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Introducing M&A Roundtable

By Alliant Specialty

Jacob Borth and Sumit Agarwal, Alliant Mergers & Acquisitions, speak with Brian Richards, Partner and Chair of Global Private Equity and Amit Mehta, Partner and Global Chair of the Corporate Department at Paul Hastings about current trends in the Reps and Warranties insurance market, overall deal activity and the impact of COVID-19 on policy terms.

Intro (00:01):
You're listening to the Alliant M&A Roundtable providing insights and expertise on the unique risk management needs associated with private equity firms. Here is your host, Jonathan Gilbert.

Jonathan Gilbert (00:21):
Hi, thanks and welcome. Appreciate everyone joining for this first edition of Alliant and Paul Hastings M&A round table. We hope you find it to be a lively discussion on current trends in the rep & warranty insurance market and what we're seeing in terms of deal activity overall, as well as the impact due to COVID, which certainly has caused some changes in policy terms, underwriting and otherwise, which will be sure to touch upon throughout the discussion.

Shari Paul (00:46):
Thanks, John. And now let's introduce your round table participants for today.

Sumit Agarwal (00:51):
This is Sumit Agarwal, I'm part of Alliant’s Mergers and Acquisitions Group. I'm based in Chicago, Illinois.

Jacob Borth (01:05):
This is Jacob Borth from Alliant’s Mergers and Acquisition Group. I specialize in reps & warranties insurance out of Chicago, Illinois.

Amit Mehta (01:11):
So, this is Amit Mehta, partner of the private equity and M&A Group at Paul Hastings, and global chair of the firm's corporate practice.

Brian Richards (01:13):
This is Brian Richards. I'm a partner at Paul Hastings in Chicago, as well, and I am the chair of the global private equity practice.

Sumit Agarwal (01:21):
Thanks for kicking it off, so without further ado, if everyone could speak to what we're seeing with current year to date trends, if any trends have carried over from 2019 fully recognizing that, the world in 2020 is a little bit different than 2019. But just in terms of M&A deal flow, and even a little bit more specifically to reps & warranty insurance and really what trends does everyone anticipate on seeing through the end of 2020?

Brian Richards (01:56):
Sure. This is Brian Richardson, from Paul Hastings. I'll take the first stab at that, and I think instead of viewing the world in a 2019 versus a 2020 construct, I think that maybe the better way to look at it is pre COVID and post COVID because the early part of 2020 was just a continuation of 2019 and 2018. And, and the market that was, as everybody knows, robust for five to seven years, and then all the sudden stopped. It didn't slow down, it didn't fade, it just stopped. Like most folks, I expect we had a number of deals that were either days from signing and or closing, and they stopped. whereas other deals that had closed a week earlier, you know, it went off without a hitch. And I think the biggest trend that we have seen is, as it relates to COVID and the exclusions and the evolution from just blanket attempts by underwriters to initially exclude COVID related issues from the definition of loss to a more specific exclusion, to lately in a couple of policies that we've worked on having very specific exclusions for COVID so that the exception doesn't swallow the rule. And we think that that trend will continue as people continue to further the understanding of the impacts on the underlying businesses that COVID has had. And I think from a policy perspective, you know, from a buyer's perspective, which is where we usually are in the transaction, when we're dealing with the policy, you know, return to normal and minimalize those exclusions, is where we see things going and where we hope they continue to go.

Sumit Agarwal (03:45):
So, I think that's right. We’re certainly seeing the same, Brian. So, thanks for that. I would bring up, you know, part of the irony and in the marketplace for rep & warranty, is that there obviously has been somewhat of a slowdown in deals. And as a function of that, carriers are seeing less submission flow, which in turn is, has almost created a soft market or more of an appetite to write deals, obviously, exclusive of that COVID exclusion, that you referenced. So, with fewer deals out there, it’s a little bit interesting to see that carriers are stepping up and getting maybe a little bit more aggressive than we would've anticipated at this point in 2020, to write deals. You know, I would say that, certainly through Q1 and into Q2, we probably were seeing more submissions than ever, and that speaks to the broader M&A marketplace. Obviously, a little bit of a slowdown into Q2, but expect that things will pick up here and have been picking up here certainly in June and July, across a number of industry classes as well.

Jacob Borth (05:01):
Yeah, and I mean, I think I would echo both of what you guys are saying is that we're certainly seeing, kind of across our platform, in various sectors, an increase in volume of new transactions coming in or transactions that had frankly just been delayed, and put on hold or pause, starting to actually move forward. Now, as people start to get their head a little bit around the effects of COVID and what it's really meant, for the market, for the EBIDA companies, for the financing industry and what they're willing to lend against and rates related there too. I think that's going to be for us when we think about it from at least a global perspective and a market perspective, really going to be the question. Is if we can keep things moving forward, is the market going to continue to kind of reopen, if you will, just on the private equity side, kind of allowing for financing to come into place. People getting comfortable understanding what companies they're financing into and what those look like in the near and short term. And I guess the last piece that we're starting to see, you know, especially in the last week or two, as states start to close back down, or at least at least, you know, move a little bit backwards from where they were otherwise, think they were going to be, what's the market reaction going to be to that kind of across the board? I think your perspective and my perspective, one of the big question marks is we kind of look at the third and fourth quarter for the year.

Sumit Agarwal (06:19):
Not to put anybody on the spot, but what would you say is the percentage of financial buyers versus non-financial buyers on the deals that you guys are working on. And I'm glad you brought up private equity, and I think we can all appreciate private equity's role in M&A, and in this particular product. But if you had to guess, what would you say is the breakdown of financial sponsors versus non-financial sponsors, on deals that you're working on?

Brian Richards (06:51):
This is Brian. We specialize in private equity and that's the vast majority of the transactions we do. So, we may not have a sense for the broader market there. So, I would say 80% of what we do is for sponsors, across the table, I would say probably at least 70% or so. I know Amit’s experience is different, but when we're selling on behalf of sponsors, we usually see sponsors across the table as well.

Jacob Borth (07:22):
While the activity and the volume has been down. I think that the private equity level is continuing to kind of, move along, and I think we'll talk about something a bit about what that pace looks like and how they're looking at it. I think certainly,you've certainly seen some bigger deals, in what I'll call the strategic space, getting in announced. I think in the last week, or in the last couple of days, the largest M&A deal's been announced, but looks like it's going to be a stock for stock deal. But you're starting to kind of see them play in this market as well, but they're also, you know, a lot of the big strategics are dealing with earnings calls coming up here in the next week or so, which will be interesting to decide what they're otherwise looking at and what they're otherwise going to do with the market. And you've seen certain industries, obviously, the airline industry, travel industry, just being at this point a total mess. I don't think they can really see out the other side of what this market's going to look like. So, if we see activity in that front, I think it's probably going to be on the distress side, and opportunities that people are going to find, either companies going away or using them as bolt on acquisitions to their kind of current businesses, assessing they're otherwise healthy enough.

Sumit Agarwal (08:27):
Yeah. And I'm glad you brought that up, thanks for bringing up, for using the word of distress. We'll certainly touch on that a little bit later. Just from a timing perspective and from start to finish and getting deals completed, how would you compare 2020 to 2019, really from your clients dipping their toes in the water from the exploratory phase through the bid process? And again, through signing and closing, have you seen most of your clients really itching to get deals done, both on the buy and the sell side, or are clients taking a slower approach in getting deals completed? I guess, you know, from our perspective, it's been a little bit of a mixed bag. And I think we can all appreciate the fact that everybody has a target signed date, which is a working date until it's not the signed date. We've seen signed date get consistently get pushed back, and then on the flip side, we've had a handful of deals that from start to finish and getting a policy in place have gone otherwise relatively quickly. So interested in everyone's thoughts there as well.

Jacob Borth (09:45):
Sure. I can jump in on that. I think you're right. It has been a mixed bag, but I also it's been evolving. So, I think when we were looking at maybe the March time frame, you know, at least on a private equity side, we had seen a pretty strong freeze on all transactions. They were starting to look at the ones that were a little bit farther along, and most of our clients had looked internally, looking at their own portfolio companies and trying to understand how those were going to weather the storm, those that were going to and those that would not. Part of that also was seeing what government assistance would otherwise become available for those companies, which as it turns out in the end of the day, there really wasn't much government assistance available for most private equity clients and most of their portfolio companies, just because of the restrictions in the PPP program. But when you roll that now forward to kind of where we are today, I think you're starting to see more activities from the investment banks, moving companies forward, moving them forward in the sales process. So, when we talk to our clients, they're starting to see more books come across their desk, more opportunities that are out there, both, kind of, healthy and distressed. Obviously with certain caveats to when we say what healthy looks like right now, so they're starting to see more and recognizing that our clients are paid to do deals. So, sitting on those sidelines for too long doesn’t make economic sense for them, funds have defined lifetimes, and investors are looking to put that money to work, which you can certainly read the amount of capital, that's sitting out there both from an equity and a lender side, out in the market.
So, we're starting to see, I think, more new activity come in, and then when you think about transactions themselves, I would say, and I'll be curious on Brian's perspective, as well, as here everyone else is that I would say it's more cautious and slower than it than it's ever been, because everybody just keeps waiting for that second shoe to drop if it already had hasn't. And so, we're proceeding, but it's more cautious, working with the lenders is a little slower, and what they're willing to put money on and risk. And I think people think that these deals if we're working on them still will get done. But I would say if we were looking at deals, you know, moving to 30 to 60 days timeframe, in the past, I would say it's at least double that on average of a timeframe to sign a close and even up to 90 or 120, but that's what I'm otherwise seeing in the market.

Brian Richards (12:08):
Yeah, no, I agree with that. I think that as I mean, at everybody's cautious in the driver for that is the ability to predict demand and nobody can predict demand for their product, absent, certain industries that are benefiting from the current situation for most businesses. It's hard to impossible to predict what demand's going to be in 30, 60, 90 days, 100 days. And that applies to the lenders of course, as well. And so, everybody's just cautious. People are getting the work done that they can get done so that they're in a position once they're comfortable with what demand's going to look like to close the deal, but, ultimately cautious to pull that trigger is what we're seeing.

Sumit Agarwal (12:51):
Yeah, and I echo both your comments from the Alliant side as well. Certainly, on the deal financing side, speaking with some of our colleagues and friends, who are on the credit side, you know, credit tends to generally be available and readily available, but kind of what we're hearing is that, for existing clients, credit is much more easily attainable than for a new client. And then that also goes without mentioning the regulatory approval process. A lot of times that comes to fruition, obviously in deals as well. We've, seen a couple transactions, whereby that have been delayed due to regulatory bodies, just simply not being able to get up to speed with their work, as they normally do.

So, I can fully appreciate that, but would largely echo that. To your initial point, I think that deal speed is certainly picking up through the summer months and maybe a little bit closer to what we're used to seeing as well. And at that point, I'll kind of kick it off to the next question. And we've touched a lot about this topic already in terms of what to expect in the second half of the year in the summer months and where folks see Q3 and Q4 deal flow going. And just so we don't talk about the same topic again and again, with the deal activity that's in Q3 and Q4, do you see any potential changes in deal structures, either with the players involved in deal financing, use of escrow or seller indemnity? I know some of the larger deals these days have no seller indemnity, and now we're seeing limited seller indemnity and specific indemnity as it relates to COVID and PPP loans.

Brian Richards (14:40):
Sure. This is Brian. I'll take a first crack at that. I think that we all, everybody on this call, probably most people who will listen, are all hopeful that the market will pick up. That there'll be a lot of activity again because our livelihoods will all depend upon it. But I think realistically, it's going to continue to be slow again, until people can predict demand, until management teams can predict demand and buyers and lenders can trust those predictions of demand. And I think if you talk to the investment bankers, if you give them some truth, they'll tell you that pitch activity and deals and process coming to market our low levels compared to where they were. Again, we're all comparing this to a very robust 2018, 2019, early 2020. So, you know, the deals are just going to be slower.

I think again, except for businesses that are unaffected, we've seen some companies that are in the market where they're positively very positively impacted by COVID whether because they produce PPP or otherwise are producing products that are in demand and those are equally different, difficult to value because we don't know how long that surge in revenue is going to last. Is that going to be six months or three years that they're going to have access to these kinds of revenues. But I think the one factor that I haven't seen much written about or talked about that is going to become very important in the next few months is the election. And you know, everybody talks about how in election years, a lot of times deals slow or pick up depending on what people's expectations are here. I think it's going to be more interesting than most election years and in part that's because what the polls look like right now and just in part, because it's just the general uncertainty in the world, in the market today.

But if the markets start to think and if sellers start to think that the Democrats will sweep the White House, the Senate, and the Congress. Then I think you're going to see a flurry of deals kind of back to the question on timing. You'll see a flurry of deals done very quickly because sellers will be looking at potential corporate tax rates going up, which is something that is part of the platform. You'll see capital gains rates for individuals going up. You'll see possibly finally the carried interest being tax order, income rates, which has been a topic we've all heard about for decades now. But there's a lot of moment with some very influential Democrats, including Senator Warren who've made this an important part of their platform. And if owners of businesses, whether it's entrepreneurs, private equity firms or others, see that corporate rates can go up, capital gains rates can go up, carried interest, can be tax order income. And oh, by the way, the Senate Democrats have said, they're in favor of blowing up the filibuster so they can get things done with just 50 senators. If I owned a business, I think I would rather sell it prior to those things happening rather than after they've happened. And so, you might see, like I said, a lot more activity. Also, maybe even sellers willing to take a little bit of a discount as they focus on the after or tax proceeds, they're going to get as opposed to the top line number.

Sumit Agarwal (18:12):
Yeah. Completely hear you on that. And even as Jacob mentioned previously from a regulatory standpoint. I feel like both can happen a lot quicker given this administration view on relaxing regulation. I guess deregulation, whereas your kind of alluded to, if the election kind of pans out the way people anticipate it to or expect it to, then there might be a ramp up in regulatory oversight and then it might be a little bit harder to get some of those larger deals done. And I guess from a larger standpoint, as opposed to like deal structures and the like, it's tough to say with all these specific indemnities, and the like buy kind of have to take what sellers provide. And there's just also, there's a ton of dry powder on the sideline.

So, with all these delays, then people are kind of waiting as you, as you mentioned earlier for the second shoe to drop if it hasn't already some of these private equity funds that have done fundraising and have to kind of distribute capital for 2020. If you have billions of dollars, if not trillions that need to be invested, it just kind of delays the 5-to-7-year return that investors are expecting. And I think that's an impact that again, as you mentioned, there's just some things that people aren't talking about putting a lot of points on.

Jacob Borth (19:35):
Yeah, and I think it's a good point. This is Jacob again, I think it's a good, a good point. And it kind of goes back again to the use of capital that's available, right. And even, you know, pre-coronavirus, I think that at least domestically here in the us, there was a record level of availability of capital on corporate balance sheets. So, to your point, at some point it's just simply going to have to get put to use and you know, I think we would've expected maybe a little bit more activity on the strategic side. But as the Paul Hastings guys mentioned earlier, I think that's starting to come back a little bit, which is good and not just on the mega deals, and in the deals that make the headlines. I think that we'll certainly continue to see more activity in the deals that range from, certainly 50 million of enterprise value and not to get into the nitty gritty of, of the deal itself.

Sumit Agarwal (20:28):
One question that certainly always comes up on every deal on the insurance broker side would like to get the Paul Hasting’s team's perspective on due diligence, and any trends or developments that you guys are seeing for 2020. I know that we keep harping on coronavirus and its impact. I think it's a little bit tough to get away from that conversation, but I think we'd be remiss not to talk about, due diligence and really, what are your clients focused on and where are you guys advising clients to focus on? And how has that potentially been impacted through, at this point in time?

Jacob Borth (21:10):
Yeah, I mean, so I think in a lot of ways I would say it will continue to be consistent with the items that we're kind of looking at that we've been looking at in the past. Obviously with adding COVID on top of it. So, you know, heightened risk of certainly data privacy, be an example and kind of how the policy, how the insurers are looking at those from an inclusion basis or coverage bases or not is certainly top, top of mind for us. I think a lot of times on the COVID side where, you know, initially it seems like it's continuing to shift more from the insureds, I guess betterment than it was before is the, the policies are getting narrow. The language is getting narrower and how people are viewing those in terms of kind of what the exclusion to the policy or the loss would be.

And I think from our perspective, like our client's perspective is also not just from the policy, but just understanding kind of what the business on legal risk is, for companies that have otherwise shut down, they furlough employees, or they terminated them. They've got labor agreements in place for the concept of furloughing or termination doesn't necessarily coincide with how those are otherwise written. And so, I think they're also looking at it from a perspective of, okay, well, if we're going to have these issues, how do we deal with that risk? So, the policy, if the seller's not going to stand behind it, if the policies underwriters aren't going to stand behind it, or if the way they're going to stand behind it, it's really not going to benefit us from an economic perspective. It's taking that and kind of flipping it on its head a little bit and understanding, okay, then from a purchase price perspective or deal mechanics, how do we deal with that issue? and so that's where I think we've started to see. And we talked about this a little bit is when we continue to see these transactions move forward. I think the contingent nature of some of the consideration is where they may be driving a bit of value. So if it's an earn out, if it's a seller note, if it's some rolled equity, you know, those kind of concepts, I think in the current market, I think where their bigger concern is, from an economic value perspective then necessarily from a rep & warranty side, I think they're going to continue to view the rep & warranty insurance and this and that for which the sellers have to about say behind it is really going to be their kind of historical look at that business for really the unknown.

Sumit Agarwal (23:27):
Yeah. Agree. And I think you touched on a couple great points, thank for that, the adequacy, of it and network systems is something that we're seeing insurance carriers really hammer down in 2020. And Alliant would argue that was probably going to be an area of heightened risk and heightened underwriting focus, in 2020 irrespective of COVID. But with employees working remotely and added stress on companies IT systems, it's become all the more prevalent and I think the other great point that you touched on is just with respect to earns themselves. I feel like here, certainly in the last couple months, the percentage of earn has gotten a little bit higher and higher. That's a state that buyers aren't open to, or they don't want to, provide for that sweetener in a transaction. But I feel like we're just seeing more and more of an earn, as part of a transaction structure, and further on the due diligence point and specific again, to the underwriting, I feel like customer and supplier contracts are certainly continuing to be areas of heightened focus. Maybe a little bit irrespective of coronavirus, the classification and misclassification of employees. As independent contractors were certainly something that we were seeing a lot in 2019 and into 2020, and those are kind of areas, where again, insurance carriers are drilling down on underwriting calls and we're seeing, our clients conduct significant diligence on those fronts. Are you guys seeing any shift in the paradigm as well? How deals are getting done? I know we touched on the earn out structure, but what are you guys seeing from a distress or underperforming target standpoint, or even what are you guys seeing from a multiple standpoint? I fully recognize that's a little bit of a loaded question and probably somewhat depends on industry, and obviously is deal specific, but just generally speaking distress versus performing assets where are guy seeing in multiples?

Jacob Borth (26:04):
Yeah. Maybe I'll hit the first part of that question. And Brian, a little kind of the second on the multiple side, is that on the distress side? I think we certainly see a pickup, in that world of me not surprising, you saw it a bit new on the gas side, but I think now, obviously it's starting to kind of move along, into a lot of other industries. We're seeing it, and you've seen a ton of lenders take the keys on restaurant related businesses, on travel related businesses, and we're working with a couple of lenders now that are kind of going through that process where either they've bought into the loan kind of late stage, after the financing, because they otherwise looking at it as a successful acquisition opportunity for them, otherwise going to be in the FCR in the business.

But I think we're seeing a pickup there, and I think we'll continue to see that pick on what called the distress 360 side. And as part of that, I know we've got a couple of lenders, their clients, ours, we were seeing in the lender position or on the kind of private equity, you know, stalking horse side, that are actually looking at rep & warranty as kind of a viable option for them now. When they're thinking about taking these assets over, I think for them, it's an opportunity. It’s an available source of recovery that they didn't otherwise have in the past, but I think they're certainly a look at that. And as we talk to you all, and the other brokers that's certainly a pick of availability, that otherwise we didn't really see, it's kind of a useful mechanism in the past. So, I think we'll continue see a lot of picks on the stress side. I think people are going to continue to look at it from either financing companies, never away from their growth equity side, maybe taking a piece of the loan over either in either using that as the fulcra to kind of foreclose on the assets or just running as a stocking horse, otherwise in the marketing.

Brian Richards (27:53):
Yeah, I think on Jacob makes a really good point there. I think that the way that simply stated is in most rapid warranty deals, you've got the insurer substituting for the seller, and that's been the reason in large part. I think that the market has evolved is, because sellers have gained leverage over the last several years with all the dry powder and the other things we've talked about. So, another way for sellers to exercise that leverage in addition to squeezing on price and, and closing certainty was to get out of post-closing indemnification obligations and revenue warranty. Insurance has done a great job of fulfilling that role and the evolution as it relates to the distress is it's not the insurance here isn't replacing. The seller is indium. It's creating a new class of indium. And what debt really does is facilitate transactions that otherwise might not have been able to get done because the buyer now has some form of protection and the sellers had no ability to give that protection because there was no, they weren't getting anything for the deal.

So why would they? It really opened up a new class of transactions that otherwise might not have gotten done or would've gotten done on different terms. Just generally as the question as to multiples and I think again, it's very deal and industry specific and goes back to the question of ability to click demand, which is why we're these earnouts everybody hates earnouts. And yet we were seeing them, as we've all talked about more and more than we have been in the last few years. And I think they're serving a useful purpose because we don't know if the businesses worth six times or nine times. And so, you can pay six times a close. And if things pan out, as people hope buyers are happy to pay the nine times. And if, obviously I'm making up these numbers and if the business or the economy or things beyond the business's control don't pan out, then six times probably was the right price.

And, you know, all of this under the cover of what we've already talked about in terms of just being so much dry powder and capital sitting on the side, but, you know, I think LPs are generally happy to have their funds not investing if they're not competent in the deals they're doing. So, while there's dry powder, I don't know that it's necessarily burning a hole in the pockets of the sponsors. And I don't think unlike in other markets where we've seen over the years, I don't think the sponsors are getting a ton of pressure from the LPs to deploy that capital right now. I think they're comfortable, the LPs are comfortable with the caution approach that the sponsors are taking.

Sumit Agarwal (30:43):
Thank you for that Brian. Then Brian, to your first point on the use of reps & warranties in the marketplace and specifically for you guys on the legal side of it. I guess the question is, do you see any changes on the horizon and how reps & warranties I share is going to be used just based on how it's functioning from finish, even post close from a claim’s perspective, and from our perspective as a broker, as to where we see the reps & warranties market going over the next 24 months? I mean, everyone anticipates a hardening at some point, and what that means is, there's a slight uptick in premiums. There are some markets out there that are kind of pushing a market towards a little bit higher premium, we're seeing higher retentions, but we'd be Remis to say that on the flip side, we don't also see a downward pressure on retentions on some of the larger transactions.

Also recently, as of the last few months we've seen some sort of COVID exclusions. Initially, when the market was reacting to it, there's very broad exclude. We've kind of worked over the last 60, 90 days to narrow and tailor that down to something that's a little bit more quote, unquote, directly related to COVID. It's so ambiguous, and from the insured's perspective, we understand from a claim standpoint that if there's ever a claim on a policy with the COVID exclusion, that the insurer might just point to COVID and try to deny the claim. But then from the carrier standpoint, we also understand that COVID or PPP might not be something that our reps policies supposed to cover, and then just continue scrutiny, financial statements and the like things that have given rise to claims in the past in currently, I don't know if you have a take on where you kind of see the, the use of reps & warranties policy kind of go forward basis over the next 12 to 24 months, just based on your experience on how it's functioned.

Brian Richards (32:34):
Yeah. I think what that they built, will continue to see it's adoption in the marketplace. We, as the buyers of policies love to see the trend of decreasing premiums, decreasing retentions, some cases no retentions on specific reps, fundamental reps. And so, all the trends I think over the last years have been good for us. And I think it's just like we were talking about on the due diligence, I think the areas where there's heightened due diligence, it all circles back to where there have been claims. And as long as the insurers continue to have relatively low claims where they actually have to pay out, I think we'll continue to see the premiums going down. I mean, as you guys know better than us, number of new entrants in the market, it seems every year, the market gets more competitive every year, which is a function I think, of a market where there's people making outsized profits.

So as long as it's a profitable business, it'll be more people coming in, it'll be more competitive. And at some point, we'll find that equilibrium where the policies are priced fairly quote, unquote for the payments that are going out. And I think we're now getting to the place where there's a maturity in the marketplace, where the insurers can take a look at a of five to seven year horizon to see what they've taken in, what they've paid out, what it's been for, and that, you know, that drives where they push back on exclusions and it drives where then we all have to do more on the diligence.

Sumit Agarwal (34:14):
Yeah, that makes perfect sense. And then I guess further to that point, what areas have you seen use reps & warranties and have fared better than others? All things considered. I mean, from our perspective, lower middle market deals that which is kind of under 50 million have fared well better than others. Most of the deals that we've done that survive the initial drop off in deal flow, worthy, lower middle market deals. They kind of weather the storm, given their initial and the deal size. They won’t be able to still close a deal in March and April, and these are deals where we may not have been able to find competitive rates just three to six months ago, carriers, like you said, there's more and more carriers entering the market, each passing year. And to some degree they come in and kind of provide competitive to whether by premium or retention or underwriting capability, and it's these new entrants people who are entering the market are not just new underwriters. They're all coming from experience in the market for 5 to 10 years and establishing their own shop. So, in that sense, the name is new, but the people are right from the industry that have kind of been there and just starting up their own shop.

Jacob Borth (35:23):
We've certainly seen, I think I would agree with this, the norm for almost all of our deals, especially in the lower middle market to middle market, have been the use of rapid warranty policies. And I think there's been an increase, of use of using both just what I'll call a normal general policy, that may or may not have kind of an additional policy on top of that, just to deal with increased coverage, plus the fundamental policy on top of that as well. And I think, you know, on the competitive side where, you know, we've gone into auction, certainly pre COVID, but I think we're starting to see that we'll come back or kind of know that it'll come back is that, we've advised clients that if you really want to be thoughtful in this auction and if it's that hot, we're otherwise going to need to look at it from a kind of a public company style purchase agreement where we're buying both a general and fundamental policy and letting the sellers walk away, certainly if they're their sponsor on the other side, otherwise in a competitive process.

So, I think we would agree with that in that marketplace, it's going to continue to be abundant unless there's something that's otherwise changed. The dynamic where people just don't view the policies is kind of worth the cost of binding them. But I think we don't think that will otherwise change and continue to be something we guide our clients toward. I certainly think sellers are going to be pushing those and not going to really change that perspective from what we've seen, kind of pre-market. And I think the expansion of other carriers in the market certainly helped it become, I think for us in some ways, a little confusing to keep up and I mean, that's kind of where we rely and work well with your team is that, you're trying to figure out: okay, well, we had a great policy negotiated with this group and now some, maybe some persons in that group have otherwise moved over to a new team.

What does that mean from a policy perspective? Are we starting over, do we have forms with that group? I mean, I think that's where we get a little, I wouldn't say concern, but it can, what's down a bit. If we're going to a new, a new carrier that we don't otherwise feel like we have a good starting place. But like anything else, I mean, I think the increase in the insurance, brokers or the insurers that are out there is somewhat similar to what we've seen from the availability of financing sources out there. The amount of non-bank lenders, that we're working with come bar to one, two to three years ago has probably tripled, and similar, we see that in the insurance base as well. And part of it is just making sure we understand who we're interacting with and making sure they're going to be reasonable. They're going to work as fast as we need them to, and otherwise get insurance in place that we're comfortable with.

Brian Richards (37:56):
Yeah. I think just picking up on that, remember a couple years ago, it seems maybe it was even less than that, but the timeline would allow for about a week from the diligence call or at least providing final reports to the underwriter, to the time we close and that like, everything else in deals has gotten compressed. And so, while we talked before for about how deals are slowing down and people are being more cautious, it it's slow until it's not. And at the end of the transaction, once people have decided to transact and they've got the terms, there's not a lot of patience or tolerance for us and the underwriters, you know, the lawyers and the, the brokers and the underwriters to, to do the job of finalizing reports, having to do those in call getting a policy and then finding it in, in order close.

So instead of seven days, like we used to have that, you know, now sometimes two or three and so it's super important for us to have confidence and be able to communicate to our clients' confidence, that we'll be able to get that done. It's one thing where it's an underwriter where we've got like a meet said a really good form and a working relationship where we can just change names and dates on the form update for the deal. And then we're really just talking about closing out final diligence items and talking about exclusions. Whereas if it, someone with whom we don't have a good form, then we're really relying on, on you guys on the brokers to make sure that this is a group that we can get a good form quickly with. And also, hopefully you all have one that we can work with and that the group, the underwriter is going to be reasonable, when it comes to exclusions. Because at that point we're stuck. We're going with that underwriter, whether they're reasonable or not, and if they're not, it's a disaster or for us on this deal, it's the end of the relationship for, for them on deals going forward. But they've got all the leverage in the short run. So that's where you guys add a ton of value in terms of helping guide us to, with respect to the, the new underwriters, whether they can be trusted in that case or not.

Sumit Agarwal (40:15):
Oh yeah. We definitely hear you on that point. And with each market that kind of enters the space, at least us at a line, we kind of try to get ahead of it. We reach out to them, we talk to them, we actually try to get their foreign policy and mark it up before we even have a deal with them. There's certain things that we look for in terms of value add, and the policy that we'd like to negotiate on your behalf or on the insurance behalf. And we try to get ahead of that, get it into policy and make sure the carrier's going to kind of be open to those changes, obviously deal steel and even on the exclusion front, again, yeah, you're right. If they come with an exclusion at the 11th hour, one that didn't flag earlier is always an issue, but we've kind of seen with experienced people starting up the new shops, they kind of know, and their experience, and it's not like they're new to the game, so they kind of know how it works. And there's usually a rationale behind it, obviously, from your perspective, in terms of representing the buyer, you want to have, make sure there's minimal or no exclusion. I mean, we've pushed back on those. It's something that kind of came up that can be resolve you make it conditional, or you kind of work with the carrier, to either limit it or make it very specific, as opposed to overly broad.

Brian Richards (41:27):
Yeah. And we get, there are going to be in certain cases, there are going to be exclusions. It's, that's fair. We're not looking to jam the underwriter, but then just making sure one, they are fair and two that they're narrowly defined to address the specific concern, legitimate concerns that the underwriters have while not, you know, being over, brought in and picking up things that aren't really intended to be picked up and for what it's worth. I think our experience has been very good with most underwriters over the last 12 to 18 months in that for the most part, the underwriters are, like you said, they're commercial and a lot of them, whether they're the new shop or an old shop they've been around the individuals that have been around understand how the product works.

Jacob Borth (42:13):
Yeah. And this is Jacob. You know, just to touch, on the process itself. I know this was brought up, a couple minutes ago, but on the process itself, I do think that the process itself has gotten better than ever, and is probably more swift than ever, maybe with the exception of the current environment. But I do think that the process has been extremely streamlined and I think a value add of a broker who's in tune with this product certainly recognizes that and is also in tune with that process. Then obviously, you know, from our standpoint, recommending a carrier underwriting, ease of underwriting, I should say, in conjunction with claims experience and claims payouts, that really goes a long way.

For EV for each and every deal, there is an element of reputational risk for these underwriters that I think we touched on, and I think we can all appreciate, we're not in the business of selling paper. Nobody likes to go through the claims process, but it is the reason why the policy is purchased. And the reason why we do have a marketplace in and of itself, which I do think it goes along a long way in a hardening market. However, I wouldn't necessarily think that, and this goes back to the point of value add. I don't think that the process itself would be a little bit more, more difficult, but, you know, insurance companies are certainly taking more losses even away and exclusive from the rep & warranty policy, carriers are certainly taking more losses insurers and reinsurers, certainly in catastrophic losses and property and casualty losses as well.
Whether that will eventually have an impact on the warranty market, I think is maybe somewhat anybody's guess. And I think that, that this product overall continues to be extremely profitable for those that are involved maybe somewhat exclusive of the, of the bigger losses that we see. Again, you know, I think this was alluded to just a minute ago, but in, from your guys' perspective and in even, recommending the value of the policy itself until we hit a point, in a harder market where carriers are excluding something like fund to amount reps, which is probably a pretty bad example, but where, where they're just simply excluding fundamental reps or anything, any tax reps, just as examples. Then I think, you know, we can all probably maybe start to question the integrity, of a policy itself.

Sumit Agarwal (45:09):
That's a longer way of saying that. I think we we're pretty far away, from that standpoint, and I think we're all on the same page that we actually see the product continuing to develop, in a favorable position for our collective clients on the, on the claims front, interested to hear if anyone has seen any rep & warranty claims out of COVID 19 to date, or, you know, whether that claim has been denied, or otherwise certainly on the business interruption front in other insurance policies. And this is maybe the hot button topic in the insurance industry right now, as to where and how, or probably better put if insurance carriers are going to be on the hook for paying out on business interruption claims, tied back to, to coronavirus would be interested in your guys' perspective to see whether you guys have seen any claims on that front or not.

Brian Richards (46:09):
Yeah. I mean, not only have I not seen any claims on COVID 19 in all the deals we've done over the last several years, we haven't had any real claims. We've had to notify insurers in a few cases of third-party claims that could potentially result in a claim against the insurance, but we've never actually recovered from insurance, nor we suffered loss that I think would be recoverable under a policy. So not, not yet. And hopefully we can save the state in a couple years.

Sumit Agarwal (46:44):
Yeah, exactly. And, just generally speaking, as to claims trends, where are you guys seeing an uptick, or where's the most common area that you see claims? I think financial statements claims, for the last number of years has been the number one area where claims are seen in these policies, I think probably closely followed by regulatory, in compliance matter claims. So, we'll be interested in your two sense that, now that we've beat the dead horse, that is coronavirus, where you guys seeing more and more claims.

Jacob Borth (47:29):
Yes, I think for us, thankfully, we haven't had too many issues with having to bring otherwise crimes. I think probably certainly on the tax side, I think we've brought at least initial claims in from audits in issues related there to, so we've kind of notified people up. But I think the income tax kind of derive from audits, or similar issues from a historic basis of where we've otherwise notified people up. I think we've had, and then someone on the financial statements and then we've a couple of claims I think we've otherwise gotten resolved before. And they were probably under the retention amount. Anyways, I think where the two really areas that I think we've seen it the most and just kind of look at the surveys and studies, I think, where I've kind of seen them kind of hitting the market in the most.

Sumit Agarwal (48:12):
Yeah. We're, we're seeing really the, the exact same. I think that we've seen a couple claims here in the last, in the last few years, with respect to condition of asset claims, which the carriers have seemingly stepped up in our, in our paying out on. But completely agree with you just here recently, and obviously not without naming we have seen a couple claims on the fundamental rep side with respect to subsidiaries and another with respect to really, ownership of shares, which was a little bit interesting, just because frankly, the general reps seem to get hit with claims on a much higher frequency than the fundamental reps. So somewhat glad to hear you guys are seeing the same trends. That’s really all for the questions. Thanks so much for everyone’s participation, we obviously look forward to working with you guys more in the marketplace and again, really appreciate everyone’s participation and look forward to a strong second half of 2020.

Shari Paul (49:33):
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