More GPs purchasing deal insurance

There were some 650 warranty and indemnity insurance (W&I) policies bought globally by private equity houses in 2012, according to a recent report by law firm Baker & McKenzie.

Over the past three years the use of transaction insurance has increased on average by about 20 percent year on year, with most policy purchases being made in the US, UK and Australia, according to the report. 

“However, there has been a steady increase in the numbers of policies purchased in Europe and Asia and the interest levels continue to grow,” the report said. 

The total number of policies purchased in Asia was 150 in 2012 compared to 130 the previous year.

A big barrier to buying W&I in Asia has been cost, according to Philip Latham, partner at Navis Capital Partners. W&I costs are at least 1 percent of a deal's capped proceeds. Insurance companies, as well, are very adroit at finding technical defenses that could deny a claim, he added.

“That's often the reason why buyers will [try to convince themselves], 'There's not that much risk in this deal, and I think I can go after the seller if I really need to'”, Latham said.

W&I is essentially a way for private equity to ensure they get the right amount of cash proceeds for an exit or purchase, according to Dorothea Koo, Baker & McKenzie’s head of private equity practice for Asia-Pacific.

Once W&I is purchased, if a company is found to have priced itself incorrectly or presented false information, the buyer can then claim compensation from the underwriter – which is usually a bank or broker, according to the firm.

Buy-side warranty and indemnity insurance tends to be viewed by some in the industry as a tool to achieve a clean exit, “often avoiding the need for any escrow”, she said.

Navis has used W&I in the past and sought to reduce the cost of the policy by sharing the expense with the seller, Latham said. Buying a W&I policy tends to ease the seller’s concerns about liability, making private equity's discussion with the seller that much easier, he added. 

Where W&I coverage has been put in place, the average level of warranty protection coverage secured over the last two years has been just over 10 percent of enterprise value of the target purchased, the report said.