Need to Meet: Jon Gilbert, senior MD, Crystal & Company

  • Crystal & Co is intermediary between insurance companies and PE firms
  • RWI helps simplify M&A negotiations
  • RWI costs 2 to 4 pct of limit of insurance policy

Representations and warranties insurance (RWI) is a hot topic in M&A, especially since the policies help simplify negotiations in the sale of a company.

RWI provides protection for a seller’s breach — intended or unintended — of a representation it made in a deal, said Jon Gilbert, a senior managing director at Crystal & Company and leader of the firm’s M&A practice.

 “There are invariably things that come up where representations made by the seller may be incorrect,” he said. For example, it may turn out that the seller’s financial statements aren’t in accordance with GAAP or that the seller isn’t in compliance with all laws and regulations, Gilbert said.

Founded in 1933, Crystal & Company is a risk and insurance advisor that acts as an intermediary between insurance companies and firms. The New York-based firm works with insurers to secure RWI for clients, Gilbert said.

Crystal represents about 95 private equity firms and more than 300 hedge funds, Gilbert said. This year is expected to be the biggest for RWI, he said.

A private equity executive who asked not to be named said RWI helps simplify negotiations and allows parties to close a deal much more quickly. “Sellers, especially founders, want simple,” the source said. However, the PE executive cautioned that RWI makes deals more expensive.

The price tag for RWI tends to be around 2 to 4 percent of the limit of the insurance policy, Gilbert said.

A second PE executive, who has used RWI twice, said those concerned with the price of RWI should consider all the time they spend negotiating reps and warranties. “The quality and certainty provided by RWI is worth it,” the second PE executive said. “It’s a smart product for PE to use.”

Another factor to keep in mind that RWI reduces the seller’s post-closing risk. This may motivate the seller to shade the truth, limit disclosure or negotiate in bad faith, said a third PE executive who has used RWI as both a buyer and a seller.

RWI does create the potential for “moral hazard,” Gilbert said. Some insurance carriers require sellers to “have skin in the game” and put some amount, sometimes 1 percent of the transaction costs, in escrow. But that’s the exception, not the rule, Gilbert said. “This gives sellers a greater incentive to be as forthright as possible,” he said.

Action Item: Contact Crystal & Company at 212-504-5997 or visit its website here: http://www.crystalco.com/

Photo of Jon Gilbert Crystal & Company