www.lexpert.ca | LEXPERT • June 2014 | 35
PRIVATE-EQUITY FUNDS
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THE LARGE AMOUNTS of undeployed capital available to Canadian
private-equity (PE) funds a er a banner year of fundraising in 2013 and a renewed willing-
ness by banks to extend credit on more favorable terms have set the stage for an active year
in the Canadian PE market.
Here are fi ve PE trends to watch for this year:
INCREASED RELIANCE ON REP & WARRANTY INSURANCE
Representation and warranty insurance (RWI) covers indemnifi cation obligations arising from
a breach of representations and warranties in a purchase agreement. RWI policy pricing is trans-
action-specifi c, but premiums are generally in the range of 2 to 4 percent of the coverage limit
and deductibles are typically between 1 to 3 percent of the transaction value.
RWI benefi ts sellers and buyers in several ways:
• It lessens the seller's potential exposure in the event of a breach.
• It may reduce the need for capital clawbacks from investors to fund a successful claim.
• It can reduce or even eliminate the need for traditional means of securing indemnifi cation
obligations, such as depositing a portion of the sale proceeds into an escrow account. Minimiz-
ing the percentage of sale proceeds deposited into escrow helps maximize the seller's internal
rate of return from the investment (an increasingly important metric for PE funds in the cur-
rent competitive fundraising environment).
• Buyers looking to position bids in a competitive auction can seek a lower escrow or indem-
nity cap where RWI is in place.
• In the negotiation process, RWI can reduce friction between the parties by taking con-
tentious issues such as escrows and indemnity caps off the table, or at least minimize their
signifi cance.
• RWI is particularly attractive where the seller's management retains an ongoing interest in
the business by potentially eliminating the unpleasant scenario of having to seek recovery from
management for a breach.
Although insurers have off ered RWI for more than two decades, the use of RWI by both
PRIVATE EQUITY:
FIVE TRENDS
TO WATCH
With capital and credit waiting in the wings, the stage
is set for an active year in Canada's PE market
BY JOHN CONNON; GOODMANS LLP
