Posted on April 14, 2016
2015 in Review
2015 was a record year for global M&A, up 43% on 2014. Increasing globalisation of the market and significant US and Chinese investment were the main driving forces behind this record year. The US has led the way, powering forward with investment. It appears that the risk aversion which has been affecting the US has changed into the belief that inaction is now riskier that pursuing opportunity. This has been helped by a number of mega deals involving US companies who see the benefit of slashing their corporation tax bill.
China has also invested heavily, especially in Europe and the UK. This could signal weakness in China’s economy, as lack of opportunity nationally causes investment to go elsewhere. However, there is no doubt that this growth in external investment is also fuelled by the current high relative value of the Yuan to the Pound and Euro offering Chinese investors great value for money and higher returns on investment.
Investment from other Asian markets was also strong, with London in particular being seen as a good investment opportunity. Private Equity funds are also returning to the buyout markets bringing with them an estimated US$1.3 trillion available for investment in 2016.
Trends for 2016
The fact 2015 was such a bumper year means that we are likely to see a slowing in M&A in the first quarter and the rest of the year as a whole. The mega deals of 2015 helped create record levels and it is impossible to predict whether these trends will continue. There is currently uncertainty in the Malaysian economy which may see a downturn in investment. However, Chinese and US investment appears likely to continue with Europe and particularly London, as they are seen as safe havens in a time of economic uncertainty. In 2015, Western Europe saw 33% of all deals globally, and this seems set to continue for the foreseeable future. The forecasted dip in M&A appear to have borne through according to recent data which shows a fall in the number of deal and the total value of all deals. Levels for January and February are below those for 2014 and down significantly on 2015 figures.
The ‘Brexit’ Effect
The effect of the upcoming referendum has affected both the EU and the UK. The low value of the Pound and Euro means that property has never been cheaper for investors in the US and Asia. There are risks involved and the uncertainty surrounding the result means we are likely to see a tailing off of deals during the run up to the referendum in the UK until the picture becomes clearer.
The Continuing Rise of W&I
With increasing investment and many more buyers than any time since the crash, the market very much favours the seller. It is becoming increasing more difficult to find an asset with good growth potential which comes free of competition. The effect of this is that the seller holds most of the cards. This leads to many deals which lack the warranties and guaranties buyers and their funders need. In the past, the lack of these protections would come with a price drop which may make the asset worth the risk. If the buyer tries to demand stronger warranties, or a reduced price, the seller can often find another buyer willing to take the risk.
Warranty and Indemnity (W&I) insurance has stepped in to try and fill this gap, giving buyers and their funders the protections they desperately need. W&I has changed from being a speciality risk to a much more mainstream product. This growth means the market is constantly changing. Increased completion between insurers means that more flexible and cheaper coverage is becoming more prevalent.
W&I Trends and Claims
AIG recently released their claims data for 2011-2014 and it shows some interesting trends. The highest areas for claims were financial statements, tax, contracts, IP, employee disputes and litigation. This is in line with the experience of the rest of the market. The data does indicate a low likelihood for loss of the full value of the property. Risks where the full value is at stake, Title and Title to Shares, materialise extremely rarely. This information is not surprising to anyone within the Legal Indemnity insurance market. Legal Indemnities has been around a long time and has significant claims data which backs up this finding from the AIG report. Therefore it seems unnecessary to obtain policies which cover the full value of the asset, when the risks which are likely to trigger full loss can be insured elsewhere for a much reduced premium. The same hold true for environmental issues, which would benefit from the input and experience of a specialist environmental insurer.
The report also suggests that claims occur early and are more common the bigger the deal is. That most claims arise early is not a surprise, but that larger deals attract greater claims is. This will perhaps lead to a lessening of the restrictions on insuring small deals which may increase the usefulness of the product.
2015 was a very strong year in the M&A market. 2016 is likely to see a small decrease, but the risks for buyers in the market is still high, with sellers dictating deals. W&I insurance can be a useful tool to help mitigate the risks, but careful thought needs to be given to the level of cover actually required, especially if other aspects can be insured at a lower price elsewhere.