A View From Me on ‘23 – Coverage vital as M&A sector looks to the future

Josh Cowen, managing partner, Fusion Specialty UK and Katherine Simmonds, managing partner, Fusion Specialty Asia Pacific believe 2023 will still see M&A activity continue in the year ahead.

After a year in which global M&A activity was down but definitely not out, dealmaking looks set to remain a key feature of 2023. In an M&A insurance context, the uncertain economic environment and slowing deal timelines is encouraging more expansive due diligence and in turn facilitating broader cover without projected spikes in claims activity.

Despite headline grabbing tech-related megadeals such as Microsoft’s yet-to-close $69 billion purchase of Activision Blizzard and Elon Musk’s private equity-backed, $44 billion buyout of Twitter, 2022 has not matched records set in 2021 when PwC put publicly disclosed deal values at $5.1 trillion. That said, global deal data for 2022 suggests more robust M&A activity in line with recent historic averages (2021 aside). Rising interest rates, soaring inflation, stalling economies and continued uncertainty linked to the war in Ukraine have naturally tempered overall activity. Yet the headwinds giving some buyers pause for thought may now be catalysts themselves to global deal opportunity. The speed of transaction processes has certainly slowed in the second half of 2022, but M&A’s resilience against global challenges and adaptation to market conditions is once again starting to show through.

In the UK, for example, smaller ticket deals involving SMEs and lower mid-market (LMM) valued companies are less affected by the rising cost of debt finance and these are expected to remain steady, if not increase significantly, next year. Private equity remains a significant force; its mountain of dry powder, search for investments into recurring revenue business and desire for bolt-on growth to existing portfolios will continue to fuel activity. Domestically in the US, adverse developments such as supply chain pressures and increased compliance requirements are actually spurring deals as sellers look for exit opportunities and buyers look to capitalise on market terms that are turning in their favour. Divestitures, particularly of non-core assets, driven by harsher economic conditions are another major source of activity as corporate groups look to raise liquidity or create more immediate value for shareholders.

In terms of cross-border transactions, in the UK domestic political uncertainty has conspired with global inflationary pressures to push down the value of sterling, attracting capital interest from the US, Asia, Middle East and Africa. Further, a shift to M&A “friend-shoring” in the US has facilitated an increase in North American buyers, in particular, taking advantage of the suppression of economies oversees and conducting deals among “allied” countries. Market reports noted in Q3 that dealmakers in the Americas had delivered almost half of worldwide deal value in the first half of this year.

In the Pacific region, whilst interest rates have risen, the availability of debt finance remains strong and this has stemmed any potential decline in the private M&A market. Leveraged deals have contributed to an active deal environment where higher interest rates are affecting valuations (which have dropped 5-30% from the highest points of late 2021/early 2022) rather than deal execution.

South Asia represents another pocket of significant M&A opportunity, and this is expected to continue in 2023. North Asia now looks poised for an uptick in activity as the easing of Covid-related lockdowns and restrictions releases growth and pent-up demand.

The SME /LMM segment has traditionally been underpenetrated by warranty and indemnity (W&I) /representations and warranties (R&W) insurance, but as the segment proves to be the most resilient to fluctuating market conditions and macro-economic /political /social shock-factors, we expect to see an increase to demand from these deals for insurance solutions. Further, the rise in prominence of contingent risk liability insurance is set to continue as conditions point at a turn towards buyers’ markets pushing sellers to seek risk transfer of specific identified risks and avoid the ring-fencing of sale proceeds for long tail liability.

As insurance continues to weave through the fabric of global M&A, insurers and reinsurers will be focussed on what the market conditions and economic environment means for claims. Notably, any anticipated rise in claims frequency related to policy issues during the height of the COVID pandemic has not, as yet, materialised. The same can be said for current global economic conditions, rising inflation and the impact of global conflicts. This follows a historic trend that major economic events have not, in and of themselves, given rise to materially increased claims activity to M&A insurance policies and insurers are not predicting any sudden surge in frequency in any region. In fact, the claims environment for M&A insurers is helped by the slowing pace of M&A transactions and the shifting in power to buyers, by facilitating a more considered approach to due diligence. More importantly though, this will have a positive impact for clients to the scope and terms of cover insurers can offer and the associated costs.

As 2022 comes to a close, whilst a more challenging year for M&A and transactional risk insurance than the previous post-COVID buoyancy of 2021, the current macro environment does offer a number of silver linings for both dealmakers and their insurers. Key, as always, to a sustainable insurance market offering the breadth of cover to continue to facilitate global M&A, is keen transactional discipline and a thorough application of due diligence and assessment to risk.