n Purchaser due diligence. Who is the purchaser and why is it a good acquisition? What experience does the purchaser have in the sector?
n Profile of debt. Does the company have other debt or financial commitments? Is the interest rate reasonable? Is the repayment schedule prudent and manageable?
n Management due diligence. Is there sufficient management experience? Is the team in place?
n SPA/Transaction documents review. Is the Sale Agreement standard? Are there any unusual warranties or indemnities? How does liability under the SPA tie-in with the deferred consideration?
The policy DCI policies are structured as indemnities or guarantees to pay. They can be very simple in form because a claim payment will be due in the event of non-payment of interest or principle according to the set schedule of repayments. Provided that the Seller (Insured) has not otherwise breached any policy conditions, the proof of loss is relatively straightforward.
The complexity of the contract of insurance surrounds what happens when there is a claim. At this point the insurer can have considerable rights over the management and even day to day running of the business. They may even have additional equity rights in these circumstances. These clauses tend to vary greatly from policy to policy and are the subject of significant negotiation between the parties and insurers.
Is Deferred Consideration Insurance available today?
This is the key question and one that is not easy to answer. We are certainly aware of insurers agreeing to consider offering DCI and there have been several examples within the last 12 months. Responses from insurance brokers involved in the M&A arena are quite mixed, with one large global broker stating the DCI was “most definitely not available anymore”. Others are less negative but we suspect that the options are currently limited. Having said that, the underwriting appetite for transaction specific risk like Warranty and Indemnity and Tax Insurance is at an all-time high, so perhaps we can rely on our creative underwriting colleagues to come up with some alternative solutions! n
By deferring part of the consideration, it may be that several layers of alternative debt/equity may not be required.
Risk and Insurance in Private Equity and M&A 2012/13
Author Viewpoint 39
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