2021 has been an exceptional year. Global M&A activity is projected to hit an all-time record of c. $6 trillion by the end of 2021, according to Refinitiv; roundly beating the previous high of $4.8 trillion, set in 2015 and almost double 2020’s figures.
As a year-on-year comparison, by mid-November, there had already been $1trn more M&A undertaken in 2021 than in 2020, with the year-end flurry of deal closes still to come. The sectors that account for the majority of these deals are technology, financial services, industrials and energy, and the activity is primarily led by private equity firms, SPACS and corporations.
What has driven this busy scene? A recent KPMG survey found that eight out of 10 CEOs see inorganic growth as their main option for expansion at this point in time. CEOs are looking to buy their way to growth in products, in markets, and in capabilities.
This has to be added to the much-discussed caches of ‘dry powder’ being released by investors and companies after the pandemic, allied to a lack of alternative investments with similar levels of return. Cash deposits and treasury bonds are both offering historically low yields, which means that surplus cash can make its best return in the M&A world through private equity investments.
This thirst for M&A opportunities has been matched, of course, by a parallel growth in the need for M&A insurance. But this doesn’t explain all the growth we insurers have seen this year. The number of submissions for cover has grown even faster than the number of M&A deals, and the obvious inference is that there is more product penetration and more appetite for M&A cover in the market.
Some of this is down to experience. As M&A insurance comes of age, insurers are doing a better job at communicating to our potential customers. The product itself is getting better and becoming more user friendly, and with familiarity dealmakers are using it more.
However, there is also a real perception that the world is getting riskier, and this is also driving buyer behaviour. We have seen several emerging themes in terms of changing risk trends in 2020. Firstly, stock and inventory are more difficult to assess during virtual due diligence processes, and there is more room for seller fraud or significant accounting error. Long-term material contracts are more difficult to interpret, predict and understand because of supply chain issues – there may be vulnerabilities of supply that were not predicted in the original contract process, for example. Externally, the positions of national tax authorities are becoming almost universally more aggressive, with increased willingness to target larger corporates after a tax event.
Employment and wage-related disputes are also increasing, and we are seeing class-action suits by blue-collar workers to claim for historic lost holiday pay or benefits which are amplified by the phenomenon of social inflation.
All these trends are real and are already resulting in claims. As a result, we can end 2021, although somewhat in need of a rest, reasonably certain that in 2022, M&A insurers will be writing a greater percentage of the deals to be done. 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 – a good news story for insurers, and for buyers, who are proving keen to manage the changing risks of deals in a controlled and positive way.
We will be writing a greater percentage of the deals to be done. While it is difficult to predict what the M&A market will do in 2022, we feel certain that the product penetration will continue its upward growth trend.
