Tough economic conditions have meant that many companies have held off transacting in the last 12 months, but this could all be set to change this year. The availability of ‘dry powder’ in the private equity/VC market and the natural investor desire for growth or an exit means that, despite tightening liquidity conditions and a tougher regulatory environment, the transactions market could see increased activity.
While established companies may be holding back on larger transactions during this period of volatility, perhaps more so now in light of the recent collapse of SVB, the start-up market on the West Coast of the United States is one area in particular that could see a spike in deals. Companies may look to grow with smaller strategic or add-on acquisitions, which are easier to conduct during a time of economic uncertainty. We are also likely to see a rise in minority investments, which entail less risk, and are well suited for many target companies in the Western Zone (from Colorado to Hawaii).
While the challenges that were present last year such as inflation and geopolitical tensions have not improved and new challenges have arisen in the local banking sector, there has been an adjustment to this ‘new normal’ (though the full impact of SVB’s collapse and potential secondary effects remain to be seen). Pricing, which was a particular point of deal-making contention in the last year, seems to have realigned and there is an acceptance that valuations may potentially be lower than they have been previously. In addition to this, many private equity investors still have ‘dry powder’ available and may take this opportunity to make acquisitions at a good price. This is likely to drive demand for Representations and Warranties (R&W) insurance this year. We also often observe that periods of uncertainty actually increase demand for R&W as buyers become increasingly focused on protecting their down-side exposure.
Growth areas for R&W insurance
Regionally, the mix is changing and there has been significant growth in West Coast R&W industry recently. In the last two years, we have underwritten over 50 deals with West Coast touch points. The top sectors have been the tech/IT space and the industrials space (including waste management and recycling companies, equipment repair and maintenance companies, shipping and fulfillment services). There are signs that this may change, though, as we are increasingly seeing West Coast deals in companies that are providing communications services, and businesses based on consumer discretionary/spending activities such as local schools, car wash chains and weight-loss programs. There are now also smaller, more regional players who are becoming increasingly familiar with the R&W product and are starting to use it.
The growing popularity of the product has meant that the region has seen a significant number of national and global private equity firms, other strategic investors and RWI counsel basing themselves in the Western Zone. This has been helped by the ease of relocation outside of the Northeast of the US during the pandemic and the acceptance of hybrid working arrangements. There are now also 20 R&W brokers in the Western Zone. Having underwriters based in the region means that there is also an opportunity to work on cross-border deals in the APAC region with US ties.
Increasingly, we are seeing a number of quotes for California-specific industries, such as wineries. However, as yet there has not been significant use of R&W insurance in a number of areas including the real estate space, we could see further growth and expansion of the product here.
There are also hundreds of smaller strategic companies in the region who would benefit from R&W insurance products and there is a significant effort to familiarize them with the advantages that it can bring their business.
Liberty GTS has always had a significant presence in the Western Zone and was the first R&W insurer to establish such a large and formalized presence in the region. Currently, it has three permanent specific R&W underwriters, two in San Francisco and one in Southern California, providing on the ground support for our clients across the Western Zone.
