Who should foot the bill for the W&I?

It’s not an unusual question to receive as we’re reaching the end of a client call: “In your experience, who picks up the W&I cost?” Reading between the lines, the question is often a thinly-veiled: “Could you confirm that we can suggest the other side should pick up the premium?” 

We, of course, respond diplomatically, and suggest that there are various situations where i) the seller pays, ii) the buyer pays or iii) it’s split – but what do we see the most? And has the shift in market dynamics affected this at all?

Before getting into who pays most often, it’s worth looking at the arguments for each party to push the cost on to the other side. Looking at it first from a buyer’s perspective, the case is based on the origins of W&I as a product. “But for this W&I policy, you (Mr. or Mrs. Seller) would be having to put a chunk of cash into an escrow in case we have a claim. By taking this policy out, we are generously allowing you to forego that restriction on your access to funds and allowing you to reinvest your entire proceeds as soon as you like. You are clearly a huge beneficiary of this product and, as such, you should be paying the premium.”

‘neither in a Sellers’ market, nor a Buyers’ market’,

Unquote Private Equity podcast

This argument carries some weight and, on a technical basis, would be difficult to rebut – but as my learned colleague (and one-day-Hollywood-director), Tim Davidson, states in hisrecent W&I Premium Video – “the market rules”. In this context, that market position has meant that over the past three or four years, sellers have been in a really strongposition. 

This usually meant Sellers could set the terms of a deal, particularly in auction processes, and it would be made clear to any prospective bidder that they’d be picking up their own W&I costs as part of the offer. Such has been the competition for assets, no serious buyer was going to let the relatively minor cost of the W&I premium derail the opportunity to pick up a prized asset. 

And if a plucky buyer did choose to challenge the position presented as part of the process, the Seller could fall back on some technical arguments of their own. “Look at the protections the policy gives you. You can choose your own limits of protection; you can buy down the basket almost as low as you want; the coverage periods are longer – wow, you can even obtain a much broader set of warranties and a narrower disclosure position if you like. You’re in a fantastic position, much better than if it was an uninsured deal – your investment committee must be thrilled with your work – you should certainly be picking up the tab.

The result? Well, while it wasn’t an absolute rule, in recent years it was certainly buyers who generally seemed to pay for the cost of the policy.

Fast forward to early-2023, and market dynamics have shifted a little. Interestingly, the most recent episode of the Unquote Private Equity podcast suggested that we were ‘neither in a Sellers’ market, nor a Buyers’ market’, and so where does that leave us for dynamics on deals that are going ahead? Well, clearly there are significantly more critical points that will be affected by transaction dynamics than who pays the W&I premium, but as an indicator, we’ve seen a bit of a shift. No longer is it assumed that a buyer is going to pick up the whole cost. Increasingly buyers who we work with have suggested to us in a confident tone that “We’re going to split it 50/50 – we haven’t raised it yet, but I don’t think they’ll mind.” A bullishness that wasn’t present until recently.

We’ve even seen some Sellers taking it further and setting out their stall in process letters stating that they will pay for W&I up to X% of the purchase price – with X being a fairly generous limit – offering such a position to tempt a broader set of bidders into their process and therein signalling what a reasonable counterparty they’ll be if you’re tempted by the target asset.

So, in our current market, we can ask again – who typically pays for the premium on a W&I deal? The answer …diplomatically, it’s still “there are situations where the seller pays, the buyer pays or it’s split” … but … if you’re a buyer in today’s market you’re certainly in a stronger position than you were this time last year to suggest that, ‘probably, we should split the bill’.

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