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The Secondaries Market Solution

The Secondaries Market Solution

“Everything changes and nothing stands still.” – Heraclitus, Greek philosopher With few exceptions investment funds were not meant to last forever. Investors seek to cash out, while new investors want to join in. The challenge comes during the transition of the old investors leaving and the new ones entering: The original investors want one thing: their money (along with its accumulated growth) free and clear. New investors want to move forward without legacy risk. Between these interests lies the General Partner (GP) or sponsor, who has a foot on both sides of the fence. The biggest concern for new investors is potential Excluded Obligations – financial liabilities of the Seller Vehicle (SV, the original fund) that “leak” over to the continuing vehicle. This can happen where the GP serves a dual role on the SV as well as the Continuing Vehicle (CV). Therefore, the risk of an expensive “wrong pockets” case can drag in new investors – something they keenly want to avoid and can be the source of protracted negotiations. Enter a new risk transfer vehicle – Secondaries insurance. This coverage is designed specifically to address this exposure by providing legal defense expenses as well as settlement and judgement costs protecting the CV’s assets. This insurance is the natural by-product of Representations & Warranty (R&W) insurance, which has become a favorite of PE firms for more standard acquisitions (it’s featured in 90% of deals these days). R&W insurance elegantly moves financial risk from the deal parties to an insurer. As was the case with R&W in its early days, Secondaries is new and therefore seldom used. But we expect Secondaries to become as ubiquitous as R&W coverage as PE firms and Independent Sponsors seek a smooth transition. Just as R&W revolutionized M&A transactions, Secondaries serves as a facilitator that

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Notable M&A Trends to Watch Out for in 2023

Notable M&A Trends to Watch Out for in 2023

When the world’s largest transactional insurance broker talks… you listen. I’m talking about Marsh McLennan, a Fortune 500 firm with a global reach that wrote more than 1,000 Representation and Warranty (R&W) insurance policies in 2022. Their Transactional Risk Insurance 2022: Year in Review report is an excellent resource for anyone involved in M&A, as well as the specialized insurance products like R&W that have become essential to deal-making. It’s a report worth taking a close look at…because in addition to reporting on trends from the past year… they are also looking ahead and forecasting what they believe will happen

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Rubicon M&A seller, how to avoid danger

The Biggest Danger to M&A Sellers – and How to Avoid it

I got a call earlier today… one that I wasn’t exactly happy to receive. But I feel like I should share the situation that I learned about because it showcases the importance of transactional liability insurance to cover M&A transactions. Here’s the situation… The caller had sold their industrial supply company in the Midwest for just about $3.5M. But, as the deal neared close, additional inventory, not initially part of the deal, was discovered. Buyer and Seller agreed that this inventory was worth $150,000. And the Buyer suggested that they would pay the Seller in installments of $10,000 over 15

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M&A Buyers Should Secure Sell-Side Transactional Liability Insurance.

Why – and When – M&A Buyers Should Secure Sell-Side Transactional Liability Insurance

Let me say this loud and clear right now: Every Buyer of a sub-$30M EV target should insist on a sell-side Representations and Warranty (R&W) insurance policy from their counterparty. This might sound strange. And I know that you’ve probably encountered many Buyers who are reluctant or resistant to the idea of even considering a sell-side insurance policy. After all, the Buyer is not insured under this coverage. The name on the policy is the Seller’s. A sell-side policy is only triggered when the named insured (the Seller) receives a demand from the Buyer saying there has been a breach

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A Close Look at Deal Drivers for 2023

A Close Look at Deal Drivers for 2023

When looking ahead at 2023, it’s clear there are economic headwinds out there impacting deal-making, including inflation and the threat of recession. Big tech companies are entering a period of austerity, with giants like Google and Microsoft laying off tens of thousands of employees recently. They over-hired during the pandemic, and they are now having layoffs. But I’d make the case that lower middle market M&A, especially with regards to tech, media, and telecommunications firms and business services companies, will see no slowdown in deals… In fact, there could very well be an increase in transactions in the coming year.

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Two women shaking hands and confirming the deal.

Breaking Down Your Transactional Liability Insurance Options: No Insurance, Traditional Buy-Side, and New Sell-Side

When looking at options to cover a M&A transaction in the past, we’ve always said that you could either use traditional Representations and Warranty (R&W) insurance or… nothing. Nothing would often be the case for deal sizes under $20M, where R&W coverage simply does not extend these days except in very special cases. Now, we have a compelling third option, an innovative Sell-Side policy, for the smaller acquisitions out there. It’s called Transaction Liability Private Enterprise (TLPE). It was created just a couple of years ago by London-based CFC Underwriting but is now gaining ground in a serious way as

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Buyer Uses TLPE to Win Auction on Desirable $13M Tech Company

TLPE Case Study: Buyer Uses TLPE to Win Auction on Desirable $13M Tech Company

For many years, it was standard practice for Sellers in M&A deals with leverage to insist that Buyers forgo escrows as part of the terms of their deal and instead use Representations and Warranty (R&W) insurance. However, there is a catch … This process works only if the target’s pricing is above the Buy-Side R&W guidelines, which is $20M in most cases. And even then most insurers are reluctant to cover more than 30% of the purchase price.

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A person explaining to others about rep and warranty insurance

Rep and Warranty Insurance Is a “Mature” Product

In the world of M&A, Representations and Warranty (R&W) coverage has become a go-to transaction insurance product. Many PE firms, for example, have made it an almost standard part of any deal that is able to be covered. Simply put, R&W is a mature insurance product and despite its growth in popularity, it has not fallen off in terms of quality.

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