For much of the past two years the industrial sector has operated in a state of strategic restraint. Rising interest rates, persistent inflation and geopolitical fragmentation forced many companies to slow expansion plans and focus internally. Capital expenditures were scrutinized more carefully, portfolios were streamlined and non-core assets were divested as firms prioritized balance sheet resilience over growth. Global deal activity reflected that caution. According to Dealogic data, industrial M&A volume fell sharply in 2023 as higher financing costs and valuation uncertainty stalled negotiations across multiple sectors.

Entering 2026 that posture is beginning to shift. Instead of waiting for macroeconomic clarity, industrial leaders are increasingly using acquisitions as a mechanism to reposition their businesses for the next decade of competition. Bain & Company reports that global deal value rebounded significantly in 2025, driven in large part by large strategic transactions in industrials and infrastructure. Bain estimates that megadeals valued above $10 billion accounted for roughly one third of global deal value last year, signaling that large-scale consolidation has returned as companies pursue scale and operational resilience.

Recent transactions illustrate the trend. The proposed $71.5 billion combination of Union Pacific and Norfolk Southern would represent one of the largest industrial mergers in decades and would reshape the U.S. freight rail network. While regulatory scrutiny remains high, the strategic logic reflects a broader industry shift toward consolidation in sectors where scale improves efficiency, pricing power and capital access. Across transportation, manufacturing and infrastructure services, companies are increasingly viewing M&A as a tool to strengthen supply chains and expand technological capabilities rather than simply increase market share.

Technology itself has become one of the primary drivers of industrial dealmaking. Artificial intelligence and advanced analytics are rapidly changing the competitive landscape of manufacturing and industrial services. PwC’s 2026 Global CEO Outlook highlights a growing valuation gap between companies that have successfully integrated AI into operations and those that have not. Firms that deploy machine learning in predictive maintenance, demand forecasting and automated production systems are achieving measurable efficiency gains, often commanding higher valuation multiples as a result.

This shift is changing what companies are actually buying when they pursue acquisitions. Investment is no longer limited to physical assets or production capacity. Increasingly the focus is on data infrastructure, software capabilities and specialized technical talent. EY-Parthenon reports that roughly one third of industrial CEOs now prioritize acquisitions specifically to obtain intellectual property or engineering expertise. Recent transactions illustrate this transition. Trane Technologies’ acquisition of BrainBox AI for example reflects the growing importance of software platforms that optimize building performance and energy efficiency, turning traditional HVAC equipment into digitally enabled systems.

Geopolitical forces are also reshaping the map of industrial consolidation. The era of fully globalized supply chains has given way to a more regionalized model shaped by tariffs, national security concerns and logistical risk. Deloitte’s 2026 M&A Trends Survey notes that many industrial firms are using acquisitions to nearshore production and reduce reliance on distant manufacturing hubs. Instead of expanding into unfamiliar international markets companies are increasingly pursuing domestic bolt-on acquisitions that strengthen local supply chains and shorten delivery networks.

Mexico has emerged as a particularly important component of this shift. According to data from the U.S. Census Bureau, Mexico became the largest trading partner of the United States in 2023 with bilateral trade exceeding $800 billion. Industrial companies seeking proximity to North American markets have increasingly invested in Mexican manufacturing capacity under the USMCA framework. At the same time many firms continue to diversify production across multiple countries to reduce geopolitical exposure.

Financing conditions have also begun to stabilize. Although traditional bank lending remains cautious following the rapid rise in interest rates earlier in the decade, alternative financing channels have filled the gap. Private credit funds in particular have played a growing role in supporting industrial acquisitions. KPMG reports that nearly half of mid-to-large industrial transactions in late 2025 and early 2026 involved financing from private credit lenders rather than traditional syndicated bank loans. The ability of these lenders to move quickly and provide flexible structures has helped revive deal activity even as capital markets remain selective.

Taken together these dynamics suggest that industrial M&A is entering a new phase. Rather than simply expanding capacity or market share companies are using acquisitions to accelerate technological transformation, strengthen supply chain resilience and reposition their portfolios for a more uncertain geopolitical environment.

For industrial leaders the message is increasingly clear. In a world shaped by AI-driven productivity gains, regionalized supply chains and shifting capital markets, standing still carries its own risk. Strategic acquisitions have become less about opportunistic growth and more about long-term adaptation.

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Private credit has transformed from a niche financing alternative into one of the defining forces in modern corporate lending. A decade ago the asset class was still viewed as an opportunistic corner of the asset management world where a limited number of funds stepped in to provide financing that traditional banks would not. That began to change in the years following the global financial crisis. As regulators tightened oversight of leveraged lending and risk exposure at banks, a growing pool of institutional capital began flowing toward private credit managers willing to lend directly to middle market companies.

Freed from many of the regulatory constraints that limit bank lending, private credit funds quickly filled the gap. What began as a workaround for tighter banking rules soon evolved into a structural shift in corporate finance. Direct lending became a staple of private equity transactions, particularly in the lower middle market where speed, certainty of execution and flexible structures were highly valued by sponsors and borrowers. According to Moody’s, private credit assets under management have now grown to more than $2 trillion globally as of 2026, reflecting more than a decade of rapid expansion. Preqin estimates that private debt fundraising has compounded at more than 15% annually since 2015, with hundreds of new funds entering the market.

However the model contains an important vulnerability that is often overlooked. Private credit depends heavily on deal activity. Unlike traditional banks that generate revenue from a broad range of lending and fee-based services, direct lending funds rely primarily on leveraged buyouts, refinancings and acquisitions to deploy capital. When mergers and acquisitions slow, the pipeline that feeds the industry begins to stall.

That dependence became visible during recent periods of market turbulence. Rising interest rates in 2022 and 2023 sharply reduced leveraged buyout activity as financing costs climbed and valuation expectations diverged. Similar dynamics reappeared in 2025 as geopolitical tensions and tariff uncertainty dampened corporate dealmaking. With fewer transactions coming to market, private credit funds accumulated significant levels of undeployed capital commonly referred to as dry powder. According to Capstone Partners, dry powder within U.S. direct lending funds reached a record $146 billion at the end of 2025 despite declining fundraising during the year. For an industry whose economics depend on putting money to work and earning interest spreads, extended periods of slow deal activity can quickly create pressure to deploy capital even when risk conditions deteriorate.

This dynamic has contributed to a shift in negotiating leverage toward borrowers. With large pools of capital competing for a limited number of deals, lenders increasingly face pressure to offer more favorable terms. Competition has intensified particularly in the lower middle market where many private credit funds seek higher yields. As a result leverage levels have crept upward while spreads have compressed.

Data from Raymond James illustrates the trend. In its Debt Market Insights report the firm estimated that interest coverage ratios for lower middle market borrowers declined to ~2.3x in the fourth quarter of 2025 from ~2.7x earlier in the year. At the same time loan pricing has tightened. Spreads on lower middle market first lien loans have compressed to around SOFR plus 500 basis points and in some cases as low as SOFR plus 475 basis points as lenders compete aggressively to deploy capital.

Industry reports suggest that total yields have followed a similar trajectory. Houlihan Lokey reported that yields on first lien loans declined to ~9.7% in the third quarter of 2025 compared with ~11.9% in 2023. At the same time leverage levels have continued to rise. According to S&P Global Market Intelligence, private credit default rates have increased to ~5% compared with ~3% during the 2021 to 2022 period. The growing use of payment-in-kind structures where borrowers defer interest payments by adding them to the principal balance further suggests that some companies are already experiencing pressure from higher borrowing costs.

Taken together these trends point toward a more challenging environment for private credit lenders. The extraordinary growth of the asset class over the past decade has been built on abundant capital, steady deal flow and the assumption that lenders could continue to command attractive risk premiums. Today that balance appears to be shifting. Leverage ratios in the lower middle market are rising even as spreads compress, leaving lenders with less cushion precisely as credit conditions become more uncertain.

Private credit remains a powerful force in modern finance and continues to provide an important source of capital for growing businesses. However the combination of record dry powder, increased competition and early signs of credit stress suggests that the next phase of the industry’s evolution may look different from the last decade. If deal activity remains subdued and defaults continue to rise, lenders may be forced to reassess pricing discipline, underwriting standards and portfolio risk. The same conditions that fueled the industry’s expansion could ultimately expose the vulnerabilities embedded within its model.

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In the lower middle market buying a company is only the beginning of the investment process. The real work begins after the deal closes. Unlike large-cap acquisitions where companies often already operate with mature systems and institutional management teams, many lower middle market businesses operate very differently. Firms generating between $10 million and $100 million in revenue are frequently founder-led and operationally informal with limited infrastructure to support scale. Because of this the presence of the right operator often determines whether an acquisition becomes a solid investment or a transformational one.

An operator often referred to as an operating partner is typically an experienced executive or industry specialist who works alongside investors to improve the performance of portfolio companies. Their responsibilities extend far beyond advisory roles. Operators help professionalize organizations by strengthening management teams, implementing operational discipline and executing strategic initiatives that expand revenue and improve margins. In many cases they serve as the bridge between the investment thesis developed during diligence and the operational execution required to realize that thesis. This focus on operational improvement has become increasingly central to private equity investing. According to research from Preqin, many firms are relying more heavily on operational enhancements rather than financial engineering to generate returns

The importance of operators has grown significantly over the past decade as the private equity industry has evolved. In earlier cycles firms could rely heavily on financial engineering through leverage and multiple expansion to generate returns. Today those levers are less reliable. Higher interest rates, tighter lending standards and increased competition for assets have pushed investors toward operational value creation. According to industry analysis from Bain & Company, more than half of private equity value creation in recent years has come from operational improvements rather than financial structuring.

This dynamic is particularly pronounced in the lower middle market. Many companies entering institutional ownership for the first time lack professional reporting systems, modern technology infrastructure or scalable processes. Sales efforts may rely heavily on founder relationships. Pricing strategies may be inconsistent. Back-office systems may not support growth across multiple locations. These conditions create meaningful operational upside for investors capable of improving the underlying business.

Operators play a central role in unlocking that potential. Their work often begins with establishing basic operating discipline. This can include implementing standardized financial reporting, building forecasting capabilities, introducing pricing frameworks and developing repeatable sales processes. In service businesses it may involve improving route density, expanding maintenance contracts or introducing customer relationship management systems that strengthen retention and cross selling.

Operational involvement early in the investment process has also been shown to improve outcomes. Research from McKinsey examining hundreds of mid-market transactions found that companies where operational planning began during diligence achieved significantly stronger EBITDA growth than those where operational initiatives were introduced only after closing. This finding underscores the importance of integrating operators into the deal process itself rather than relying on them solely during the post-acquisition phase.

Operators also play a key role in executing growth strategies once a company stabilizes. These initiatives often include expanding into adjacent markets, improving pricing discipline, developing new service offerings and pursuing add-on acquisitions. In fragmented industries such as home services business services and specialty manufacturing add-on acquisitions have become one of the most effective ways to accelerate growth. Experienced operators help management teams identify targets, integrate acquisitions and build systems capable of supporting a multi-location platform. According to PitchBook research, add-on acquisitions have accounted for the majority of private equity buyout activity in recent years, highlighting the importance of experienced operators who can integrate acquisitions and scale platforms effectively.

Talent development represents another critical dimension of the operator role. Founder-led companies often have strong leadership at the top but limited depth in areas such as finance operations or sales leadership. Operators frequently assist in recruiting senior executives structuring incentive plans and building management teams capable of scaling the business beyond its original footprint.

The lower middle market remains one of the few segments where operational improvements can fundamentally reshape a company’s trajectory. While capital and deal sourcing remain important competitive advantages investors increasingly differentiate themselves through the operational expertise they bring to portfolio companies. Firms that combine capital with experienced operators are often better positioned to transform founder-led businesses into scalable platforms.

For this reason the operator is no longer a supporting participant in private equity transactions. In many lower middle market acquisitions the operator has become the central driver of value creation. Their ability to translate investment strategy into operational execution frequently determines whether a business simply grows or evolves into a durable high-performing enterprise.

WestGate Partners (WGP) is an independent sponsor focused on acquiring and growing lower middle market businesses in essential residential and commercial services. We bring institutional experience, tailored capital with hands-on partnership to help owners transition, grow and preserve their legacy. By partnering with strong operators, we build enduring businesses in economically-insulated industries.