2018 Trends and What to Look Out For in 2019 and Beyond
As Asia grows in stature as an M&A hub, competition drives parties to become more innovative in seeking alternative solutions to mitigate transaction risks. Here are a few trends we have observed at Aon, based on our experience with clients across the continent.
Drivers of growth
- While private equity firms were the main drivers of growth in 2017, an increasing proportion of corporates took up Warranty & Indemnity insurance in 2018, an indication of the increasing cognizance by clients of its strategic uses and benefits as a transaction tool.
- Sellers are approaching Aon at an earlier stage of the sale process to ‘staple’ Warranty & Indemnity insurance programmes to bid packages in lieu of traditional indemnities, allowing them to negotiate an exit with limited trailing risk. As such, transactions with nil seller liability have gradually become more common.
- We have seen a higher pick-up rate from Chinese companies as they are increasingly using the various M&A insurance solutions to enhance their bids on cross-border transactions.
Warranty & Indemnity insurance has been placed for deals across a broad range of industries, including those for which insurers would have had limited appetite just a few years ago – such as financial institutions and technology sectors. Surprisingly, technology has been one of the top 4 sectors for Warranty & Indemnity insurance in the past year, with the other three sectors being manufacturing, real estate, and education.
Tax insurance continues to be an area of growth
Interest in tax insurance has also grown, in an effort to address specific known tax matters that would not be covered by Warranty & Indemnity insurance. In 2018, Aon placed a first-of-its-kind tax liability policy in North Asia, allowing sellers to return funds to limited partners that would otherwise have been tied up in escrow.
Litigation risks arising from transactions
The contingent nature of a litigation risk means that its existence may be a deal breaker, or severely impact the value of the target company in M&A transactions – even if a negative outcome is remote. Parties seek Litigation Risk Insurance to help cap their maximum exposure in connection with existing or threatened litigation uncovered during due diligence.
Increased focus on IP risks given technology surge
The increasing spotlight on technology sectors create pressure on certainty around valuation and validity of core intellectual property assets. Aon’s Intellectual Property Solutions group can help clients address these challenges through intellectual property-based value creation strategy development, risk assessment and insurance solutions.
Looking ahead – 2019 and beyond
By equipping buyers with alternative recourse in respect of breaches of reps and warranties and allowing sellers to have a clean exit post-closing, Warranty & Indemnity insurance has proven to offer clients some peace of mind. Given the compelling growth factors in the M&A insurance landscape, we expect Warranty & Indemnity Insurance and other transaction risk insurance solutions to be an area of focus among M&A advisers and deal makers, as they become progressively more aware of the strategic benefits of such solutions and test the boundaries of their uses in more innovative ways.