic outlook, conditions already beginning to influence credit markets and deal financing structures.

To better understand the implications, we surveyed Axial members to understand how lower borrowing costs may shape valuations, competitive dynamics, and seller timing in the lower middle market as we head into 2026.

Thank you to the Axial members who participated in this survey and shared valuable perspectives. The following members are quoted in this article.

Timing The Rate Cut Impact

Do you believe the Fed’s recent and expected rate cuts will meaningfully impact LMM deal activity?

Survey responses indicate that most Axial members expect lower rates to have a noticeable impact on LMM deal activity, but the magnitude and timing vary. Roughly 70% of respondents believe the Fed’s recent and expected cuts will influence deal activity—17.7% expecting a significant impact and 52.9% expecting a somewhat meaningful effect.

When do you expect the effects of lower rates to become visible in deal flow?

When asked about timing, nearly half (47.1%) expect the effects of lower rates to appear in early 2026, with an additional 29.4% pointing to mid-to-late 2026, suggesting a broadly anticipated uplift beginning next year. Although the impact on overall deal flow is expected to be gradual, several members noted signs of early movement. Cody Clemens shared that his team has “started seeing more general excitement for next year.” He added that it’s difficult to pinpoint whether this shift is driven primarily by rate cuts or simply by “a less shaky end to the year,” but the overall mood among market participants has improved.

Others described a more cautious but still evolving environment. Warren Rose noted that it is “too soon to determine what long-term impact the rate cuts will have” and stressed that “anticipated future cuts will be necessary to develop a solid trend.” Even so, he has observed an immediate rise in interest around “large-scale acquisitions” and sector-specific activity, particularly in healthcare, technology, energy, and consumer goods. Together, these early observations suggest that while most dealmakers expect the broader effects of lower rates to build gradually, some momentum is already forming.

Lower Rate Beneficiaries

What type of buyer do you think will benefit most from these rate cuts?

Survey responses suggest that Private Equity Funds stand to benefit the most from the recent rate cuts, with 47.1% of members selecting them as the buyer type that will benefit the most. This aligns with Investopedia’s observation that PE benefits greatly from lower interest rates, as cheaper debt directly improves the economics of leveraged transactions.

Nearly 30% of respondents pointed to Individual Investors and Search Funds, indicating that cheaper debt may help level the playing field for smaller buyers who have been disproportionately constrained by high financing costs.

Which types of transactions stand to benefit most from rate cuts?

Regarding transaction type, 41.2% of respondents selected platform acquisitions as the biggest beneficiaries of lower rates. This aligns with the fact that platform deals typically require larger initial financing, making them more sensitive to reductions in borrowing costs. Add-on acquisitions and recapitalizations followed at 29.4% each, suggesting that lower rates may also accelerate buy-and-build strategies and create more attractive opportunities for owners seeking partial liquidity.

Notably, no respondents selected minority investments, indicating that the impact of rate cuts is most meaningful in transaction types where leverage plays a central role.

Valuation Implications

When asked how seller valuation expectations might shift as rates fall, respondents anticipate only modest movement. A majority (58.8%) believe valuations to increase slightly, while the remaining 41.2% believe expectations will stay about the same. Notably, no respondents anticipate a significant increase or any decrease in expectations. This suggests that while lower rates may give sellers the confidence to hold firm on price, dealmakers do not foresee dramatic valuation inflation in the near term.

Do you think rate cuts will close the valuation gap between buyers and sellers?

When asked whether rate cuts would help close the valuation gap between buyers and sellers, most respondents expressed hesitation. A majority (58.8%) said it is too early to tell, reflecting uncertainty around how quickly, or meaningfully, lower borrowing costs will filter into pricing alignment. Nearly 30% do not expect rate cuts to close the gap, suggesting that structural factors beyond interest rates may still be driving valuation mismatches. Only 11.8% believe lower rates will directly narrow the divide. Overall, respondents are cautiously optimistic but unconvinced that rate reductions alone will resolve the disconnect that has persisted in the market.

This recent Axial article highlighted the historical link between interest rates and LMM valuations. As illustrated in the chart below, the Axial platform data shows that multiples generally rise when borrowing costs fall and compress when rates increase. 

Median Valuation Multiples For $1M – $5M EBITDA Businesses

source: axial platform data

Together with the survey results, the data points to a steady but modest outlook. As the Fed began easing in late 2024, valuation multiples began to rise, improved financing conditions gave buyers more flexibility, and lower yields elsewhere pushed more investors toward private deals. By Q3 2025, Axial platform multiples averaged 6.1x. While respondents expect only slight increases in seller expectations and remain unsure whether rate cuts will narrow the valuation gap, the broader trend suggests that easing rates are helping stabilize and gradually lift LMM pricing.

Opportunities & Challenges

We asked Axial members to weigh in on the biggest opportunities and challenges that lower interest rates could create in the lower middle market. Their responses reflect a mix of optimism and caution: many see cheaper debt unlocking flexibility for buyers, renewed competition for quality assets, and stronger valuations for sellers, while others highlight the risk of overheated bidding, rising leverage, or inflationary pressures that could prompt the Fed to reverse course. The following perspectives illustrate how dealmakers are thinking about both sides of the rate-cut environment.

What’s the biggest opportunity lower rates create for dealmakers?

What’s the biggest risk or challenge that lower rates could bring?

How Rates Impact a “Good Deal”

When asked how the current interest rate environment has changed their definition of a “good deal,” the majority of respondents said that it hasn’t meaningfully shifted their criteria. Warren Rose noted that it hasn’t, emphasizing that a strong M&A deal “will always be a transaction that creates sustainable value by aligning with strategic objectives, being financially sound, and successfully integrating two companies with compatible cultures.”

Similarly, Bill Schloth reinforced that core fundamentals remain paramount, saying, “Not much. You need strong fundamentals in a business for it to be sellable in any market.” These perspectives highlight a consistent theme: while interest rates influence deal structures and valuations, the underlying definition of deal quality in LMM M&A remains steady.

Final Thoughts

The latest Axial member survey points to a measured but encouraging path forward. Rate cuts are beginning to restore confidence, improve financing conditions, and lift valuations, though respondents expect progress to be steady rather than swift. As 2026 approaches, dealmakers continue to anchor their decisions in fundamentals while navigating a gradually more supportive market backdrop.