2023 Predictions: M&A opportunities return for insurers

2021 was an incredible year for M&A. Buyers motivated by the plethora of available assets, low cost of capital and record levels of dry powder drove total deal value to record highs of US$5.9trn.

Fast forward to the tail end of this year and it’s a very different picture. While it might well be the case that we’re seeing a reset to pre-pandemic levels and M&A activity was always going to go through a correction, there’s no doubt that the brakes are on at the top end.

So what does 2023 have in store? Rising interest rates, geopolitical risks, the ever-growing chance of a recession and the current high-inflation environment mean ongoing correction is inevitable. However, while the outlook may look a little gloomier for traditional M&A markets, the current environment could provide huge new opportunities in the SME sector.

Whilst appetite to buy and sell may have cooled at the upper end of the market, things are starting to hot up at the lower end driven in part by what economists have dubbed ‘The Great Wealth Transfer’.

Over the next couple of decades, literally trillions of pounds of assets are set to be transferred as the baby boomers look to retire. While much of their wealth is held in property and pensions, it is estimated that as many as 12 million privately held businesses, valued in excess of US$7trn, are owned by the boomers – and it is likely that few have natural successors. Various reports reveal that two thirds of family businesses fail to survive first to second generation transfer while another 50% don’t survive the transition from second to third generation.

Keeping the business in the family doesn’t appear to be the best path to cement family legacy and therefore we could well see a significant number of these businesses being transferred to third parties.

Private equity investors still have a lot of dry powder and the SME segment can sometimes be viewed as a lower risk investment due to their simpler business models and more conservative valuations. Equally, there is often more upside for businesses that haven’t already been through a PE cycle. All this presents a real opportunity for the insurance industry.

Traditionally SME sellers have faced two significant issues when looking to offload their business. Firstly, they face significant risk post-transaction. They are required to give a broad package of representations and warranties to buyers and if these turn out to be inaccurate, they can face large legal claims from the buyer, which can emerge up to seven years after a deal closes.

Secondly, sellers are required to tie up large portions of sale proceeds in escrow which can mean losing hundreds of thousands in real world spending power – particularly in a high inflation environment – whilst not having access to their capital for several years.

While R&W insurance has historically provided a solution that allows the parties involved in larger deals to significantly mitigate these risks, it has been unattainable on smaller transactions due to a complex underwriting process and high minimum premiums. But this has changed over the past 12 months with transaction liability policies coming to market that have been designed to be distributed as a volume product for micro M&A deals.

As the introduction of these policies shift the narrative of transaction liability being a specialist class of insurance to something this is accessible, 2023 could well afford brokers with little to no experience of M&A insurance the opportunity to unlock a significant business opportunity that could help enable SME business owners maximise the profits of the sale of their business.

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