The SPAC Life Cycle – All Your Insurance Needs In One Stop
Special Purpose Acquisition Companies (SPACs) have gained increasing attention as a means to fundraise public M&A and bring companies onto public markets. SPACs come with a unique set of challenges. As they navigate their life cycle from IPO to M&A and beyond, careful consideration is needed to ensure that the liabilities to the business and its directors and officers are managed.
We discuss the one-stop insurance solutions from Marsh at each stage that can be a strategic asset to optimize the process of raising capital, completing the business combination and managing operational risks post-transaction.
The diagram below shows three major stages of the SPAC life cycle and the key risk management activities required:
Directors and Officers Liability Insurance
SPAC Key Activities
- Incorporate SPAC and sell founder shares.
- Prepare and file S-1
- Road show, pricing, and closing.
SPAC directors and officers face direct risks to their personal assets as the funds held in SPAC trusts cannot be used to indemnify them. Directors and Officers (D&O) insurance is thus a critical tool for all SPACs to consider at the early stages of the lifecycle.
However, with the sudden and large increase in SPAC-related activities since 2020, securing favorable SPAC D&O insurance is a challenge as insurers have yet to catch up with the changing landscape. It is therefore imperative for SPACs to engage the right risk advisors.
Marsh’s dedicated Asian SPAC team is the gateway into both overseas and domestic underwriting markets. Leveraging a network of 300 specialist brokers in all major global insurance hubs from the US, UK and Asia, we are strategically positioned to develop holistic risk management solutions for you.
For reference, below is Marsh 2021 SPAC D&O benchmarking data (with fund sizes between US$100m – US$600m). The key drivers for the D&O risk profile of SPACs include:
- Target industry and geographic focus.
- Offering size.
- Management team with the right mix of M&A veterans and executives with targeted operational experience.
- Advisor team credentials.
- Transparent and balanced compensation and conflict management structures.
The Cost-Cover Tradeoff: Side A Cover Only, Or Side A-B-C?
Given the high premiums in the current hardening market, it is an option for SPACs to consider procuring Side A cover only instead of the full Side A-B-C in the D&O policy. However, careful consideration should be made on the tradeoffs between cost and coverage. As your advisor, Marsh can explore innovative options for blending different coverage structures – achieving the desired protection while managing costs at each stage of your SPAC lifecycle.
Case Study – SPAC D&O Placement
The Asia team of a global private equity firm
SPACs with Asian interests and/or Asia-focused mandates have grown in popularity since H2 2020. Unfortunately at the same time, insurers in the US and UK were flooded by prior listings.
This increase in demand and declining supply created difficulties in securing underwriting capacity from the market, with unfavorable terms when quoted
Marsh Asia SPAC team coordinated colleagues across the major insurance hubs from London to New York in a market approach. We also identified an untapped opportunity with Chinese domestic insurers, taking advantage of Chinese interest in the client’s investment structure as an entry-point.
Combined, our deep relationship with insurers at both international and domestic levels, and our understanding of the client enabled us to obtain more than one competitive quote, driving value in the client’s decision making process.
Risk and Insurance Due Diligence
SPAC Key Activities
- Target search.
- Conduct diligence and negotiate acquisition agreement.
- Potentially arrange Private Investment in Public Equity (PIPE)/ debt financing.
- Announce acquisition agreement and file preliminary proxy / tender offer document.
- Obtain shareholder approval / renegotiate transaction or return to target search.
Finding the right target for a SPAC transaction is key in a landscape of increasing stockholder and regulatory scrutiny. Marsh can serve as risk and insurance advisors where our Private Equity and Mergers & Acquisitions (PEMA) practice can conduct pre-merger insurance due diligence, helping investors understand the potential financial impact of the target’s risk and insurance issues and thus facilitating a winning bid.
Portfolio Insurance Programs
SPAC and Target Business Key Activities:
- Close transaction.
- Driving value post-close.
While much has been written about the growing popularity of SPACs, relatively little attention has been paid to the post-business combination, and the former SPAC’s ability to drive value post-close.
Managing different types of insurance programs across the business can be costly, complex and onerous when executed through a fragmented approach. Marsh’s team of specialists leverage detailed knowledge of a variety of insurance lines and deep relationships with leading insurers to deliver cost-effective and efficient solutions tailored to the target’s risk profile and specific objectives. This includes facilitating DeSPAC D&O, which is necessary to address the increased liabilities and navigate the litigious landscape associated with a public listed company.
All Your SPAC Insurance Needs Under One Roof
As the world’s largest insurance broker, SPACs come to Marsh for a one-stop approach to innovative SPAC solutions at each stage of the lifecycle. With specialized local expertise and global resources, Marsh creates comprehensive, tailored solutions for every SPAC client. We help to ensure speed and accuracy of execution to ensure that you can deliver returns with confidence.