King & Wood Mallesons (KWM) has released its 11th DealTrends report on the Australian private Mergers & Acquisitions (M & A) market evidencing a buoyant deal market that has shifted back to pre-COVID 19 pandemic dynamics.
External factors such as favourable macro-level conditions (driven by low interest rates) and surplus availability of capital have played a role in rebalancing deal making conditions. The latest DealTrends data illustrates that the high deal activity is taking place within an environment of changing deal terms.
Deal terms have bounced back from the impact of the initial uncertainty generated by the COVID-19 pandemic. Buoyed by the favourable macro-level conditions, the market has seen a shift back towards pre-pandemic strong sell-side dynamics and a retreat from COVID-19 induced buy-side risk aversion.
Unsurprisingly, regulatory conditions remain a key feature of many deals with FIRB scrutiny on cross-border deals driving more conditionally. Commenting on the findings, KWM Partner Ros Anderson said, “While much of the regulatory change of recent years remains a key issue in deals, such as a more stringent FIRB regime with stricter critical infrastructure and security considerations and longer processing times, a number of deal term differences have emerged. While deal parties are faced with potentially longer pre-closing regulatory timeframes, the seller friendly deal environment has meant that deal conditionality has otherwise reduced, including less frequent agreements to buy-side protections such as MAC conditions and third-party consent conditions.”
Market developments around warranty & indemnity insurance was also a notable feature. Following a moderate COVID-19 induced dip in FY20, market utilisation of warranty & indemnity insurance rebounded to pre-pandemic levels, with approximately 54% of deals utilising warranty & indemnity insurance. Higher M&A activity combined with high take-up of warranty & indemnity insurance has, in recent times, translated into capacity constraints in the W&I market, including longer lead time to underwrite W&I “trees” at the competitive bid stage. Increased premiums do not appear to have dampened market appetite for the product.
“W&I insurers are willing to underwrite to key deal issues such as data protection and cyber security as long as adequate diligence had been done. Payroll and award compliance remains an area of focus, and may impact sellers’ ability to achieve a “clean exit” if not adequately addressed through diligence. While market conditions have been favourable over the last 12 months for both private and public market transactions, macroeconomic factors such as geopolitics, rising interest rates and an Australian federal election will test the robustness of the domestic market over the medium term” said KWM Partner Matt Coull.