2022 to deliver a ‘perfect storm’ for M&A, but beware ESG requirements: Aon

Mergers and acquisitions (M&A) activity in the re/insurance sector has hit record levels since the onset of the COVID-19 pandemic, with some dealmakers describing the environment as “frenzied”. According to experts from Aon, 2022 is forecast to be no different.

Drivers of this activity, they say, include an abundance of private equity “dry powder”, excess cash sitting on corporate balance sheets, and digital transformation. But there are also less obvious forces at work providing a tailwind driving further activity in the M&A space.

That is according to Alistair Lester, global co-chief executive officer of M&A and transaction solutions at Aon. Deal activity in most sectors and geographies has been off the charts and is showing no signs of slowing down any time soon, he says.

Lester was speaking to the Re/insurance Lounge, Intelligent Insurer’s digital hub for interviews, debates and panel discussions, following the release of Aon’s report “ C-Suite Series: Mergers & Acquisitions—Better decisions for deal value” in November.

There are a number of reasons for the spike in M&A activity, he said. COVID-19 is one, but “essentially a record amount of capital” needed to be deployed, which was further increased due to an acceleration in government stimulus into the economy.

“First, we absolutely came out of a lull in the early phases of COVID-19. There was a record amount of dry powder in the private equity space. There was an increasingly record amount of cash sitting on corporate balance sheets,” said Lester.

“If you’re a corporate sitting on record amounts of cash you either give it back to your shareholders or you deploy it in M&A.”

A ‘perfect storm’ for M&A

Lester believes that digitisation of the economy and change in consumer behaviour have driven a perfect storm for M&A over the last 15 to 18 months. “It was almost unthinkable two years ago that people would be making acquisitions without even meeting the counterparties or the management teams of the target business face to face.

“As people got more comfortable with that being possible as COVID-19 settled down into the second half of 2020, what happened was a sort of a large tailwind, which drove this activity,” he said.

Lester highlighted that insurers are looking to generate yield, and one of the ways they can find it is by deploying capital into the alternative asset management industry, and the private equity and hedge fund communities.

“That has contributed to this increase in the amount of dry powder that exists in those ecosystems, and therefore the capital that can be put to work in various M&A deals.”

Third, Lester noted, the insurance industry is seen as an “attractive” sector and “very well pursued” by private equity for investments because of the economics of distribution, stability of annual revenues, and profitability of the business.

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ESG not a tick-box exercise

Lester observed that traditional approaches to due diligence are no longer enough to tackle the rising complexity of M&As. Previously unfamiliar issues such as environmental, social and corporate governance (ESG) factors, sustainability, digital technology, cyber, and new dynamics in public markets have become important aspects of dealmaking, further accelerated by November’s COP26 conference.

“These are going to be central aspects to consider in doing M&A deals and in terms of valuing businesses,” he said.

“Gone are the days of solely focusing on the profit and loss, cash flow and balance sheet to understand deal value,” he added. “Today, sellers and buyers must assess a business’ ESG practices, digital capabilities, technology and intellectual property just as closely as they scrutinise financials.

“Expert insight alongside public and client-specific data is necessary to help quantify and value assets, identify and mitigate risks and ensure proper disclosure.”

Aon’s report calls for a new approach to ESG due diligence, which now goes far beyond a “box-ticking” exercise, requiring the same level of detail as financial considerations. “That’s a very bold statement but we genuinely believe this,” Lester noted.

Part of this, he said, includes understanding ESG risks that are difficult to measure and quantify as the market evolves and decision-makers navigate new forms of volatility.

The return of SPACs

The report outlined a recent surge in special purpose acquisition companies (SPACs) activity that is presenting new risks for dealmakers.

“We have seen a number of companies go public in the last 12 to 18 months. We have also had this phenomenon of the SPAC boom in the US, which is starting to come across to Europe,” said Lester.

“SPACs historically have shown that they are very interested in digital assets. So you’re going to end up with a lot of relatively early stage, highly technical, technology-focused digital assets going public, potentially without the extent of due diligence analysis that you would expect there to be for an M&A transaction or a traditional initial public offering.

“This leads to what the consequences will be from an ESG point of view of people investing in those transactions,” he said, pointing to how “deeply intertwined” all these features are and how they can impact the M&A process in the future.

To view the full Re/insurance Lounge interview click  here.