'Market volatility drives demand for M&A insurance'
The market for M&A cover remains healthy, even if the overall numbers of deals are down. If peace can be achieved in Ukraine, a side-benefit could be that the M&A market may have a strong close to this rollercoaster year
This year’s Russian invasion of Ukraine, like any other macro uncertainty, has had a direct impact on mergers and acquisitions (M&A) and has led to a slowdown in M&A activity.
The invasion has driven volatility across pricing, with movements in interest rates, currency swings and dramatic rises in raw input costs that have led to caution in the market, as well, of course, as rampant inflation in many countries.
The Ukraine crisis is particularly affecting M&A because it exacerbates pre-existing supply chain difficulties, the impact of which will call into question the saleability of certain businesses, making valuations difficult.
The M&A market requires stability to allow pricing models to produce rational and effective valuations and stability is in very short supply in most markets.As a result, in the past few months a number of deals have not progressed or have been put on hold because of market volatility.
There is also nervousness in relation to Russian investment in deals and deal-makers most definitely do not want to contravene the international sanctions that have been put in place. This uncertainty reaches through all company sizes and is therefore also affecting mega-deals.
The M&A market requires stability to allow pricing models to produce rational and effective valuations and stability is in very short supply in most markets
However, while there may be less deal volume as a consequence of political uncertainty, the participants in the deals that are being done are much more likely to buy insurance, simply because of the unpredictable nature of the market; allied to an inherent desire to dial down risk wherever possible in a volatile situation. The market for M&A cover remains healthy, even if the overall numbers of deals are down.
The uncertainty of the past few years, as well as the increasing “embedding” of the M&A insurance product into the DNA of transactions, has driven a long-term upwards trend in the number of insurance enquiries for warranty and indemnity cover.
Had the busy M&A environment of 2021 continued unabated in 2022, we would have been looking at a record year for the product. It is no surprise we have seen some slowdown in activity irrespective of the conflict in Ukraine.
Dry powder
However, in spite of these challenges, there remain investors that continue to seek deal-making opportunities.
The pandemic has brought the majority of private equity players into sync and allowed them to enjoy a phase of growing their acquisitions before divesting out of them but, surprisingly, and in spite of this, available cash still abounds. The need to make returns to investors, the high inflation environment, and a number of undervalued assets may lead to private equity firms taking the opportunity to invest further.
However, the strategics are definitely being more cautious, particularly as a number of deals have already fallen over. Some of those that do not have to make returns to investors will most likely move their cash into accounts to make money on interest.
Deal activity may begin to suffer if interest rates rise further, causing the cost of capital to increase, as businesses start to look at alternative sources of revenue such as cash or treasury bonds.
Rising claims
Finally, let us consider the impact of all this on claims – the back-end story of our product. In my view, the number of claims will increase over the next year as businesses continue to face further regulatory reforms and economic challenges.
Claims related to tax issues are likely to continue to grow as regulatory authorities increase scrutiny and compliance to strengthen budgets depleted by Covid-related recovery spending. This is already driving greater interest in tax liability cover for M&A deals.
Other factors will also lead to increased claims inter alia employment-related ones linked to pandemic-induced shutdowns. Claims related to environmental, social and governance issues will likely grow as authorities move towards green economy adjustments. Social and monetary inflation will also continue to affect M&A claims.
Carriers in this space will do well to consider the likely trajectory of claims as they look at ratios. However, with all this said, if peace can be achieved in Ukraine, a side-benefit could be that the M&A market may have a strong close to this rollercoaster year.
Rowan Bamford is president of Liberty Global Transaction Solutions