Following consecutive years of record M&A activity, and the growing use of transaction risk insurance across multiple sectors and jurisdictions, the second half of 2023 appears to have finally begun to see a more persistent slowdown in M&A dealmaking.
Auction and bilateral sales processes are taking ever longer, with wider bid ask spreads even derailing some sales processes (or have resulted in them being put on hold). Inflationary pressures, the rising cost of finance and market uncertainty have suppressed confidence in M&A activity.
That said, some market participants have significant “dry powder” and are still keen to select the right deals. Renewables and other green energy deals have remained resilient, albeit as outliers.
Transactional risk insurance is a dynamic product which continues to evolve to meet the needs of corporate, institutional and private equity clients alike.
Reduction in “hard staple” processes and need for “trees”
The subtle shift from a seller’s market to increasingly a buyer’s market, has led to a move away from the trend of so-called “hard staple” auction processes – where substantive W&I underwriting is undertaken on the sell-side using vendor due diligence – to a “soft staple” process. There are still benefits to the seller retaining control and oversight of the W&I process with a lighter touch (particularly in an auction context), without incurring upfront costs to do so. We are also seeing fewer requests to begin underwriting prior to bidder(s) obtaining exclusivity, easing the requirement for multiple trees that had become commonplace on large deals.
Use of W&I in more complex deal structures
W&I insurance continues to evolve. We have recent experience of providing insurance solutions on public to private (P2P) deals, large cross border mergers, joint ventures, co-investment and minority investment deal structures.
Growth of W&I usage in secondaries transactions
There has also been a noticeable increase in W&I insurance usage in secondaries transactions. Funds holding trophy assets which have a strong performance track record, unable to achieve the valuations (or IPO exit) previously anticipated, have changed course and looked for alternative ways to elongate the life of their investment(s).
This has translated into W&I insurance solutions specifically tailored to secondaries transactions (both GP-led and LP-led) – facilitating an exit route for some investors and providing an insurance solution for the continuation vehicle for (re)investors. At Liberty GTS, we have a dedicated team who are familiar with the nuances this entails.
“End of Fund Life” insurance
For other funds reaching the end of their lifespan – even where a buy-side W&I policies may have been proscribed on various corporate disposals from the fund itself – the fund may retain certain liabilities which prevent timely winding up and distribution to investors (which can impact its rate of return). In these circumstances, an “end of fund life” W&I policy can potentially wrap these liabilities to facilitate the exit. We have seen an increase in these types of enquiries recently as multiple funds established during a booming period in M&A and fundraising reach their conclusion at similar times.
The process of unearthing the original acquisition documentation may also reveal historic identified issues which are unsuitable for W&I coverage. Depending on the facts, circumstances and quantum of these risks, a bespoke tax liability insurance, contingent legal risk insurance or environmental impairment liability insurance solution may be available by way of an alternative. Liberty GTS has expertise and capabilities to provide solutions for each of these.
Increase in tax and contingent legal risk insurance submissions
Despite the stagnation in M&A growth and IPO activity, often a source for specific risks, the tax liability insurance and contingent legal risk insurance markets have continued to mature and grow, supported by the welcome increase of dedicated specialists at our broker partners throughout EMEA. The increase in corporate restructurings and reorganisations presents clients with similar risks to those typically identified in M&A processes – requiring the same innovative bespoke insurance solutions.
Tax Litigation
Increased competition, along with the growth of sophisticated cross-disciplinary underwriting teams such as at Liberty GTS, where we have both tax and litigation specialists with complementary skill sets, has also led to the expansion of tax liability insurance into more complex tax risks – either where such taxes are already under audit or already in litigation (more typically, adverse judgement insurance).
Conclusion
Despite the more challenging and quieter M&A market conditions as we move into the final quarter of 2023, transactional risk insurance continues to adapt and evolve to suit the needs of its clients – particularly for those able to take advantage of the uncertainty.
