Euclid Transactional - what exactly do they do?
I know this forum is the IB forum, but since you guys do lots of deals and might have come across these guys so here goes:
Anyone knows what exactly does Euclid Transactional do? I came across them at a couple of PE conferences lately, and read on their website that they basically underwrite insurance that insures against deal-related risk, and I'm rather confused -
1. Some of their Analysts are titled "M&A Analysts" on linkedin, and apparently juniors at the firm conduct detailed reviews of a prospective deal including a review of the CIM, target company financials, CDD, LDD, TDD, and so on. How exactly does this review and due diligence process look like on their end? Do they underwrite the financial aspects of the deal separately and build operating models / financial models? Or would it be more like a passive review?
2. Lots of guys there used to be lawyers at top tier firms. Would it be right to say then that their due diligence is much more legal in nature?
3. How often do PE firms / strategic acquirers use firms like Euclid? In the handful of co-invests I've worked on the PE firm didn't use firms like Euclid because they didn't deem it to be necessary (rightly or wrongly).
Thanks, much appreciated if anyone knows the space well or have heard of them or used their services before.
They insure M&A deals through a reps and warranty (R&W) insurance (called warranty and indemnity (W&I) insurance in Europe). I'd say that the large majority of midcap+ sized PE deals are insured. To answer the last thing you asked first; I don't think I have done a PE deal without insurance, unless it was under 100 MEUR or a special situation.
In the Sale and Purchase Agreement (SPA), you will typically encounter a section dedicated to warranties. These warranties are statements of fact or assurances made by the Seller to the Buyer about various aspects of the business being sold. Some standard warranties might look like:
Companies like Euclid Transactional play a role in the M&A landscape by providing insurance on these warranties. Specifically, they underwrite and provide insurance coverage against the risk associated with potential breaches of these warranties by the Seller. This coverage kicks in when there's a breach that was not previously disclosed in the dataroom or during due diligence.
For instance, if the Seller inadvertently misrepresents that their Annual Accounts reflect a true and fair view of their financial position, and it later surfaces that this wasn't the case, they would have breached the warranty. This breach could lead to significant financial implications, with the Seller owing the Buyer compensation. In such situations, if you bought insurance, Euclid would cover the liabilities arising from the breach, ensuring that the Buyer is compensated without necessarily having to engage in legal battles with the Seller. You can probably see why this would be problematic, in particular for those cases where the Seller is rolling over (which is often the case with PE companies), with legal battles between members of the Board of Directors. By using insurance, you ensure that breaches of warranties can be addressed financially without directly impacting the Seller.
However, it is highly important to note that they do very little of the heavy lifting themselves. The underwriting process is a passive process, where the insurance company, with its advisors, goes through the documentation provided to them by the DD teams, from financial, technical and IP, to legal and environmental. They do not build any models themselves, and the work often boils down to highly technical legal matters such as wordings of disclosures and warranties. Because they rely on the DD reports produced by others there is often an underwriting call, where all the deal teams are questioned about aspects of the deal, and how the scope for their reports. The underwriters will often ask questions to grasp whether or not the DD reports have disclosed and, again, it comes down to what information has been disclosed (looked at) and not. This explains why most of their guys are ex-lawyers from tier 1 firms.
This is incredibly helpful, thanks for the detailed explanation! Comments like these are why I browse WSO.
Not gonna lie the job sounds pretty boring to me, I already have my eyes glaze over when reviewing relatively templatised LPAs so I can't imagine scrutinising highly technical legal matters all day. Definitely sounds like a lucrative space though, especially if almost every sizeable deal requires these services
Adding onto this to say that RWI is getting big right now because it helps close deals faster. It’s used in place of an escrow account which involves a lot of headaches and can cause take much longer.
Euclid are basically outsourced underwriters, so they bear little risk if something they underwrote goes kaput, other than potentially losing future business. In addition to being pretty much all ex BigLaw, a lot of their founding/early employees were underwriters at AIG. Presumably being independent allows them a lot more flexibility and AIG or whatever other carriers they serve get to add better policies to their book of business. A win-win for everyone and a cool business model to boot.
Tbh, I think the work that they do is more interesting than the legal DD team. Instead of looking up every single employers contract and sifting through piles of documents to make a LDD report you are underwriting for 2-3 days intensively and then you move on to the next project. Instead of running the marathon, you are doing 400 meter sprints, and you are always participating in the final and usually most exciting parts of the process. And it is, as you say, quite lucrative. I think what also makes these jobs quite attractive is that you get to make business decisions and do a lot more commercial considerations, instead of just providing advice to the client. The underwriter will have to make up his/her mind about various risks, and then negotiate with the Buyer's deal team to see how to mitigate it, or alternatively, carve it out.
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