Lower Middle Market Pursuits: Quantifying Buyer Intent In The LMM

It’s not every day new metrics are introduced that can help M&A professionals better understand the markets within which they operate. This is in part because “closed deal” data and average acquisition multiples do a pretty good job already capturing the pace of activity at a given point in time and the demand that exists in certain segments. This is particularly the case as practitioners accumulate longitudinal data that provides visibility into trends over time. The catch for middle market dealmakers is that industry data doesn’t always reflect activity in this specific corner of the market, where deal valuations are only very rarely disclosed and quickly get drowned out by the billion-dollar mega deals that alone can dictate market trends.

To help fill the informational gap, we’re proud to introduce a new report, “Lower Middle Market Pursuits,” that offers a new reading for dealmakers that we believe can add further cues around “buyer intent.” And with a focus exclusively on the lower middle market, we hope we’re able to provide some light where previously little visibility could be found. The debut report can be found here.

For the uninitiated, the “pursuit rate” is a new measure that tracks buyer interest in available assets as soon as a deal goes to market on the Axial network. It’s akin to a Nielsen rating that tracks the targets prospective buyers are “watching” and increases as interested parties request additional information. If NDAs, IOIs, and LOIs reflect the progression of interest among dealmakers, the pursuit rate offers insights into the very first impulses of prospective buyers. 

To be sure, closed deals will always provide more concrete conclusions around actual buyer appetites. Pursuit rates, alternatively, represent a forward-looking measure that can offer insights around specific attributes that stand out on a real-time basis. 

As the inaugural report highlights, the average “pursuit rate” across lower middle market activity conducted on the Axial platform held steady in 2020, even amid the COVID lockdowns. The steady interest throughout a period of turmoil underscores the shift last year in which deal funnels saw low-quality properties move to the sidelines, as high-quality assets moved in and absorbed heightened acquirer attention. Meanwhile, throughout the first three quarters of 2021, when lower-margin assets again flooded the market, the average pursuit rate dropped off. In trying to extrapolate seller intentions from the data, it appears that those who had been putting off asset sales jumped the gun at the very first sign of light, but prospective buyers showed a hesitancy to chase riskier assets. 

This only scratches at the surface of some of the takeaways from the data. For instance, other correlations could be found between the average pursuit rates and the size of the target companies, the quality of assets for sale based on EBITDA margins, and even by seller type. While some of the findings seemed to confirm prevailing perceptions – such as heightened buyer interest in proprietary dealflow – other takeaways went against the conventional wisdom. For instance, unprofitable targets, on average, generated higher pursuit rates than companies that were barely profitable, underscoring the hunt for value that occupied buyer activity this year.

To be sure, the transactions conducted via Axial does not reflect a comprehensive record of all deal activity across the entire lower middle market. And the data used in the report has been aggregated an anonymized, as all prospective deals on the Axial platform are confidential. But with over 20,000 active members on the platform, and approximately 6,000-plus deals conducted each year, we believe that some of our data sets are now of sufficient scale to offer a window into certain major trends influencing the lower middle market. 

We hope you enjoy the report! 

Click Here to Download the Fall 2021 Lower Middle Market Pursuits Report