Mergers & Acquisitions “sat down” with Bain & Co.’s SPS a while back to discuss trends in the lower middle market, but a few nagging details keep me circling back to that interview. We’ve already examined the visibility gap that separates dealmakers immersed in market flow from those who might only see as few as 15 percent of target deals, and dove into key ways general partners can narrow that gap. But there are further findings from the Fall 2021 report that warrant further note: PE firms are turning to unprofitable and “out-of-favor” sectors.

For starters, one of the most attractive groups of companies in SPS’ 3,500 potential deal dataset spanning 2020 to September 2021 were unprofitable firms, which “generated a higher pursuit rate on average than assets barely above break-even, perhaps a nod to the value hunters seeking distressed sales,” the report reads. Those with profit margins in excess of 15 percent fared better, but it’s intriguing to see that private equity’s search for value is now breaching traditional profit conventions.

Speaking of conventions, another taboo is being broken by this data set. Buyers using Axial’s platform in the middle market actually indicate more interest in sectors that have yet to lead league tables (high interest in financial and business services being notable exceptions). To the extent that bidders’ non-disclosure agreements and letters of intent are a forward-looking indicator of deal activity, the volume of preliminary interest in education and food & hospitality implies that more robust deal volumes are ahead for these sectors.

Private equity continues to hunt for deals in an increasingly expensive market. Perhaps turning to “out-of-favor” sectors and marginally unprofitable companies are strategies to maintain deal flow.