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Warranty and indemnity insurance may remain a staple of European private equity, but are buyers changing course?

By Neil Campbell, Tom D. Evans, Sebastian Pauls, Maximilian Platzer, David J. Walker, Edward Coates, and Catherine Campbell

Warranty and indemnity (W&I) insurance has become an important component of European PE transactions in recent years. However, changing market dynamics and challenging macro conditions (which have cooled deal flow) mean that PE buyers are now more critically evaluating the merits of W&I insurance. The Eighth edition of the Latham & Watkins Private Equity Market Study indicates that the overall uptake of W&I insurance is beginning to plateau, having increased significantly between 2016 and 2019. From a high of 35%, overall usage of W&I insurance in European deals has dropped in the past two consecutive years.

As W&I insurance has matured and PE buyers have become more experienced consumers of the insurance (and of low or nominal liability caps for warranties), the emerging picture is one of a product with a nuanced value. Increasingly, deal-specific characteristics, structures, and issues are playing a role in the demand for and success of W&I insurance, including appetite for stapled policies.

PE acquirers should view unions as stakeholders and factor possible or actual engagement obligations with them into the deal process.

By Kendall Burnett, Tom D. Evans, David J. Walker, Paul Lawrence, and Catherine Campbell

Widespread economic pressure — including pay, inflation, and the ongoing cost of living crisis — has increased union visibility. As the number of workers interested in union membership grows and the frequency of strikes surges in the UK and elsewhere, PE deals teams should remain mindful of the presence and role of unions in M&A.

PE firms face growing regulatory and litigation risks from greenwashing claims as they navigate a fragmented anti-greenwashing landscape.

By Tom D. Evans, Nell Perks, Anne Mainwaring, David J. Walker, and Catherine Campbell

Amid concerns of exaggerated or misleading sustainability claims, the UK Financial Conduct Authority’s (FCA) recent proposal for new labelling and disclosure rules to combat greenwashing (see text box) should put PE firms on alert for a growing range of greenwashing risks. The FCA proposals are just the latest in a wave of new rules and requirements being enacted and contemplated as regulators across jurisdictions look more carefully at green claims and seek to hold regulated firms (including PE sponsors) to account for exaggerated credentials and misstated investment policies.

Similarly, investor and other stakeholder claims over greenwashing are on the rise as firms and portfolio companies come under greater scrutiny and are required to publish ESG disclosures in market-facing and other public information. These claims can be brought under different and overlapping laws, including statute, securities regulations, and “soft law” provisions, making a consistent and proactive risk management approach essential.  

Bond issuers may wish to pursue an unmodified reverse Dutch auction for debt repurchases, an effective but underutilised transaction template that is gaining popularity.

By Francesco Lione, Tom D. Evans, David J. Walker, and Catherine Campbell

During the second half of 2022, amid ongoing market dislocation and as debt trading prices shrunk, paring back financial obligations by repurchasing debt at a discount became an increasingly attractive option for PE-owned businesses. Beyond the more commonly encountered issues that companies must navigate when embarking on debt repurchases (see Navigating Debt Repurchases in Europe: What You Need to Know), borrowers have taken a fresh look at liability management templates. Dealmakers have deployed unmodified reverse Dutch auctions with increasing frequency — a development that we see continuing to gain traction as long as the current economic slowdown and tight financing conditions persist.

By Tom D. Evans, David J. Walker, and Catherine Campbell

Current Trends

The M&A market is constantly evolving — from the predominantly seller’s market of H2 2019, through the tumultuous times of H1 2020, to the strong rebound of H2 2020 and to the highly competitive seller’s market of H1 2021 — deal dynamics are shifting. Deal terms vary by transaction size, industry sector, and jurisdiction. Having a thorough knowledge of market trends is critical to negotiating and executing a successful deal.

As private equity targets emerging companies, PE investors are expanding VC deal terms and dynamics.

By Mike Turner, Shing Lo, Tom Evans, Robbie McLaren, Farah O’Brien, David Walker, Jon Fox, Katie Peek, and Catherine Campbell

Emerging companies have historically been backed by venture capital funds, but as Europe’s startup scene matures, involvement by more traditional private equity investors is growing, particularly in the tech, consumer, and digital health sectors. The number of PE investments in emerging companies has increased year on year, with investments in companies such as Wolt, Moonbug Entertainment, Zwift, Klarna, Epic Games, and Oatly demonstrating the range of opportunities available to PE sponsors in this space. While PE investors are increasingly familiar with VC deal dynamics, they are also pushing to align growth-deal terms more closely with traditional buyout concepts.

The CMA’s efforts to make dynamic, forward-looking assessments of parties’ overlaps will only increase post-Brexit.

By John Colahan, Tom Evans, David Little, Jonathan Parker, David Walker, Greg Bonné, Anuj Ghai, and Catherine Campbell

Dealmakers must be alert to the increasingly interventionist approach of the UK’s Competition and Markets Authority (CMA), including on transactions with a limited nexus to the UK. Until now, the European Commission has acted as a “one-stop shop” for large-cap transactions. But the end of the Brexit transition period means that from the start of 2021, acquirers may face parallel EU and UK investigations — with the effect that the CMA will play a more prominent role in reviewing global deals.

By David J. Walker, Tom D. Evans, and Catherine Campbell

Current Trends

The M&A market is constantly evolving — from the predominantly seller’s market of H2 2019, to the tumultuous times of H1 2020, dynamics are shifting. Deal terms vary by transaction size, industry sector, and jurisdiction. Having a thorough knowledge of market trends is critical to negotiating and executing a successful deal.

Seventh Edition

Latham & Watkins has produced the seventh edition of its annual survey of European private equity transactions. We analysed the acquisition and equity documentation from more than 260 deals signing or closing between July 2018 and June 2020 (inclusive), on which our European offices advised.

By David J. Walker, Tom D. Evans, and Catherine Campbell

Current Trends

The M&A market is constantly evolving — from the predominantly seller’s market of H2 2019, to the tumultuous times of H1 2020, dynamics are shifting. Deal terms vary by transaction size, industry sector, and jurisdiction. Having a thorough knowledge of market trends is critical to negotiating and executing a successful deal.

Seventh Edition

Latham & Watkins has produced the seventh edition of its annual survey of European private equity transactions. We analysed the acquisition and equity documentation from more than 260 deals signing or closing between July 2018 and June 2020 (inclusive), on which our European offices advised.

Despite practical challenges, earnouts are a tool that PE buyers should increasingly consider to reconcile differences and get deals done.

By Alexander Benedetti, Giancarlo D’Ambrosio, Sebastian Pauls, Laura Kichenside, Catherine Campbell, Tom Evans, and David Walker

The use of earnouts, though historically disliked by PE buyers, is increasing across Europe. Earnouts can provide a way to bridge valuation gaps, a common need given frothy valuations pre-COVID-19, and a more frequently encountered issue during H1 2020. According to the forthcoming seventh edition of the Latham & Watkins Private Equity Market Study that examined deals signed or closed between July 2018 and June 2020, 18% of deals featured an earnout, compared to 16% and 14% in the 2018 and 2019 editions respectively. While the use of earnouts has challenges for PE dealmakers, earnouts have enabled parties to reconcile differences and get deals done, making them a tool that PE buyers may become more willing to accommodate in the year ahead, particularly given the uncertainties for many businesses caused by COVID-19.