Manufacturing: Q4 2025 Report
As it relates to manufacturing, 2025 did not come out as strong as we expected as indicated by a purchase manufacturing index PMI below 50 for most of the year including the close of the year. M&A volumes in the sector were down for the year. We expected this to be much more robust given the money at funds that needs to be put to work and an administration that would cut taxes and regulation.
- We believe the tariffs enacted earlier in the year created a lot of uncertainty which led to manufacturers pausing some of their production to try and figure out the effects of the tariffs and the M&A markets also had to evaluate the effect of this and the uncertainty caused pause.
We are optimistic about the future potential for a more robust manufacturing market both in terms of production as well as deal activity. We believe this for several reasons:
- The Big Beautiful Bill has many pro-business initiatives such as lower taxes and accelerated depreciation on capital goods.
- Interest Rate Easing
- Tariffs coming off the table or at least being settled which creates less uncertainty and allows businesses to invest knowing what the rules are.
- Private Equity Funds are sitting on mountains of money that needs invested.
Manufacturing Data
Economic Data
Industry Trends
Private Equity is taking the lead in M&A in the manufacturing sector
Strategics are focused internally on upgrading their technology and they will generally pursue something if it fills a need (capability or end market) or it’s sizeable enough to be worth the effort.
Private Equity is dominating this space for several reasons.
- There are estimated to be almost 10,000 PE firms and most are sitting on money that needs deployed.
- Private Equity can acquire a string of private manufacturers and upgrade the technology as well as create a bigger platform so that the the total business grows in value.
- With a diversity of PE strategies there are buyers for everything from lower valued companies to highly valued companies.
Tariffs have created substitution effects
The tariffs have disproportionately targeted metals such as copper, steel and aluminum. This helped accelerate manufacturers looking to make product with other materials such as composites, polymers and ceramics. Often these are newer materials that in some case are superior but depending on the industry and product some companies may not feel comfortable adopting. This additional incentive is helping to drive additional demand and Manufacturers trying these alternative materials.
”A” assets are commanding premium valuations in the sector
There are a scarcity of quality “A” assets in the market. An “A “ asset is described as:
- Strong management team
- Strong end market: Aerospace, Space & Defense as well as data centers are two examples
- A differentiated offering whether process or product.
- Diversified revenue streams and strong growth prospects.
- Strong margins.
A company does not need all of these but the more they have the better. A assets have been commanding EBITDA multiples as high as 15x+.
The Purchasers Manufacturing Index (“PMI”) closed the year below 50
The PMI took a dip in the last month of the year. There may be some seasonality to this but we are looking forward to seeing how the PMI performs throughout the year. A PMI above 50 is generally though of indicating growth in the sector. From our vantage point we think there are reasons to be optimistic such as:
- Interest rates are moving lower.
- Newly enacted rules for accelerated depreciation should incentivize more investment.
- Reshoring continues driven by a demand for more local sourcing as well as new technology that is leveling the playing field with low cost labor countries.
