“Seller’s Market, Seller’s Rules,” Private Equity Professional, September 12, 2019
Private Equity ProfessionalSeptember 12, 2019
Seller-friendly positions on deal points continue to accompany favorable economics in this sustained seller’s market, according to GF Data’s Fall 2019 Key Deal Terms Report.
Two hundred private equity sponsors and other acquirers reported to the data tracking firm on transactions completed in the $10 million to $250 million Total Enterprise Value (TEV) range.
The average cap on indemnification against breaches of representations and warranties was 9.8% in the first half of 2019, following a rise to 15.0% last year.
“We keep a close watch on key deal terms as leading indicators of a market shift,” said Andrew Greenberg, CEO of GF Data. “Buyers will clamp down other deal points prior to extracting concessions on price. For now, it remains a seller’s market all the way down the term sheet.”
GF Data’s key deal terms report also tracks the increasing usage of representations and warranty insurance (RWI) over the past few years, and differentials between transactions completed with an insurance product and those completed without.
Use of an insurance product continued to rise, but after the dramatic proliferation of RWI from 2016 to 2018, the curve has begun to flatten. According to the report, RWI utilization overall was about 53% year to date, up from 52% in 2018. The use of RWI by transaction size also tended to stabilize – in the 25% range at $10 million to $25 million TEV; 50% to 60% at $25 million to $50 million; and 75% to 80% at $50 million to $250 million.
“The valuation spread on deals completed with and without RWI has remained steady year-over-year,” said B. Graeme Frazier, IV, GF Data’s co-founder and principal. “Deals featuring an insurance product were completed at an average valuation of 7.8x in the first six months of this year – the same as in 2018. In both years, this was about a turn ahead of the average for non-RWI transactions. It seems clear that this spread represents both cause and effect – better businesses are able to secure RWI and then the insurance coverage has some protective value to buyers.”
In addition to data on indemnification caps, the Key Deal Terms Report also covers the impact of earnouts and seller financing, escrow/holdback incidence and duration, and basket amounts.
“In recent competitive processes for quality companies, the negotiation over general indemnification limitations is occurring within a narrow band and tends to be resolved quickly,” said Mark Witt, an attorney in the mergers and acquisitions group at Godfrey & Kahn in Milwaukee. “Most of the bargaining capital on indemnification issues is being used to address known risks and liabilities that either are not covered by an RWI policy or that the buyer otherwise perceives as inconsistent with its valuation.”
GF Data provides reliable external information for use in valuing and assessing M&A transactions to private equity firms, investors, lenders and other users. The firm collects and publishes proprietary transaction information from private equity groups on a blind and confidential basis. The pool of active contributors comprises 200 private equity firms, mezzanine groups and other financial sponsors. Data contributors and other subscribers receive five products: (1) a quarterly report containing high-level valuation, volume and leverage data; (2) a quarterly supplement offering detailed information on debt and capital structure trends; (3) a semi-annual supplement on indemnification cap, escrow and other details; (4) quarterly industry drilldown reports; and (5) continuous access, through GF Data’s secure website, to detailed valuation data organized by NAICS code.
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