Woodruff Sawyer, a prominent independent insurance brokerage in the United States, looking ahead to Q4’23 and throughout 2024, suggests that the deal landscape may continue to evolve, with new structures emerging, and deal flow is expected to increase compared to the lows witnessed in Q1’23.
In its 2024 Private Equity and M&A Looking Ahead Guide, Woodruff Sawyer shed light to the challenging year that 2023 has been for dealmakers, with a substantial decline in deal volumes and exit activity.
As anticipated by Woodruff Sawyer’s previous guide, dealmaking faced significant headwinds in 2023. Quarterly deal volumes had declined by 24% in terms of deal count and a striking 49.5% in deal value since their peak in Q4 2021.
Exit activity experienced a staggering 75% drop from its peak in 2021, and the outlook for improvement remained bleak for several quarters.
Despite these challenges, private equity funds have demonstrated resilience by adapting to the market conditions. They have achieved this by keeping deal sizes small and exploring alternative sources of capital for financing transactions.
The changing dynamics of the deal environment have had a profound impact on the insurance sector. Insurance due diligence is expected to gain momentum as deal teams seek ways to enhance EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) efficiencies and mitigate risks associated with their investment assets.
Simultaneously, the M&A insurance market is adjusting to reduced deal flow and smaller transaction sizes, intensifying competition among insurance carriers.
This has resulted in notably lower reps and warranties premiums, especially for deals that underwriters have traditionally been more cautious about.
Luke Parsons, Partner & Senior Vice President of the Private Equity Practice at Woodruff Sawyer, emphasised the intrinsic importance of transactional risk and insurance due diligence in their operations.
He noted that even in the face of the lowest deal flow in a decade, speed and certainty in managing EBITDA risk through insurance is paramount for investors. Inadequate execution of insurance due diligence could expose acquirers and investors to increased risks that could impact short-term EBITDA and long-term asset value.
An expert team of insurance advisors is seen as essential in navigating this challenging environment and safeguarding investments. As deal flow is anticipated to increase in the coming quarters, insurance diligence is set to play a pivotal role in optimising investment strategies and minimising risk.
