Following a bumper year of transactions in 2021 and in the first half of this year, deal activity across Asia has started to slow down. While M&A deals are still happening, they are taking longer to complete, because of multiple economic challenges facing buyers, and many sellers are holding out for a better price. However, despite the uncertainty, most deals are still going ahead, which is good news for all sides. On the insurance side, we believe that we are soon likely to see a renewed interest in insuring M&A deals as buyers seek to protect their investments. So far, this year the biggest growth area has been in tax-related insurance submissions, particularly in the Australian market, although India still dominates– remaining the most established tax market in the Asian region.
Given the vast size and economic differences between each of the countries in Asia Pacific they are likely to be impacted in different ways if there is a global economic slowdown. Currently, each is performing at a different pace and there will very likely be some markets that continue to grow even in the expected downturn.
Opening up of China
As one of the biggest players in the market, China’s performance impacts the other countries in our region. The Chinese economy has remained fairly stable since the pandemic, although subsequent lockdowns in the last couple of months are likely to spur a slowdown, and of course uncertainty over Taiwan casts a long economic shadow over the whole region. However, M&A activity in the region currently remains strong. If Xi Jinping, as expected, secures a third term as President he may open up the Chinese economy further and China will have renewed appetite for outbound investment.
Soft vs hard recession
As the global economy continues to face several headwinds, including rising inflation and interest rates, energy crises, supply chain disruptions and geopolitical tensions, there are already signs that there will be a recession. Yet there is much uncertainty around how soft or hard this will be and the level of its impact on the M&A market in Asia Pacific.
A soft recession across the region could lead to a slight slowdown in the market where some countries may not even be impacted. However, if the larger economies go into a hard recession this will have a domino effect on the others, and impact cross-border transactions.
A hard recession across most markets may mean a significant slowdown in M&A activity but in insurance terms could well lead to an increase in insurance buying as dealmakers will be more cautious in a period of uncertainty.
Meanwhile, pricing is currently a point of deal-making contention. There is a significant mismatch between what the buyers are willing to pay and expectations that sellers have on price. If recession bites hard, there will need to be a period of realignment that may last between six months to a year. Once the price gap has realigned, private equity investors, many of whom still have ‘dry powder’ available, will take the opportunity to make acquisitions at a good price. It is these deals that will drive further demand for W&I insurance – meaning that even a reduction in deal value could still mean continued demand for the insurance product.
A further interesting trend has been the uptick in claims notices in the first half of 2022. We predicted this in 2021, but it failed to materialize, possibly due to buyers still being fully focused on the search for new acquisitions. But, arriving later than expected, claims activity has indeed picked up since early 2022. We have seen an increase in precautionary notices as buyers look for issues to pursue, driven by a desire to recoup cash from what they now see as over-priced acquisitions made in the last couple of years.
The demand for W&I insurance will continue to be stable in Asia. In the last two years the demand has been driven by a boom in M&A transactions. However, as nervousness grows around a potential slowdown in the market that in itself will drive buyer desire to use the product as buyers look to protect their investments in a global economic downturn.