It is always interesting to investigate the behind-the-scenes data describing the deal market. In 2022 deals have been hard to come by, but it seems like things may have turned around in Q2. Lower middle-market M&A was strong as sell-side activity reached new heights, representing a year-over-year surge of 20 percent and an increase of 8 percent in the first half of the year.

This comes from a report by Axial, which tracks buy-side and sell-side pursuit data and shines a light on some of the variables pushing dealmaking through the uncertain market conditions of 2022. The pursuit rate represents the level of buyer interest in assets based on Axial’s platform. A 15 percent pursuit rate represents elevated interest among buyers.

While the buy-side is receiving more dealmaking mandates and sell-side activity is high, only 25 percent of 2022 pursuit rates are above Axial’s threshold, showing more evidence that buyers are being selective and representing a decrease from 2021.

“There is still plenty of appetite to do deals in today’s market, buyers are just more conservative when it comes to making offers,” says Peter Lehrman, CEO of Axial. “Buyers are hesitant to think that 2021 is repeatable, and looking at pre-pandemic numbers isn’t particularly helpful since the economy was at such a high. That makes forecasting especially difficult, and in tandem with the higher interest rate environment, it often creates a pricing disconnect between buyers and sellers.”

Although sell-side volume has increased, pursuit rates in most sectors are still down. “One way people began to differentiate a few years ago is through specialization – firms would focus on healthcare or industrials –  but that specialization has intensified,” adds Lehrman. “In order to differentiate today, buyers are drilling down to the next layer of specificity; now it’s a focus only on dental, or home health, or gaskets & pumps.”

One example of this niche specialization is the increased pursuit rates of the agriculture sector. In the first six months of 2022, nearly 50 percent of agriculture sector targets saw a pursuit rate above the 15 percent index. Niches like fertilizer and soil amendment have seen interest as the war in Ukraine has disrupted the industry and buyers have seen an opportunity amidst the perceived food shortage.

With industries like agriculture receiving specialized niche interest from dealmakers, it will be noteworthy to see which other niches emerge for M&A. Let me know your thoughts on possible future niches at [email protected]

-Cole Lipsky