The Diverging Paths of Investment Banking in 2025: Middle-Market Dealmaking and the Uneven Recovery

The investment banking sector in 2025 is navigating a paradox: a broad-based rebound in revenue and deal activity, yet stark divergences in performance between large bulge bracket firms and their regional counterparts. This divergence is most pronounced in the middle-market dealmaking landscape, where macroeconomic tailwinds and capital market dynamics are reshaping the competitive order.

According to a report by PwC, global M&A volumes in the first half of 2025 fell by 9% compared to the same period in 2024, but deal values surged by 15%, driven by a 19% increase in mega-deals exceeding $1 billion [1]. This shift toward larger transactions has disproportionately benefited large banks, which dominate the advisory and underwriting of high-stakes cross-border deals. Goldman Sachs, for instance, reported a 26% year-over-year increase in investment banking net revenue to $2.19 billion in Q2 2025, fueled by a 71% surge in advisory fees [2]. Similarly, JPMorgan Chase saw a 28% rise in advisory revenue, reflecting its stronghold in sponsor-led M&A and equity capital markets [2].

Meanwhile, the middle market—long a sweet spot for regional and second-tier banks—has shown uneven resilience. While U.S. private equity deal activity in Q2 2025 totaled 2,158 transactions (a 5% drop quarter-over-quarter), the average transaction value rose to $104.3 million, up from $89.2 million in Q1 [4]. This suggests a consolidation of deal sizes, with larger private equity sponsors prioritizing scale. For regional banks, which traditionally specialize in smaller, niche transactions, this trend has created headwinds. Data from Axial’s Q1 2023 rankings indicates that regional banks facilitated an average of $21.4 million in revenue per deal, but the number of such deals fell by 16% in 2023 amid broader economic uncertainty [3].

The divergence is further amplified by valuation dynamics. In the middle market, investor interest has concentrated on transactions valued between $100 million and $250 million, where valuation multiples rose to 10.0x TEV/EBITDA in 2025, up from 8.5x in 2024 [4]. Sectors like healthcare and technology have been particularly attractive, with 3G Capital’s $10.4 billion take-private of Skechers underscoring the appetite for strategic consolidation [1]. Large banks, with their global reach and deep sector expertise, have capitalized on these trends, while regional banks have struggled to compete on scale.

Yet the future is not entirely bleak for smaller players. The Federal Reserve’s anticipated rate cuts in 2025 are expected to stabilize financing conditions and narrow valuation gaps between buyers and sellers [4]. This could spur a wave of middle-market deals in the second half of the year, particularly in sectors like business services and retail, where margins are defensible. Moreover, regulatory shifts—such as eased merger rules and reduced macroeconomic risks from tariff negotiations—are likely to catalyze activity [6]. For regional banks, the challenge will be to leverage their agility and local networks to secure a share of this rebound.

The broader banking sector, however, remains under pressure. While investment banks reported a 15% year-over-year revenue increase in Q2 2025, the FDIC noted a 1% decline in net income for the broader banking industry, driven by a 33.7% spike in provision expenses linked to a large bank acquisition [5]. This underscores the fragility of the recovery, particularly for institutions reliant on fixed income trading, where performance varied widely across firms [2].

In conclusion, the investment banking sector in 2025 is defined by two narratives: a robust rebound in large-cap dealmaking and advisory services, and a more tentative recovery in the middle market. For large banks, the path forward is clear—capitalizing on dry powder, tech-driven consolidation, and regulatory tailwinds. For regional banks, the challenge will be to adapt to a landscape increasingly dominated by scale, while leveraging their niche expertise to capture pockets of growth.

Source:
[1] Global M&A industry trends: 2025 mid-year outlook [https://www.pwc.com/gx/en/services/deals/trends.html]
[2] Investment Banking: Industry Trends Q2 2025 [https://premium.f1gmat.com/investment-banking/trends/2025/Q2]
[3] Top 25 Lower Middle Market Investment Banks | Q1 2023 - Axial [https://www.axial.net/forum/top-25-lower-middle-market-investment-banks-q1-2023/]
[4] Q2 2025 Middle-Market M&A Insights: Signs of Potential Recovery [https://www.forvismazars.us/forsights/2025/09/q2-2025-middle-market-m-a-insights-signs-of-potential-recovery]
[5] Q2 Banking Trends: Lower Net Income, Higher Loan ... [https://americandeposits.com/insights/2025-q2-banking-trends/]
[6] Banking M&A Poised to Pick Up in 2025 [https://www.morganstanley.com/insights/articles/banking-mergers-and-acquisitions-pick-up-2025]