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Optimizing M&A Transactions Through Representations and Warranties Insurance

Jun 22, 2022 Successful mergers and acquisitions deal team

With rising inflation and interest rates, continued global supply chain disruption and tension points resulting from conflict in Ukraine, we expect a slowdown in deal volume coming off the unprecedented pace of 2021.

Notwithstanding, we anticipate continued growth in the core and lower-middle market space. With mergers and acquisitions (M&A) teams under pressure to close transactions and pay higher multiples, Hylant is helping teams achieve greater deal value through using representations and warranties insurance (RWI) as capital.

As deal interest continues to move down-market, deal quality uncertainty and hopeful exit valuations are driving the search for alternative ways to lay off deal risk and increase return on equity.

Buyers who are enjoying successful M&A transactions are:

  • consistently evaluating how to use insurance as capital in the structure of the deal,
  • using insurance as recourse for indemnification, and
  • leveraging the efficiency and certainty of having a creditworthy insurer as a counterparty to a breach.

Let’s look at how RWI supports each of these effective practices.

Representations and Warranties Insurance as Capital

When correctly structured, capital provided by an insurance company is another form of capital available to a business. Insurance risk capital has unique structural and economic advantages:

  • Conserves cash: A small premium does the work of large escrow accounts.
  • Non-recourse lending: If a loss payment is made, the borrower (insured) is not required to pay back the lender (insurer).

Creating Simpler M&A Transaction Dynamics Between Seller and Buyer

In the event of a deal issue, the buyer must assert a breach and pursue the seller. This becomes difficult when the seller has an equity position and an operating role in the new company. An appropriately structured RWI policy allows the buyer to tender a first-party claim directly to their insurance company, bypassing the need to pursue the seller. Moreover, the insurance company can directly satisfy third-party claims made pursuant to the transaction.

Benefitting from an Alternative Risk M&A Specialist

Every transaction has an inherent risk, but the risk can be effectively managed and transferred to an insurance company through a custom-designed insurance structure. Additionally, insurance risk capital can help close a problematic deal.

Each deal has its own unique circumstances and structure. A skillful insurance professional with diverse M&A experience can readily analyze contractual and financial information and effectively resolve challenging issues. To maximize pricing and value, an alternative risk M&A specialist should be a key member of any deal team. Learn more about Hylant M&A and Transaction Solutions here.

Join Us at ACG GLCC

Hylant will be speaking at the Association for Corporate Growth Great Lakes Capital Connection (ACG GLCC) in Pittsburgh this fall. Join us for our roundtable discussion, Corporate Carve-Outs – Acquisition Opportunities in Buying Corporate Divisions, on September 7, 2022, from 2:00 p.m. to 3:00 p.m.

The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.