Six reasons to be cheerful in 2023

As M&A insurers, we ended 2022 in a much quieter place than we began.  With many PE firms holding back their dry powder and rethinking their financing models to take account of global inflation, the pause in deal volume has given me some time to consider what we can expect from 2023.

Perhaps I am naturally optimistic, but I see a surprising number of good reasons for some (albeit subdued) confidence about the coming year.  Let’s look ahead to my six reasons for new year cheer:

Our core clients will continue to transact

The stronger private equity firms, and those who have proven track records, are likely to continue to transact in the year ahead, albeit selectively and with discretion.  For Liberty GTS, these are our heartland clients; and we expect to continue to help them participate in these types of deals throughout 2023. 

Due diligence will improve

Meanwhile, some of the weaker and less well-capitalized private equity firms will see enforced pauses on their activity, and this will bring down overall deal volumes.  As a result, competitive tension will undoubtedly reduce, and the pressure to complete deals within unrealistically short periods will also reduce.  For the transaction teams this brings a beneficial environment, in which, for the first time in over three years, they will be able to focus properly on due diligence, conducting it in person where necessary, and taking time to understand all the financials, contracts and quirks behind each deal target.

So, cheeringly, the deals that do go through are likely to be well thought through and properly checked, which may ultimately result in less claims coming through to us.

Reduced multiples will shrink claim sizes

M&A pricing will certainly be under pressure in 2023.  As financing sources shrink and interest rates rise, PE firms will struggle to borrow at previous levels and this will bring an enforced drop in offer levels.  10x multiples look set to become more like 5x multiples, and this is a straight six (to use a cricketing analogy) for us as insurers.  The smaller the multiple, the smaller the exposure we take as insurers.  This, in turn, means we’ll be able to live up to our service promises to pay our claims on time and to value – a win for everyone involved.

Buyers and sellers are now on the same page

It is no longer news to anyone that the global economy is in a downturn.  As insurers, there is a positive side to this too.  For much of the last year, we have feared insurance claims based on a mismatch of expectations between buyers and seller.  Buyers lifting the lid to a nasty surprise when they look at the detail of what they have bought brings nobody any joy.  But – for the animal lovers among you – if you buy a dog that you already know has fleas and perhaps a touch of mange, you buy it more cheaply, prepared to take time to clean it up and see the benefits of a loving brush and polish.  Then you’re much less likely to regret your purchase and make a claim on the basis the dog was sold to you under false pretenses.

Tax is an area of opportunity

We also see new opportunities in the changed economic landscape.  As governments look to raise money through higher taxes, there will be an increased need for my tax specialist colleagues.  Many companies will look to reorganize themselves for tax purposes – which may lead to M&A outcomes; or to reorganize the tax provision that sits on their accounts currently.  Here tax insurance products that can crystallize the cost of an expected tax liability that might well go up over the coming year, will suddenly look highly attractive.  Expect growth in this field next year.

The types of deals will be different

2023 will not be the year of the big retail or service industry deal (unless there is distress involved).  Instead, we expect to see recession-proof infrastructure assets (such as road networks and water companies) being bought and sold, alongside renewable energy infrastructure.  These are bigger deals that play to Liberty GTS’s strengths. 

2023 may be a tough year, but I take comfort from the fact that not every part of a changed economic circumstance is bad news.  And on that note, thank you for your support in 2022, and happy new year for 2023!