Rising cross-border activity and heightened risks lead to expanded use of transaction insurance in the Asia-Pacific M&A Market

On the back of a slow first quarter, new challenges to deal activity have surfaced in Asia with major economies such as China experiencing greater regulatory and geopolitical headwinds. For instance, increased regulatory scrutiny can pose challenges for companies’ compliance with laws, a commonly-reported breach in M&A transactions. M&A practitioners can anticipate such challenges by factoring in appropriate mechanisms to mitigate such risks.
In our recently-published Asia-Pacific M&A Risk in Review and based on our experience with clients across the region, here are three key themes we have observed:
Macroeconomic and political risks to take precedence
With economic growth in key industrial jurisdictions of China, South Korea, and Japan decelerating, coupled with the escalation of US-Sino trade standoff, deal-makers are increasingly concerned about key risks impacting a deal. Based on our survey of Asia Pacific-based deal-makers, 40 percent of respondents cited evaluating key macroeconomic, regulatory, and other risks as the most crucial factor in properly valuing a deal. In Asia, we have also seen an increase in adoption of Warranty & Indemnity (W&I) insurance. Following a period of double-digit growth since 2015, uptake in 2018 increased 40 percent year-over-year as deal-makers seek to mitigate risk and enhance their cross-border bids in competitive foreign markets.
PE firms to drive growth, particularly in South East Asia
According to Pregin, a record $317 billion of private equity dry powder – committed but unspent capital – is set to target the Asia Pacific region. This capital war chest, coupled with strong economic growth in Indonesia, Malaysia, and Vietnam is expected to continue to attract inbound investments into South East Asia (SEA). Merger market reports overall M&A activity in SEA to have significantly increased by 2.1 times in deal value for the first quarter of 2019 compared to the equivalent period last year, pointing to a positive outlook for deal-making in this region.
Competition in M&A insurance market to provide greater client benefits
In 2019, we have seen an increase to more than 20 insurers with appetite for Asian risks. This is a significant increase from the start of 2018, where we observed three insurers with presence of underwriters based in Asia. Greater competition in the transaction liability insurance market has brought about more client-friendly trends of decreasing premium rates, lower retentions, and a broader appetite to underwrite transactions in the Philippines and Indonesia.
Following new developments in the macroeconomic and regulatory landscape, we have observed a continuous inflow of queries for transaction liability products. W&I insurance has been proven to offer clients greater peace of mind by providing buyers comfort in a market with limited or no post-deal indemnification, as well as facilitating clean exits for sellers. Furthermore, such transaction liability solutions have progressively improved to be more client-friendly, with premium pricing down and insurers being increasingly comfortable providing coverage in more challenging sectors and jurisdictions.
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