M&A Activity Is Up – and So Are the Associated Risks

August 17, 2021

It’s been a strong year for merger and acquisitions activity. According to Fortune, a report found that global mergers and acquisitions totaled $2.4 trillion in the first five months of 2021, an increase of 158% compared to the same period in 2020.

This increase in deals may be a promising sign for the economy, but each transaction brings the potential for litigation and regulatory action. At the same time, an increase in private equity deals and SPAC formation is complicating the risk landscape.

Many M&A Transactions Involve Private Equity

Investopedia warns that private equity investors face greater market risk. Private equity firms invest in smaller, private companies. Failure can be more likely among these companies, and many may fail to provide significant returns. However, when they do succeed, the returns can be much higher.

Private equity can be high risk, high reward – and right now, it’s accounting for a significant amount of the M&A pie.

According to Bloomberg Law, $1.2 trillion in mergers and acquisitions transactions have involved private equity so far in 2021, including those that have been announced and are pending or completed, and private equity buyout volume reached $55.6 billion in July 2021, which is the highest it’s been since 2007.

The SPAC Frenzy Continues

The rise of special purpose acquisition companies, or SPACs, is another trend that’s impacting the current M&A risk landscape. SPACs, also called blank check companies, are formed for the sole purpose of raising capital through an initial public offering to acquire an existing company.

According to Investopedia, smaller companies, which are often private equity funds, may find being acquired by a SPAC to be a very attractive and lucrative proposition. This is because selling to a SPAC instead of making a more traditional private equity deal can increase the sale price by 20%, and a SPAC acquisition can facilitate a faster IPO process.

But SPACs are not without risks. As we’ve covered before, securities class action filings involving SPACs have increased in recent years, and the SEC has increased its scrutiny on SPACS. Perhaps unsurprisingly, D&O premiums for SPACs are also increasing.

But these problems may not keep SPACs down for long. According to CFO Dive, SPAC formation slowed down earlier this year after increased SEC attention. However, a report predicts that SPAC activity is expected to increase again. In June, a record high of 27 SPAC mergers were completed.

Securing Appropriate Insurance Coverage

Private equity and SPACs are creating exciting opportunities for investors. However, M&A activities always involve risk, so risk management strategies are needed.

If you are involved in a merger or acquisition, either as a buyer or a seller, securing the appropriate insurance coverage is paramount. Depending on the details, you may need representations and warranties coverage, as well as other insurance products designed to protect your interests.

Introducing the Heffernan Insurance Brokers Private Equity and M&A Practice

The Heffernan Insurance Brokers (HIB) Private Equity and M&A Practice helps you manage all the risks involved with new deals. We understand what to look for during due diligence, how to transfer transactional risks to insurance products and we possess the resources necessary to provide advice and service to participating companies post-close.

We can also help you manage your existing portfolio risks with a complete suite of insurance, risk management, and employee benefit solutions.