Warranty and indemnity (W&I) insurance has developed a reputation over the years as a ‘go to’ risk facilitation tool for private M&A transactions. It has served the private equity community in particular to facilitate ‘clean exits’ from their investments. However, with private markets getting increasingly competitive as buyers position themselves for a COVID re-opening boom, we are seeing an increasing number of privatisations in Australia as acquirers search for mispriced targets with stronger upside potential. This is a trend that is also occurring in many other parts of the world.
As these transactions are inherently opportunistic, buyers traditionally receive little by way of contractual warranty protection in the event there is a problem with the target post-acquisition. However, the team at Liberty GTS in Australia have been at the forefront of developing a transactional risk solution for local listed targets which can bridge the risk gap between buyer and target. W&I insurance creates real value over an uninsured public-to-private transaction by providing target management with the comfort to give meaningful operational warranties in the sale contract to the acquirer on a nil recourse basis which are then backed by the insurer.
The Challenge with public deals
Historically, the W&I product has not been suitable to insure public deals for a few key reasons. One of the key principles for W&I insurers has been the need to maintain subrogation rights against sellers in the event of fraud. However, a disparate public share register means warranties are typically given by the target itself thereby eliminating such recourse. Public listing and directors and officer’s (D&O) exposure also play a part from a risk appetite perspective given the increasingly litigious class action environment that has developed in recent years. Access to comprehensive data room documentation on the listed target is another issue that can be difficult to overcome given confidentiality and takeover regulations that apply in certain jurisdictions.
Tailored W&I solution
Liberty GTS has sought to mitigate these concerns by adapting the underwriting process and policy wording to tailor a W&I solution that is both competitively priced and fulsome in coverage across key operational and tax areas of the listed target in much the same way as a private transaction. In order to address the lack of subrogation rights the policy excludes target fraud which in the context of a listed company isn’t typically of major concern to buyers given the microscope that is placed on them by public market regulators. Listing rule compliance and public D&O exposure are also excluded on the basis that other more purpose built insurances are already obtained by the target to cover these particular risks (and thereby enabling W&I insurers to disregard such risks when setting premium pricing). Local listing rules in Australia also fortuitously do not prevent the sharing of a comprehensive data room with would-be acquirers under the protection of non-disclosure agreements. This helps our underwriters obtain comfort that a robust seller disclosure process has taken place to enable buyers to conduct a comprehensive due diligence we expect to support a fulsome set of warranties.
Australia – a fertile ground for W&I innovation
Australia has proved to be an ideal market to test and expand appetite for new W&I solutions. With an innovative approach being taken with W&I insurance to address an unmet need in the public to private space, acquirers have another valuable risk facilitation tool available at their disposal. Although restrictions on access to confidential target information may still be an impediment in certain jurisdictions, significant opportunities exist globally to expand W&I into the listed arena where similar laws to Australia allow it. We certainly hope to see the market for insured privatisations continue to grow in years to come.