Deal by Deal: A Private Equity Podcast How to Approach RWI With Lockton’s Matt Heinz and Highlights From McGuireWoods’ 2021 Deal Survey
In this final episode of Deal by Deal for 2021, Matt Heinz, Partner & Co-Practice Leader, Transaction Liability at Lockton Companies, joins the podcast to share the outlook on representations and warranties insurance.
As the fourth quarter of the year comes to a close, Matt has insights into how the robust M&A activity we’ve seen will impact the insurance market moving forward, as well as the challenges those in the industry are facing.
“We've arrived at a scenario where we have more demand than supply from the insurance market,” Matt says on this episode — referencing how demand combined with the increasing claim environment is leading to an increase in prices.
Also on this episode, a presentation excerpt from McGuireWoods Partners Greg Hawver and Jeff Brooker from the McGuireWoods Independent Sponsor Conference in October. The presentation titled, “What is Market with Respect to Independent Sponsor Deal Economics?” covers the independent sponsor survey. The excerpt in this episode covers the portion on closing and management fees.
Meet Your Hosts
Name: Gregory Hawver
Title: Partner at McGuireWoods
Specialty: Greg represents private equity and strategic clients in a wide variety of change-of-control transactions, minority equity investments, domestic and cross-border acquisitions, recapitalizations, joint ventures and corporate reorganizations, as well as advising clients on day-to-day corporate matters.
Connect: LinkedIn
Name: Rebecca Brophy
Title: Partner at McGuireWoods
Specialty: Rebecca focuses her practice on advising private equity funds, other institutional investors, and strategic acquirers in connection with mergers and acquisitions and other complex business transactions.
Connect: LinkedIn
Name: Jeff Brooker
Title: Partner at McGuireWoods
Speciality: Jeff focuses his practice on advising private equity funds, venture capital funds and other institutional investors and strategic acquirers in connection with mergers and acquisitions, early- and late-stage investments, leveraged buyouts, recapitalizations, management buyouts and secondary transactions.
Connect: LinkedIn
Meet Your Guest
Name: Matthew Heinz
Title: Partner & Co-Practice Leader, Transaction Liability at Lockton Companies
Speciality: Matt’s name is synonymous with transaction liability insurance for M&A professionals across the country. He has served as both an underwriter and broker during his time in the industry. Before joining Lockton, Matt served as a Senior Managing Director and Co-Practice Leader of Aon’s North American transaction liability team.
Connect: LinkedIn
Acquired Knowledge
Top takeaways from this episode
★ An increase in demand and in claim activity has led to increased RWI prices. After more than 12 months of robust M&A activity, we’re seeing cases where insurance representation and warranties insurance market (RWI) carriers are not able to service all of the available deals in the market. Due to the increase in demand, carriers have to be more selective in the deals they want to underwrite. They are also charging more for their time.
★ While constraints due to deal caps are going away in Q1 2022, human capital constraints are not. As we move towards January 1st, those looking to structure a deal and secure RWI can look forward to any cap constraints being removed once we hit the new year. However, Matt explains that there will still be a constraint on the human capital available to underwrite and structure RWI meaning some of the current crunch we’re seeing in the market will continue into the new year.
★ Fees are unlikely to go down in 2022. The general sense is that while fees might stabilize in 2022 they are not going to go back down to the sub 3% fees seen previously in the industry. The prediction is that RWI fees will stabilize around the 3 to 4% range for the foreseeable future.
Episode Insights
[05:45] High demand: Matt shares how a hot insurance market and an increase in claims is pushing RWI prices up while insurance carriers also get to be more selective in the deals they underwrite.
[06:08]: The insurance market is getting more challenging: Today it is more difficult to get deals below 50-75 million in enterprise value, particularly if they are lacking audited financials. However, Matt notes that he believes reports of the M&A and RWI markets shutting down for Q4 are somewhat exaggerated.
[08:25] Carriers may be restricted by limit caps: Matt explains that insurance carriers may have a premium cap that when reached causes them to limit the new deals they take on as they manage their exposure in a particular market or industry. Not all larger carriers will have these same reinsurance restrictions.
[10:48] RWI premiums have increased: Looking at inclusive amounts for insurance including the premium, taxes, underwriting fees, and broker fees (if applicable), the rate has traditionally been 3-4% of the limit of liability assuming a policy equal to 10% of the enterprise value on a deal. Today this price has increased about a hundred basis points up to around 4 to 5%
[11:39] Underlying cyber insurance is crucial: Matt says RWI carriers do not want to take on all of the cyber exposure and carriers are now more careful about ensuring companies have existing cyber insurance in place at an adequate limit.
[15:28] Reps are no longer purely seller friendly provisions: Matt explains that claim activity for carriers around contract reps have caused them to re-look at how reps are written so they are no longer as seller-friendly as they were a year ago.
[17:44] Start early on challenging deals: Matt says that if you have a potentially challenging deal, including those in the $50-75 million range it’s important to line up RWI well in advance of your signing date and to make sure you have a well connected broker.
[20:39] Human capital constraints aren’t going away: While the capacity constraints Matt referenced earlier in the episode will be lifted in January 2022, the human capital issue and need for more experienced professionals working on these deals will continue to be a concern.
[24:24] Consult with an attorney on closing fees: Jeff notes that there are many different ways to structure closing fees and each comes with a different risk so you need to review what works best for you and your comfort level before making a decision.
[25:34] Closing cost calculus: Jeff says that the majority of closing fees are calculated based on the aggregate enterprise value of the deal, if the deal is valued at 50 million, then that is what the calculation is based on.
[27:17] Closing fees: Greg shares that according to their survey results, in the majority of deals, there are no fees paid to the equity capital partner. Sometimes, PE firms are an exception.
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