Foreign Investors Look to Insurance to Mitigate M&A Risk in Latin America
Although merger and acquisition (M&A) activity in Latin America has slowed, foreign investors are turning to transactional risk insurance to help bridge gaps between buyers and sellers and mitigate exposures that could threaten, even kill, deals.
Interest in transactional risk insurance — representations and warranties (R&W), contingent tax liability, and contingent environmental liability insurance — continues to rise in Latin America, driven by three key factors:
- Foreign Investors Want Recourse Options. Similar to dealmakers in other emerging markets, foreign investors in Latin America are looking to use insurance capital to reduce unknown risks during and after a transaction. In emerging markets, the seller is often the founder and/or related family members, which can present challenges if any post-transaction liabilities or recourse situations arise.
- Transactional Risk Insurance Is Widely Available in Latin America. Transactional risk insurance is now available in most major markets in Latin America. Marsh brokered the first locally issued policy in Mexico and is seeing developing interest in most major M&A markets in the region.
- M&A Lawyers Are Driving Adoption. As transactional risk insurance becomes more widely available worldwide and claims are paid, deal lawyers are becoming more comfortable with the solution and are more readily recommending it as a standard course of action during transactions. Latin America is no exception, with initial interest in the solution coming from the M&A legal community.
M&A carries a significant risk for buyers and sellers. And it appears that investors are increasingly playing it safe. In fact, demand for transactional risk insurance doubled in 2014, according to Marsh’s Annual Transactional Risk Report.