Private equity update: Optimistic for more deal activity
Deal volume in Q4 2015 was very high, with many private equity firms charging hard for year-end closes. However, January experienced a slower pace for deal volume. Our team suspects many private equity firms were evaluating their portfolios, if sellers will adjust their pricing, and evaluating any potential impact from China’s economy.
In addition, the actions and commentary of the Fed in January when it comes to raising interest rate, has provided some uncertainty.
With February behind us, and only a few weeks away from the end of Q1, activity has steadily increased, and it appears as if the rest of 2016 will continue to follow suit. Deal flow has increase quite well, and in speaking with deal professionals and advisors, many seem to be cautiously optimistic for 2016 overall, as pipelines are filling up.
Outside of the traditional insurance products and due diligence process, we continue to experience a consistent need for Representations & Warranty Insurance (RWI). These programs have helped many of our private equity clients in various situations, to differentiate and provide an easy exit process for the sellers. With the increase in claims over the past several years, it is important to not underestimate the need for RWI protection in an M&A deal.
Here are essentially five types of situations where RWI may be needed:
- When a company is financially distressed, it will help the seller to pay indemnities
- If a seller continues to manage the company after the sale, conflicts pertaining to the indemnification claims can be avoided
- Shifting the risk to the insurer and facilitate the deal completion
- Can potentially help lower a purchase price, in turn lowering the seller’s risk
- In the case of an auction, it can make the deal more appealing to buyers knowing they do not need to pay the indemnification costs.
As we move into Q2 2016 with the competitive deal landscape for private equity firms, we anticipate a continued desire to explore the need for RWI programs. We are optimistic with all the indications toward strong deal flow and private equity investing is likely to increase.
About the Author
Peter Strong is an Area Senior Vice President at Gallagher in the Broker Services Division and is a member firm’s area Private Equity practice. Mr. Strong has extensive knowledge with financial risks, including general partnership liability.