Slow uptake for deal insurance in Asia

A gradual increase in PE purchases of warranty & indemnity insurance is occurring, but mainly in mature markets like Australia.

The number of warranty and indemnity insurance (W&I) policies bought by private equity for Asia deals and exits grew by about 20 percent in 2012, according to a recent report by law firm Baker & McKenzie.

The total number of policies purchased in Asia was 150 in 2012 compared to 130 the previous year.

A big barrier to buying W&I in Asia has been cost, according to Philip Latham, partner at Navis Capital Partners. W&I costs are at least 1 percent of a deal's capped proceeds. Insurance companies, as well, are very adroit at finding technical defenses that could deny a claim, he added.

“That's often the reason why buyers will [try to convince themselves], 'There's not that much risk in this deal, and I think I can go after the seller if I really need to'”, Latham said.

W&I is essentially a way for private equity to ensure they get the right amount of cash proceeds for an exit or purchase, according to Dorothea Koo, Baker & McKenzie’s head of private equity practice for Asia-Pacific.

Once W&I is purchased, if a company is found to have priced itself incorrectly or presented false information, the buyer can then claim compensation from the underwriter – which is usually a bank or broker, according to Latham.

Buy-side warranty and indemnity insurance tends to be viewed by some in the industry as a tool to achieve a clean exit, “often avoiding the need for any escrow”, she said.

Navis has used W&I in the past and sought to reduce the cost of the policy by sharing the expense with the seller, Latham said. Buying a W&I policy tends to ease the seller’s concerns about liability, making private equity's discussion with the seller that much easier, he added.

Private equity has been buying W&I in Australia since 2006, but in the rest of Asia it is relatively new, added Baker & McKenzie partner David Allen. 

In Southeast Asia, where family groups dominate business, W&I is not widely used. Underwriters may have reservations about providing W&I for a deal with, for example, a family-owned business that doesn't provide proper disclosure.

“From the underwriters’ perspective, they need to be comfortable with both the market and the deal” in order to provide W&I, Allen said.