Rep + Warranty Insurance More Common in PE Deals: Within the Citi Private Bank portfolio, Rep and Warranty Insurance is most prevalent in deals that involve Private Equity sellers. Even within that subset of deals, I’d say that we tend to see Rep and Warranty Insurance used the most when transaction value falls within the $100 million - $250 million range.
Rep + Warranty Insurance Not a Factor in Purely Strategic Deals:
That said, when we narrow our view to purely strategic deals (i.e., those with strategic buyers and sellers with no Private Equity player), the use of Rep and Warranty Insurance doesn’t seem to come into play nearly as much and the escrow holdbacks in those deals are still in the more traditional range of 8% - 10% of total purchase price.
Rep + Warranty Insurance Lowering Escrow Amounts in PE Deals:
In our experience, Rep and Warranty Insurance has impacted escrow percentages in Private Equity transactions. In deals that involve a Private Equity seller, historically we would have expected to see anywhere from 8% - 10% of the total purchase price escrowed for indemnification purposes. However, with the use of Rep and Warranty Insurance, we now see that escrow percentage routinely decreased to approximately 1% of the purchase price, which is escrowed to provide for payment of the Rep and Warranty Insurance deductible. In some Private Equity deals, we are even seeing just an escrow for the purchase price adjustment, with no indemnification escrow being established at all.
Special Escrows Covering Items Excluded from Rep + Warranty Coverage:
Despite Rep and Warranty Insurance generally driving down escrow amounts in Private Equity deals, on the flip side we are also seeing certain transactions in our portfolio where “special escrows” have been established to deal with risks that are specifically excluded from coverage under the Rep and Warranty Insurance policy (e.g., IP claims in tech deals, healthcare (reimbursement) issues, environmental issues, etc.).
* Citi Private Bank is a business of Citigroup Inc., which provides its clients access to a broad array of products and services available through bank and non-bank affiliates of Citigroup. Not all products and services are provided by all affiliates or are available at all locations.
The views expressed herein are for informational purposes only and are those of the author and do not necessarily reflect the views of Citigroup Inc. All opinions are subject to change without notice.