July 7, 2017
R&W Insurance: Impact on Private Equity Deal Escrows
Here’s an excerpt from a recent Nixon Peabody blog with observations on the impact that rep & warranty insurance has had on the size and terms of escrow arrangements in private equity 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.
Some private equity deals have eliminated the indemnification escrow altogether – and are just using an escrow for purchase price adjustments. In addition, special escrows have been established in some transactions to address items excluded from coverage.
The blog says that the rep & warranty insurance tidal wave hasn’t swept strategic buyers yet. Escrow arrangements in these deals still contemplate holdbacks in the traditional range of between 8% – 10% of the purchase price.
– John Jenkins