Finding value in complex deal structures

June 14, 2023

By Stavan Desai, Head of Americas, Transactional Liability

The M&A industry continues to be marred by an uncertain macro-economic landscape, and financial sponsors must deploy capital in an impactful yet responsible manner. Use of transaction structures that differ from the traditional leveraged-buyout model provides an opportunity to find value and continue investment activity, while decreasing exposure to, or even taking advantage of, current volatility in debt-financing and public-equity markets.

Understanding what transactional liability insurance solutions are available, and what the key considerations are, is crucial to maximizing coverage and mitigating an acquiror’s risk. Take-privates, minority investments, and complex carveouts are three classic examples, and Mosaic Insurance has the knowledge and expertise to facilitate insurance solutions for these transactions.

Take-private transactions

Take-private transactions, whether by traditional merger or tender offer, provide a meaningful opportunity to enhance value for private-equity buyers, particularly when public-equity markets are trending downwards. Representations and Warranties Insurance (RWI) can be deployed to further enhance that value through creating indemnification protection for the buyer in what typically is a non-recourse transaction with no survival of the representations and warranties.

Key considerations when using RWI in take-private transactions include:

  • Buy-side and sell-side advisors familiar with the insurance process and due diligence expectations of insurers are important to obtaining robust coverage. Being open and aligned is crucial to promoting a successful process
  • Fulsome disclosure, even in the presence of materiality or MAE qualification, is key to obtaining fulsome coverage. De-minimis claims baskets and a more limited materiality scrape may help bridge the gap. Public disclosure that benefits the insurance policy is also a meaningful factor to underwriters
  • Shareholder and derivative lawsuits that arise out of the transaction are not typically covered by RWI, as these are traditional D&O insurance risks that do not typically arise from the pre-transaction operations of the business

Minority Investments

Minority investments offer an opportunity to deploy capital while decreasing the need for third-party financing.

  • Coverage is generally offered on a pro-rata basis for target-level loss to mirror the investor’s proportionate ownership and risk, unless the investment is a true “control” investment. Requirements related to risk mitigation in the insurance policy also need to reflect the rights of a minority ownership position
  • Due diligence is the foundation upon which RWI is provided, and will need to mirror the due diligence scope and process typically conducted on full acquisitions. A meaningful investment amount and equity stake provide added comfort to insurers when considering due diligence scope.

Complex carveouts

Carveout transactions allow both buyers and sellers to focus on what matters most: maximizing the value of core business assets.

  • Financial and accounting matters require enhanced scrutiny in complex carveouts, and engaging in robust financial due diligence and/or preparing a carveout audit may expand insurance coverage. However, financial estimates and allocations related to stand-alone operations are typically not covered by insurance
  • Separating a business segment requires an intensive review of what is required to operate post-separation, and robust due diligence on transition services, licensing, employee matters and commercial considerations is critical to the underwriting process

Mosaic’s global transactional liability team offers the experience and expertise to underwrite and facilitate placement of insurance for a variety of deal structures. We look forward to the opportunity to assist acquirors and their advisors on their next transaction.