M&A: Liberty GTS lifts lid on 2023

Lewis said brokers are integral to his firm’s whole M&A product. Liberty GTS describes itself as having one of the largest global M&A insurance teams in the industry. He said the typical deals he sees are worth between $100 million and $400 million, but some reach $4 billion in purchase price.

“Not only do they [brokers] source the business, they also get quite involved with the negotiation of the policy,” he said. “They join the underwriting calls and effectively hold us insurers to account and test the market as well, in terms of price.”

2021’s record-breaking M&A year

2021, said Sydney-based Lewis, was very likely a record breaking year.

“Globally, coming out of the pandemic, there was all of the stimulus and liquidity that various governments were pumping into the marketplace,” he said. “So debt was cheap and when simple form debt is cheap, that just bumps the price up.”

He said, during that time, the private equity (PE) houses had access to what’s called dry powder. Dry powder refers to funds that can be called on when a good investment is found.

“So effectively, an individual would subscribe to a PE house and tell them how many funds he or she can provide and that if the PE fund finds a particular target within a sector, then they can basically call on the individual to provide that,” said Lewis.

The combination of dry powder and cheap debt drove M&A prices up and boosted the number of deals, he said.

“I’ve got the numbers for you in terms of our submissions,” said Lewis to IB. “In 2020, we saw 265 submissions, across Australia and New Zealand and 466 submissions in 2021 – so that’s almost a doubling.”

Last year, Liberty GTS received 317 submissions.

“That’s up on 2020, but you can see it’s significantly down on 2021,” he said.

The firm’s figures for Asia showed a similar curve for the last three years.

“Asia in 2020 was around 275 submissions,” said Lewis. “In 2021, 514 and then 2022, year to date, 425.”

Impacts of rising interest rates and inflation

The drop in submission numbers last year, said Lewis, was a direct result of rising interest rates and inflation. He said the M&A activity started to pick-up slightly from September to November but the whole year was down compared to “normal” activity.

“There seems to be a pickup in terms of submission volumes in the last quarter, but again, we get that every year, because people are trying to get deals done before Christmas,” he said.

However, Lewis added that a lot of those deals are self-side deals where the seller comes to Liberty GTS and they haven’t necessarily got an identified buyer.

“It’s obviously better if the submissions are by buyers or an identified buyer, because we know that the actual deal is going to happen because otherwise there’s potentially a price mismatch between the two,” he said.

Lewis puts this down to economic uncertainty and the “general nervousness” in the business people doing the deals.

“Also, there’s the mismatch between what price the sellers want – so they’ve got their historic expectations of price, and then what the buyers are willing to pay or can pay because of the increased cost of debt – that’s slowing things down,” he said.

Deals are also taking longer to go through, said Lewis, because there’s now more focus on the economics of the deal and whether the numbers really stack up.

“As opposed to at the end of 2021 when there was more fear of missing out, people just wanted to acquire something, or sell something at those exuberant prices,” he said.

What does 2023 have in store for M&A?

He’s already seen “a number of deals fall over” and others suffer delays. However, there are some promising signs.

“There’s a good pipeline of deals and we’ll see how they happen in January, February and March,” said Lewis.

With Australia Day now over, marking the end of the quiet Christmas and New Year holiday period, Lewis anticipates that soon, the state of play in 2023’s Australian M&A market will reveal itself.

“By the end of the first quarter, and certainly by June, we should have a pretty good handle on what the year’s like and we’ll have a very good handle on where we’re at in terms of supply and demand,” he said. 

If you’re a broker, how do you see the M&A scene shaping up in 2023? Please comment below.