In a very seller-friendly market, UK-style management investment warranties are providing an increasingly popular source of comfort for PE buyers. Compressed deal timetables, restricted access for due diligence and limited or no warranties in the SPA are giving buyers limited protection. Management investment warranties, on the other hand, are a relatively low friction mechanism for dealing with this lack of information and seller-friendly SPA terms.
While investment warranties do not deliver any real financial benefit for a PE buyer – a survey of our recent deals confirms that liability is usually capped at a very low amount compared with deal size, usually by reference to a manager’s gross annual salary or investment – these types of warranties and the associated disclosures do deliver valuable information and assurance regarding the target business.
Management investment warranties are largely a UK phenomenon: these warranties are generally not given in the US, are unusual (and if given,very limited) in Germany, France and Spain and extremely rare in Italy. There was a time when the need for these warranties was being questioned in the UK market, and a thought that they may be another feature of deal terms that would become compromised in today’s very competitive and global deal environment. But in fact we are seeing a re-emergence of these warranties in the UK and this has implications for other markets. UK holding structures are increasingly common for overseas businesses, partly as a result of increased public scrutiny of base erosion profit shifting. Management investment in these structures is typically on UK market terms and PE buyers are successfully arguing that this includes management giving warranties in connection with their investment.
All this means that some PE buyers who have not focused on management investment warranties are now doing so. Early results vindicate their renewed focus – there are a number of deals we have been involved in recently where material disclosures by management on diligence reports have led to risks being mitigated and addressed in ngotiations with sellers pre-signing. At a time when much PE deal architecture is becoming global, this is an example of UK technology being used to facilitate speedy and commercially viable transactions. In the existing seller-friendly climate and with the popularity of UK holding structures, we see the renewed focus on management investment warranties continuing.
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