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Private equity deals and Middle East demand drive M&A insurance optimism

PwC says increased inflation, a cost of living crisis and a possible global recession are likely to surpress deal-making, with deal value in H1 already down 20% on the same period of 2021

Amid fears of a global recession, market participants remain upbeat and say volatility could make transaction liability insurance more attractive to buyers and sellers who want a quick and relatively less risky deal-making process

Despite a global slowdown in merger and acquisition (M&A) activity, brokers and underwriters remain optimistic M&A insurance will grow in popularity as a result of an increased interest from private equity and deeper market penetration into the Middle East.

So far 2022 has not been spectacular for transactions compared with the record-breaking year before, which witnessed more than 60,000 publicly disclosed deals worth more than $5trn in value.

Deal value in the first half of 2022 was down 20% compared with the same time last year and is likely to dencrease further as the market reacts to the economic calamity of increased inflation, a cost of living crisis and a possible global recession, according to PwC.

But although it might seem counterintuitive to remain optimistic about M&A insurance, given volume levels are down, market participants say a volatile market could end up making the product more attractive to buyers and sellers who want a quick and relatively less risky deal-making process.

One reason M&A insurance has become more popular is that it allows private equity investors to complete a deal and free up capital quickly without having to wait five to seven years for all claims from the deal to resolve.

Simon Price, head of M&A for the UK and Lloyd's at Axa XL, says the lingering question for those in transaction insurance is how the product will withstand a downturn in M&A deals. He refers to this as a “decoupling” of M&A insurance from M&A deals, but adds that despite a slight slowdown in the past few months, he remains cautiously optimistic the lines of business will rebound by the end of the year.

“The advantage of M&A insurance is it allows sellers to get these clean exits. In a tough market as deals get riskier, we would expect more people to become risk averse,” Price says. “Some buyers might say they can do a deal without this insurance, but as things get trickier you can expect more people will want this product.”

“The advantage of M&A insurance is it allows sellers to get these clean exits. In a tough market as deals get riskier, we would expect more people to become risk averse”
Simon Price
Axa XL

Rowan Bamford, president of Liberty Global Transaction Solutions, is also optimistic despite a slowdown in submissions.

“Submission flow is down approximately 10% as we approach a global slow down,” Bamford says. “What we know from experience is when there is global economic uncertainty, M&A deal-makers are more cautious and therefore more inclined to insure. Product penetration increases in uncertain times.”

Price points out M&A insurance will never be suitable for all deals, but estimates 20% to 30% of all transactions involve insurance.

“That means about 70% go without any coverage. As the market becomes riskier, this insurance penetrates into more markets. The mature markets like the UK, the US and the Nordics have used this product and are comfortable with it, but we are also seeing an increase in the Middle East and Africa,” he says.

Sam Whiteman, senior vice-president and head of international transactional liability at Mosaic Insurance, says the use of M&A insurance in Dubai, Abu Dhabi and the rest of the United Arab Emirates has been increasing beyond the handful of deals he used to see each year.

The increase is both nationally and internationally, with larger sovereign funds making inward and outward investments, Whiteman adds.

Bamford also highlights an increase in activity from the Middle East in M&A insurance. He says this reflects an increasing knowledge base among local advisers in the region.

“Many of these deals relate to outbound investment into the US and Europe, the Middle East and Africa. Our experience is the African market, excluding South Africa, is still in an embryonic state. Many of the deals that come out of Africa tend to be smaller and therefore get insured by the small to medium-sized enterprise M&A market,” he adds.

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