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The Lower Middle Market’s New Inflation Hedges

As the inflation threat looms, bringing with it the prospect of rising rates, Axial explores three areas where dealmakers may seek refuge, including two sectors that haven’t traditionally qualified as safe havens.

While there has been plenty of debate around the extent to which prices will continue to rise, most observers will acknowledge that inflationary environments, when there isn’t an end in sight, can have a chilling effect on M&A.

Rising interest rates, of course, increase the cost of capital for buyers, while business leaders contend with higher input costs and margin pressure that send those who don’t have to sell back to the sidelines.

That being said, certain sectors tend to be immune to the macroeconomic challenges that can generally torpedo deal activity in areas more exposed to the negative impacts of inflation. The caveat, today, is that the same safe havens that may have attracted acquirers during previous bouts of rising rates, may no longer offer the same defensive characteristics. Meanwhile, other areas are better positioned today than previous eras to withstand inflationary pressures.

Our latest Pursuits report, “The Lower Middle Market’s New Inflation Hedges,” explores the likely areas that could attract buyer interest in the event that the inflation threat becomes more pronounced in 2022. Some, such as healthcare, are familiar destinations for dealmakers seeking refuge from the inflationary storm, but others may not be considered traditional safe havens based on past perceptions or previous levels of deal activity.

This month’s report features commentary from professionals at Cascade Partners, M&A Healthcare Advisors, SDR Ventures and FOCUS Investment Banking. The report also shares Axial’s proprietary acquirer “intent’ data providing cues on how buyers are reacting to a quickly changing deal landscape.

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