Indemnification caps on private equity sponsored transactions valued from $10 million to $250 million fell from 15.9% to 12.1% according to the GF Data(R) Spring 2018 Key Deal Terms Report.
The decline occurred in all deal sizes but was most pronounced in the $50 million to $250 million space where GF Data’s private equity contributors utilized representations and warranties (rep and warranty) insurance on over 65% of their transactions.
Representations and warranties is a term used to describe the assertions that both a buyer and seller make in a purchase and sale agreement. Both parties are relying on each other to provide a true account of all information and supporting documents to close the transaction.
“Two trends remain on full display,” said Andrew Greenberg, CEO of GF Data. “The leverage sellers are enjoying in pricing is still extending to other deal points and utilization of rep and warranty insurance has become standard practice in the middle market. Rep and warranty insurance was reported on 42% of all transactions last year, up from 7.7% in 2016. In the $50 million to $250 million TEV (total enterprise value) bracket, though, incidence skyrocketed from 11.8% to 65.6%.”
According to the GF Data report, transactions utilizing rep and warranty insurance were valued at .6x more than those without, slightly higher than the 2016 differential.
“Deal activity is robust, capital is plentiful, and, in order to be competitive, buyers are utilizing a variety of deal structures and tools to compete in a strong seller’s market,” said Gino Maurelli, an attorney at Denver-based Brownstein Hyatt Farber Schreck. “The most prevalent of these tools is rep and warranty insurance, which went from seldom used to a “must have” for any deal of a certain size in an extremely short period of time.” Mr. Maurelli is a shareholder at Brownstein Hyatt Farber Schreck and specializes in middle market private equity transactions.
Another highlight of GF Data’s semi-annual report is a downturn in the percentage of transactions closed that included seller financing or an earnout. “We suspect this is a case where sellers were more often able to extract their price without having to provide their own financing,” said GF Data co-founder, B. Graeme Frazier.
GF Data provides reliable external information for use in valuing and assessing M&A transactions to private equity firms, investors, lenders and other users. The firm collects and publishes proprietary transaction information from private equity groups on a blind and confidential basis.
GF Data provides reliable external information for use in valuing and assessing M&A transactions to private equity firms, investors, lenders and other users. The firm collects and publishes proprietary transaction information from private equity groups on a blind and confidential basis. The pool of active contributors comprises 201 private equity firms, mezzanine groups, and other financial sponsors. Data contributors and other subscribers receive four products: (1) a quarterly report containing high-level valuation, volume and leverage data; (2) a quarterly supplement offering detailed information on debt and capital structure trends; (3) a semi-annual supplement on indemnification cap, escrow and other details; and (4) continuous access, through GF Data’s secure website, to detailed valuation data organized by NAICS code.
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