By Richard Butterwick, Nick Cline, Robbie McLaren, Terry Charalambous, and Catherine Campbell
In a complex and competitive market, minimising and mitigating risk in M&A is a key concern for deal teams. High demand for assets saw strong deal volumes and values in 2019, following a standout year in 2018. The search for opportunity has brought large corporates face to face with new or rapidly expanding businesses whose risk and compliance processes may not have kept pace with other areas of growth. New risks are gaining in size and profile — meaning companies must remain alert to value-compromising issues and inherited liabilities within targets. Corporate veil cases, as well as big-ticket regulatory fines for competition failures and data protection breaches, all indicate that corporates are in the firing line.
The emergence of contingent risk insurance policies, which address known risks that would otherwise be excluded from coverage under traditional W&I insurance, is an exciting recent trend in the deal insurance market. PE funds that identify previously uninsurable risks through due diligence now have the possibility of transferring such risks to insurers, rather than seeking either a price reduction or escrow retention from the purchase price. Therefore, the use of contingent risk insurance can make a PE fund’s bid more competitive and, as a result, more likely to succeed.