According to a Capstone Partners report, “February 2022 Food & Agriculture Sector Update,” merger and acquisition (M&A) volume in the food and agriculture sector surged 17% year-over-year (YOY) in 2021 with 383 deals announced or completed, which marked the highest number of transactions in over four years.

The prospect of capital gains tax increases is reported to be the driving factor in a flurry of transaction activity at the beginning of 2021 with many business owners expediting their exit timeline to capture larger take home earnings. While the capital gains tax increase did not manifest in 2021, deal activity continued to move forward as sellers capitalized on favorable valuations and an active pool of buyers. The low cost of capital and healthy strategic company balance sheets also allowed for aggressive bids in M&A sale processes.

Private strategic buyers continued to lead transaction activity in 2021, accounting for 45% of total M&A volume. Much of the focus among strategic players, and motivations for M&A, has been to achieve enhanced scale and better control over their supply chain, according to Capstone.

The sector has also seen significant channel crossover, especially among foodservice players, which increasingly sought acquisitions in the grocery and retail end markets following drastic declines in restaurant sales during the height of the pandemic.

The reports reveals that private equity firms have also actively targeted the sector, comprising 36% of 2021 transaction volume—its highest level in over four years. The overall food and beverage sector has been the most sought-after space among private equity firms in Capstone’s proprietary database. In addition to the ingredients and flavors segment, financial buyers have demonstrated a strong appetite for contract manufacturers serving customers in the food industry, often adding on to portfolio holdings through acquisitions.