Use Representations & Warranties Insurance to Close More Deals
April 17, 2015
PitchBook Dealmakers Column
You're back from ACG Intergrowth, where you made valuable connections, and you're eager to explore new opportunities and push forward on existing deals. One of the fastest-growing and, often times, most valuable tools for any dealmaker is Representations & Warranties Insurance.
R&W Insurance provides coverage for financial losses resulting from breaches of the representations and warranties by sellers in the underlying acquisition agreement in connection with a proposed transaction. The strategic use of R&W Insurance and other transactional insurance has been available for over 15 years but has seen tremendous development over the past two to three years as the terms of coverage and pricing have improved.
PE buyers are increasingly using R&W Insurance to distinguish a bid in a competitive auction, offering sellers limited or no indemnity by incorporating R&W Insurance into their bid. On the sell-side, a growing number of sellers are building R&W Insurance into their offering in an effort to achieve a cleaner exit with limited recourse (lower escrows and indemnity caps). In both situations, a buy-side R&W Policy can be utilized to enable the buyer to obtain the desired amount and period of indemnification, while capping seller indemnification at a small escrow, or even eliminating seller indemnity in some cases. Sell-side policies are also available, but approximately 85% of policies issued are buy-side policies, which enable both a higher cap and survival period than sellers are obligated to provide under the acquisition agreement, and contain no exclusion for seller fraud.
A structure commonly utilized is to limit seller indemnity to a 1% to 2% escrow and supplement that with a buy-side R&W Insurance policy to achieve a 7.5% to 15% effective indemnity cap and extend the survival of representations and warranties beyond the escrow period to as long as six years.
The cost of R&W Insurance is calculated as a percentage of the limit of insurance coverage purchased. In the current market, the rate for U.S. transactions generally is between 2.5% and 4.25% of the limit of insurance coverage purchased (i.e., $250,000 to $425,000 per $10 million of coverage). The policy retention is typically between 1% (minimum) and 3% of the transaction value.
The Willis M&A Group can help you strategically use R&W Insurance to close more deals. For more information, please contact Jeff Roberts, Senior Vice President, Willis M&A Group, at +1 (312) 288-7312 or firstname.lastname@example.org, or George Ziv Lalich, Senior Vice President, Willis M&A Group, at +1 (312) 288-7311 or email@example.com.
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