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Utilizing RWI for Alternative Investments During M&A Downturn

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At the end of Q1, 2023, Reuters reported that global M&A had suffered its worst quarter in a decade. A perfect storm of recent bank failures, rising interest rates, inflation, fears of recession, increasingly robust antitrust review, and global political tension spooked private equity and strategic investors alike, causing M&A volumes to drop 44% in the U.S. and 70% in Europe from Q4 2022. With unpredictable interest rates, among other factors, making financing commitments elusive, large and upper middle market deals have been particularly impacted.

Despite market difficulties, companies have generally maintained strong financial and operational performance, making them attractive potential targets for private equity. Creative buyers are utilizing RWI in conjunction with certain deal structures, such as minority investments, public company transactions and secondaries transactions, to remain active in today’s challenging deal-making environment. Because RWI use has not always been widespread on these types of deals, buyers have an opportunity to capitalize on the novel use of RWI as a differentiator as they bid for deals during this competitive market.

Minority Investments

Minority investments that do not trigger a change of control often allow existing financing to stay in place, virtually eliminating debt market uncertainty as a risk.

Here, RWI can protect buyers from protracted indemnification disputes with sellers, who still own and control the target company post-closing. We saw a 147% increase in minority deals using RWI between Q1 2022 and Q1 2023. We believe this increase is not only the result of more minority deals taking place, but also of increased awareness of the advantages of using RWI in this space.

Public Company Deals

Stock market volatility has created opportunities for private equity and other buyers to capitalize on low public equity valuations. In March 2023, Blackstone, Apollo, and Platinum Equity each announced large take-private deals valued between $4 billion and $8 billion.

RWI has long been a staple in “public-company style” private deals, where representations and warranties generally do not survive closing and buyers can use RWI to supplement what is traditionally available from sellers. Recently, buyers have recognized the appeal of RWI to achieve the same ends while investing in public companies. With insurance programs as large as $1 billion having been arranged for large public deals (and more capacity available in the market), RWI is available for deals of almost any size.

Secondaries Transactions

Secondaries transactions are another attractive investment strategy in this climate, as they enable funds to hold assets longer, through periods of inflation and market volatility, while providing their limited partners with liquidity if desired. During the 12 months ended December 2022, there was $103 billion in secondaries deal volume, and in January 2023 Blackstone raised the world’s largest secondaries fund to date at $22 billion.

RWI can assist secondaries buyers in navigating the balance between preserving their relationship with sellers and protecting their limited partners. In Q1 of 2023, we saw a 36% increase in secondaries submissions as compared to Q4 2022, and expect to see more as the players in this market continue to become accustomed to using RWI in this context.

Small Deals

Smaller deals and tuck-in transactions, where financing is often either funded by the acquiring company’s cash flows, contemplated by existing financing, or not as daunting because of the smaller commitment size, are somewhat impervious to interest rate and financial institution uncertainty. While upper middle market and larger M&A deals have suffered a recent downturn, the lower middle market remains an attractive forum for deploying private equity’s dry powder. Our middle-market team, led by Simon Chung, is poised to assist in crafting policies tailored to protect buyers in this sector.

Please reach out to your insurance broker or any member of the Euclid Transactional team for more information on how RWI can facilitate your prospective transaction.