Representation and warranty insurance (“RWI”) is expanding into the GP Led Secondaries sector and we can expect to see this grow in the coming years. The market has determined that the GP-Led Secondary is now mainstream. In 2021, tens of billions of dollars went into private equity GP-Led Secondary transactions. Well-respected, and successful private equity sponsors are expanding their use of these transactions and institutional LPs are training their staff and preparing themselves for how to best position themselves as their prevalence continues to expand. In short, the GP-Led Secondary is here to stay.
RWI insurance providers have proven they are adept at growing and expanding into any fertile market that will take them. RWI’s growth in the M&A context has been exponential over the last 10 years. We have seen the once unknown insurance become common place in that industry. Now RWI providers are chasing opportunity in this new and relatively safe transaction space. By definition the assets at the heart of these GP Led Secondaries are known quantities to the GPs who have owned them for years prior to these sales. RWI is not yet common in GP-Led Secondary transactions but lawyers are trading stories and most of us have a few examples of RWI being used successfully in these deals. The big issue with RWI insurance has always been pricing and it will be a while before the RWI providers sort out the right pricing model for this sector. However, as underwriters expand their willingness to insure these GP-Led Secondary transactions and modify their underwriting process to accommodate the unique aspects of them, I expect to see more and more RWI as part of GP-Led Secondaries in the future.
Representation and warranty insurance is being increasingly used in these transactions in lieu of traditional indemnities. The costs of these policies can be significant and are often borne at least in part by selling investors.
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