M&A insurance to support transactions in emerging jurisdictions on the rise

Gareth Rees : Head of EMEA

Gareth Rees

Head of EMEA

As global M&A activity continues to accelerate in regional markets worldwide, the use of transactional insurance has simultaneously increased.  In the past eighteen months, a clear trend has developed within the M&A insurance space.  We have seen rapid growth in the use of Warranty & Indemnity insurance in jurisdictions that, until recently, would not have been likely candidates for transactional insurance products.

Liberty GTS’s professionals have underwritten complex deals where the target business, or material component of it, has been located in jurisdictions including: Croatia, Ghana, Jordan, Kenya, Kuwait, Morocco, Niger, Romania, Serbia, Turkey and Uganda.  Buyers and sellers in emerging M&A markets such as these are taking the lead from market practice in jurisdictions such as the U.S., Western Europe and the Asia Pacific region by leveraging M&A insurance tools to facilitate satisfactory deal terms and outcomes.

Global M&A volume is at a 10-year high, according to the most recent EY Global Confidence Barometer, based on the annual survey of nearly 3,000 executives across 47 countries.  Deal appetite is being driven by innovation, disruption and the need for growth as buyers reshape asset portfolios to achieve greater scale and operational efficiencies.  The Global M&A market in 2018 was $4.1 trillion, up 16% from 2017.  In 2018, cross-border deal activity remained extremely strong, reportedly representing nearly 30% of the total global M&A market, which is an increase of 23% totaling $1.2 trillion as of year-end, as stated in the JP Morgan Global M&A Outlook report.

Despite economic and political uncertainties in emerging markets, both corporate and institutional buyers are seeking risk-reward investment opportunities by increasingly looking further afield.  The executives running the deals will likely have used W&I insurance in more “traditional” markets, where the product is now regarded as a normal part of the M&A transactional toolkit. They are now driving greater use of the product when conducting transactions in emerging markets, often with the same top-tier professional advisors, also familiar with W&I insurance, that advised them in more mature markets.

W&I insurance can actually be used to mitigate one of the actual or perceived risks of doing deals in emerging markets, namely unfamiliarity with the local court system.  The dispute resolution mechanism in a W&I policy, whether court-based or arbitration, need not match the SPA so, if that provides for local dispute resolution, the W&I policy can be used by a buyer to ensure that any warranty claims are dealt with in a forum and jurisdiction with which it is comfortable and familiar.

For insurers looking to grow their books, while it is positive that use of the W&I insurance is expanding into emerging markets, care must be taken to enter new jurisdictions prudently.  That can be achieved by insurers instructing advisors familiar with both the W&I product and the local market so that cover and commercial terms can be adapted to reflect any specific risks associated with transacting in these emerging markets.

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