2021 ended up being a bumper year for M&A deals and also for M&A insurers. It is interesting that not all the increase in premium came from extra deals being done. 2021 also saw a step change in how dealmakers see deal risk, and the part that they want insurers to play in mitigating it. This has increased the take-up of this class of insurance.
Where once M&A insurance was a nice-to-have, perhaps suggested by buyers to cover a single unquantifiable risk identified during due diligence (a looming tax liability or an ongoing legal or contract issue), M&A counterparties now have much greater anxieties about uncertainties behind the deals that they doing.
Some of this concern is industry related. Healthcare M&A, for example, comes with its own health warning. In this sector, the post-deal litigation and compensation risks are high. There is also a real danger around audit risk for medical billing and coding, where inaccurate billing, sometimes semi-fraudulent in nature, can be uncovered after an acquisition is made.
But some of the risks that are preoccupying dealmakers are much more global and general. One emerging trend in 2022 that will continue to worry all parties is the move towards much more aggressive tax auditing by authorities across the globe, as they focus on recovering some of the fiscal spending spent during the pandemic. This is certainly a heightened risk area for deals in 2022, and this is already driving increased interest in buying tax liability cover.
Increased regulation is also a concern for dealmakers. PE firms ask themselves if regulators will start taking different and more stringent views in the light of what has happened in the last two years. This sits alongside the even more concerning question of whether increased ESG regulation will bring negatives to what were previously positive acquisition targets. We believe that the answer is yes and, amongst other things, have launched our contingent risk group to look at this new type risk.
Social inflation is another big concern at present. Corporates are having to look back at past positions and reassess them. Decisions and past actions taken that previously seemed rational are now raising eyebrows, and in some cases impacting jury decisions and regulatory thinking. For M&A buyers this is a terrifying prospect. If social consciences cause current thinking to be applied to the past, this could bring big changes to previously ‘safe’ acquisition plays.
As a result of all of these factors, I predict with confidence that in 2022, M&A underwriters will be writing a greater percentage of the deals done in the market. While it is difficult to predict what the M&A market itself will do, we feel certain that the product penetration will continue its upward growth trend.
What about the M&A market itself? It appears certain that the M&A market will remain strong through the first half of next year. After that, I predict that the pace may slow, and perhaps slow significantly.
There are two factors that will drive this. On a practical level, the pandemic has brought together the cycle of buy – integrate – divest for a lot of private equity firms. All firms have been buying, and now all of them need to take time to integrate, polish, improve and grow the businesses that they have bought, before they divest them. This takes time and energy, and while normally, some PE firms are in buy mode, but others are not, the pandemic has brought them all into line. I consider it likely that there may be a collective taking of breath by PE this year – not for lack of dry powder, but because they all need to pay attention to the companies that they have already bought.
The second issue is that other forms of investment outside private equity may become more attractive with the passing of time (e.g. increased interest rates may make cash or treasury bonds more attractive than at present). If this happens, it will certainly put a brake on some of the levels of cash coming into M&A.
So, who will buy what in 2022? ESG will certainly be a theme. In 2021 ESG-related acquisitions more than doubled as CEOs looked to reshape their businesses around a low-carbon future. This is a mega trend that has only just begun – one which I predict will run and run, just as the twenty year-long tech boom has run and run (and continues to do so as we speak). Businesses continue to try to inorganically source technology solutions as they look to update their businesses; and I see no likelihood of that diminishing in the year ahead. Both tech and ESG M&A will be much discussed and much enacted in 2022.
In conclusion, 2022 looks set to be an exciting year for M&A; one in which global mega-trends drive deals; but also one in which dealmakers worry about increased macro-economic risks, and as a result, look to pull the protective shroud of M&A insurance ever more regularly and tightly around their dealmaking shoulders.