to proceed with the transaction. We build cover for what we call “synthetic” representations and warranties into the policy. While this type of coverage is more expensive than situations where the seller has provided the warranties, it is an example of how flexible Transactional Insurance products can be.


Increasingly, we are also seeing approaches from firms who had major rounds of fund raising over 10 years ago and who are now anxious to close down the fund and return the investment to the investors who are pressuring for a wind up of the fund. As you know, liquidators will not let a fund shut down unless they have provided for all their liabilities. We have a specialist product to address potential exposures arising from this sort of situation called LIQUIDATIONGAP. The cost of the policy is often insignificant when compared to the cost of delaying the liquidation.


NS: I was always an advocate of that and we spent quite a long time hunting for those deals, there were some funds that said they would never give warranties but on closer inspection you would see title, and other warranties in there, but either they were ignored or people had waited until they had expired. It is my view that not enough insurance has been purchased for that eventuality. Saying that, premiums were often rated at 5% for this which is hefty, if it had been rates of 2% there would potentially have been more buyers. Going back to your earlier point, there is a lack of awareness in some sectors combined with pre-conceived ideas in others by people who are not involved in the market day to day and so may not realise how much progress there has been over the last 3-4 years on price and capacity. It would be good to have the opportunity to change some of those pre- conceptions.


JE: What has led to the change in pricing? JP: I think that we have gotten a lot better at pricing risk through knowledge and experience. So on deals where the risk is considered to be very low or theoretical, the pricing is at one end of the spectrum and when you have a real risk it’s at the other end of the spectrum and that makes it more credible to buyers. So perception has changed and we are seeing a greater deal flow.


JE: Is it a case of more buyers or the same small amount of buyers purchasing more regularly? JP: We can definitely say that we are seeing a larger volume of buyers, more businesses with risk managers and corporate buyers using it as a tool as well. While deals involving private equity exits still account for the majority of our deals, we are increasing our penetration of trade sales. Ambridge has underwritten more policies for more trade sales this year than we have ever done in our history.


JE: How has the process changed from a buyer’s perspective? JP: Years ago, the process of buying a Transactional Insurance policy was perceived to be a painfully intrusive process for the client. Our mantra at Ambridge is to make the process as painless for the customer as possible.


NS: I think the experience and expertise is much greater today and that has a great impact. Underwriters recognise similarities in situations they have experienced before which is extremely helpful. In the brokers there are concentration specialists, so you are seeing the same people 100 deals later and that can only help. Part of the reason was that back in the day when there were only say 3 lead markets, those lead markets were not as motivated to have done their homework prior to the calls. Now, with increased competition, it is a different environment with high professionalism from individuals who like to see themselves as an extension of the deal team.


JE: What does the future hold? JP: I think the use of the product will increasingly evolve to the point that if people don’t use it they will leave themselves open to second-guessing by their board or investment committee. Given the fact that our products can be used for a wide variety of transactions including traditional M&A to minority investments, bankruptcies, liquidations, and financings, in a short time these products will be larger than many other product classes. So when you broaden the scope of use beyond that of transactions in M&A I think the future for the product is very bright.


I remember a large corporate buyer had finalised a transaction and we were chatting at the closing dinner and we asked him why he bought the cover. His response was “This is my full employment insurance. We have done thorough due diligence on the target, but if it turns out that there is something out there that causes the value to be gone, I don’t want to have to go to the board and tell them we have a problem and we have no protection.”


There was also a deal that you were on Nathan – right after the credit crunch. The private equity house involved was accustomed to easy credit facilities and were pushing for the deal to close before Christmas. In the new world it closed late in January when the bank was ready to close and not before!


NS: I don’t expect people to get any more risk averse, if anything the trend is to more protection rather than less which may be related to the current economic cycle or it may be a behavioural trend. Either way that should prove a helpful driver for insurance. n


“I think that we have gotten a lot better at pricing risk through knowledge and


experience. So on deals where


the risk is considered to be very low or theoretical, the pricing is at one end of the spectrum and when you have a real risk it’s at the other end of the spectrum and that makes it more credible to buyers.”


Risk and Insurance in Private Equity and M&A 2012/13 Author Viewpoint 33


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