How PE firms are unlocking value through surgical deal-making in a high-stakes market.
In this Q&A, ABF Journal Editor-in-Chief Rita Garwood speaks with Anthony Arnold, Chair of Barnes & Thornburg’s private equity practice, about the rise of carve-outs as a go-to deal strategy. From record dry powder to shifting corporate priorities and increased private credit participation, Arnold explains why these complex transactions are gaining traction — and what investors should be watching closely through 2026.
Rita Garwood: For those unfamiliar, what is a private equity carve-out, and why are they attracting so much attention right now?
Anthony Arnold: A carve-out is when a buyer — often a private equity fund — acquires a portion of a business rather than the whole thing. It could be a division, a product line, or even a subsidiary. These transactions are gaining attention because sellers are increasingly looking to streamline and focus on core operations. On the buy side, PE firms see opportunities to grow these businesses independently or bolt them onto existing platforms.
Garwood: What’s behind the recent uptick in carve-out activity?
Arnold: Several factors. First, there are simply more PE funds and more capital flowing into the market. Second, many corporate sellers are reassessing their portfolios, especially in light of regulatory and market shifts. Carve-outs used to be side deals — now they’re front and center.
Garwood: We’ve heard a lot about dry powder. How is that influencing carve-out deals specifically?
Arnold: Dry powder gives PE firms the firepower to pursue larger and more competitive carve-out opportunities. It’s not just about the initial acquisition. These funds also have the capital to invest post-closing — to improve operations, expand strategically, and ultimately increase the value of the carved-out business.
Garwood: How are higher interest rates affecting financing for carve-outs? Are private credit funds stepping in?
Arnold: Yes, absolutely. Carve-outs are tougher for banks to finance because the business being acquired often doesn’t have a standalone balance sheet. Private credit funds are stepping in with more flexible structures and a better understanding of these deals. They’re filling the gap left by more cautious traditional lenders.
Garwood: What are some of the common reasons corporate sellers choose to spin off business units?
Arnold: Sometimes it’s a failed acquisition that didn’t deliver the expected synergy. Other times, it’s about cutting non-core operations that are dragging down performance. PE funds step in with a plan to unlock value in a way the corporate seller can’t — through operational focus, creative structuring, and investment.
Garwood: What advantages do carve-outs offer private equity firms compared to traditional acquisitions?
Arnold: Flexibility. PE firms can pick and choose the assets they want and leave behind liabilities. From a legal standpoint, it’s more complex — but that specificity gives the buyer more control and reduces risk exposure.
Garwood: Can you share an example where a carve-out led to a strong return?
Arnold: We’ve seen several deals recently where PE funds acquired legacy consumer brands — household names — that had been neglected by their corporate owners. With focused investment and better strategy, those carved-out brands are now delivering strong returns.
Garwood: Which industries are seeing the most carve-out activity right now?
Arnold: Consumer products, healthcare, and industrials stand out. In consumer and industrials, supply chain disruptions and tariffs are pushing sellers to offload assets. In healthcare, regulatory shifts and margin pressure are creating divestiture opportunities.
Garwood: Looking ahead to 2025 and 2026, what’s your outlook for carve-out activity?
Arnold: Very bullish. Our summer has been one of the busiest on record. Deal flow is up, and clients are moving quickly. Many sellers are sitting on underperforming assets, and PE firms are well-positioned to move. I expect this momentum to continue into next year and beyond.
Garwood: Any final thoughts on what makes carve-outs so compelling for PE firms today?
Arnold: It’s the ability to create value post-closing. With the right plan — and a solid transitional services agreement — PE firms can carve out a business, support it during the transition, and then build it into something far more valuable. That’s the kind of alpha investors are looking for.