The subdued M&A environment for the last 12-18 months looks set to continue for the first half of 2024. While there was a ‘rush’ to get deals done at the end of last year, this surge has consequently slowed. The outlook remains uncertain across large parts of EMEA but pockets of activity fortunately remain.
Although the Eurozone by and large escaped recession last year, ongoing geopolitical instability, one of the biggest election years in full swing and general economic uncertainty mean that many European markets are still teetering on (or over) the edge of a downturn resulting in an environment that is not favourable to bolster an already subdued M&A market.
As a result, auction processes are less competitive than they have been, and deal timelines are often lengthy. A further complicating factor is the seller-buyer valuation gap with seller expectations still on the level of 2021, when the market was buoyant, whereas potential buyers have adjusted their appetite to the current macro-economic climate. Sellers are increasingly considering “riding the storm” and postponing divestitures until the economic environment has improved and market conditions have stabilised.
The Netherlands is facing its own set of challenges. Following general elections in November 2023, a coalition government is yet to be formed and it is, as yet, unclear how supportive such government will be as regards the investment climate. Understandably, this uncertainty is negatively impacting business confidence.
On the up
On the positive side, there are some green shoots of recovery expected as we progress into 2024. Inflation has been stabilising as well as, to a certain extent, interest rates, with both potentially decreasing in the mid-term. This should encourage movement in the market. Furthermore, throughout the downturn the small- to mid-cap deal flow remained relatively robust, and we’re hopeful this trend will flow upstream into the mid- to large-cap market. It is not unthinkable that we will see the ongoing rise of the use of continuation funds by private equity firms to unlock returns and rollover assets at prices more in line with the true value of companies.
Perfect storm
With a depressed M&A environment, the W&I insurance market is challenging. There has been an influx of new MGA entrants into the market, some of whom offer considerably lower rates and broader coverage than established players. While this situation is unlikely to change in 2024, the longevity of such market entrants has not been tested and a risk may exist that insureds are left without the recourse they sought to secure.
From a long-term perspective, an insured therefore should also consider the durability of the insurer as well as the maturity and efficiency of their claims handling function to ensure that they have the necessary support, particularly during these turbulent economic times. An insurer that writes M&A insurance for their own account, on a strong balance sheet and with “skin in the game” is best placed to respond constructively to a claim, whatever its size, and to deliver an expedited and efficient claims service to their clients, no matter the payment required.
