As a company is scaling up, especially a startup, it wants to stay nimble and always moving forward to maintain momentum. At the same time, the systems they used in their startup phase – like QuickBooks – just might not be robust enough to manage their new incarnation.
There are too many financial reports, people, and processes to keep track of with simple accounting software or spreadsheets. Not evolving and finding an efficient way to keep track of it all, and meet the needs of your growing company, will cause growth to stall.
There is an ideal solution to help you put the systems you need in place to properly scale up your business. It’s a comprehensive software solution that can boost productivity and efficiency while decreasing costs by integrating:
… in one system. It gives you a 360-degree view of your business, 24/7, from anywhere in the world.
An Enterprise Resource Planning (ERP) software solution can improve productivity, increase efficiencies, decrease costs, and streamline processes, and much, much more by automating front and back office processes like…
For any startup ready to take their business to the next level and grow, as well as make itself an attractive acquisition target, a solution like this is necessary.
Cloud-based software NetSuite is the ERP system of choice. Forty thousand organizations across 160 countries use NetSuite to run their businesses. Seventy percent of all startups are transitioning from other legacy systems to NetSuite ERP.
An ERP can be used by low level staff, as well as top managers, because the level of access can be customized to each user. NetSuite is ideal for companies scaling 1 to 10 to 100 people and expanding to multiple locations and is perfect for a workforce that is spread across multiple locations, has a large percentage of employees who work from home, or has a team that is regularly on the road or in the field, like salespeople.
Because it’s cloud-based, it can be accessed by any computer around the world. And it also features an API that is easy to integrate with other systems.
NetSuite features different “modules” that are added on to its core suite, including modules like financial management, payroll, order management, fixed assets, ecommerce, and more. It can be fully customized to meet a company’s needs.
You can add or switch out modules as you need them – perfect for a rapidly growing business that needs to adapt quickly to the needs of the market.
NetSuite grows as you grow, allowing you to add features and functionality as your business grows.
This ERP gives real time visibility through dashboards and reporting throughout your organization. It’s a single platform that handles multiple services for your organization.
Dashboards allow you to analyze and track system data on a variety of levels, including tracking KPIs like account balances and outstanding bills. But they can also organize deadlines, meetings, calls, and more.
The order and billing management module integrates sales, finance, and fulfillment operations to be more efficient, improve quote accuracy, and reduce billing mistakes. It also automates your approval, invoicing, and payment management responsibilities.
Fulfillment errors can be reduced with a module that centralizes customer, order, invoice, and shipping information, while integrating with shippers like UPS and FedEx.
You can monitor your supply chain from end to end, procurement to payment. And it improves collaboration and communication between vendors and customers.
But NetSuite doesn’t only tell what happened in the past or what’s currently happening in your business.
Importantly, with NetSuite dashboards, you can conduct the financial planning that helps you achieve your company’s goals. You can conduct “what-if” financial modeling to help budgeting and forecasting, which allows you to plan your next move more effectively.
The impact on your business is felt in several other ways.
Employees can be more productive because you can reduce spreadsheet-based processes by up to 70%. With NetSuite, you’ll have one backoffice system that handles financials, fulfillment, inventory, and sales. Using real-time dashboards, scorecards, and KPIs you can constantly and accurately monitor the daily cash balance.
You also enjoy reduced IT costs; it’s estimated that companies can save up to 93% in IT costs because they don’t have to maintain, integrate, and upgrade different applications that NetSuite does in one place.
If you’re ready to move out of the startup phase, it’s clear you need an ERP to help manage your business. But it’s not a matter of a simple download.
In order to truly optimize this powerful tool, it’s best to engage an Authorized NetSuite Provider (ANSP) who can walk you through the process from concept to integration (including training) to ongoing servicing.
An ANSP will ensure that companies realize their full “NetSuite potential.” Particularly, for companies that currently use NetSuite, engagement with an ANSP can be of tremendous value.
Looking for an ANSP? Drop me an e-mail at email@example.com, and I’ll send you the contact details for the leading ANSP in Silicon Valley.
Acquisition can be the ideal way to experience fast growth as a company. But there’s no need to stay within your home country when looking at potential target companies.
Jacob Whitish is the San Francisco-based vice consul for financial services for the U.K.’s Department for International Trade. And he doesn’t just work with U.K. companies looking into the U.S. but also American companies looking to expand in the other direction.
We chat about the unique challenges – and benefits – of these sorts of cross border acquisitions, including…
Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters, where I speak with the leading experts in mergers and acquisitions, and we’re all about one thing here. That’s a clean exit for owners, founders, and their investors. Today I’m joined by Jacob Whitish from the United Kingdom’s Department for International Trade. Jacob serves as vice council for financial, professional, and business services.
The Department for International Trade helps UK businesses export and grow into global markets. They also help overseas companies locate and grow in the United Kingdom. Now, when I think about business growth, business expansion, I see two ways to get there. Either slowly through organic growth, or instantly through acquisition. And since we focus on M&A here, we’re a bit more biased in favor of the instant growth approach to doing things.
That’s why I asked Jacob to speak with me this afternoon to talk about opportunities for M&A. Not just with UK companies coming here, but also for US companies seeking targets in the United Kingdom. Good afternoon Jacob, welcome to M&A Masters.
Jacob Whitish: Thank you so much, Patrick. Great to be here and thanks for having me on.
Patrick Stroth: And I promise today, Jacob, this will be a Brexit-free zone. And before we get into all the fun stuff for the Department for International Trade, let’s get a little context for our listeners here. Tell us what brought you to this point in your career.
Jacob Whitish: Sure. It’s been a little bit of a winding route, but in all of the kind of weird different paths that I’ve taken, it all somehow added up perfectly to get me exactly where I needed to be. After college I worked in the state of Washington for the state level government, so got used to what it was like to be in these massive behemoth bureaucracies that is national politics and state level politics.
And from there I saw a lot of friends that were jumping into the tech sector. They were having a great time with different startups. A lot of fun. And I was looking a little envious, decided that I wanted to go over and figure out what was going on on that side of the fence, so to speak. And so taught myself some different tech skills. Ended up as a kind of country lead for a Canadian startup that was trying to get into the US market.
So ran all of the US operations, did all of our marketing campaign, and effectively was kind of the in-country CEO. From there went to another small FinTech startup as the very first employee after the founder, handling everything on the business side. And then after a little time there, went out on my own. Started my own company doing marketing strategy and advertising. Ran that for a while. Ton of fun. Ran it entirely distributed online. I was able to travel around the world with my then girlfriend at the time, now fiancé.
And that was a lot of fun, but eventually was starting to get a little bit burned out on the just kind of endless cycle of finding more and more clients, doing everything myself, and wanted to find something little bit different, something more interesting. And just kind of stumbled upon this job with the Department for International Trade. And it was the right weird mix of background of government service, startups, self-employed, to be able to do my job here very well.
I work for a government, but at the end of the day I’m out there interacting with companies, founders, executives, all day long. So it’s kind of an interesting mix of both public and private sector.
Patrick Stroth: Well, when we think about international activity, cross-border M&A and so forth, we always initially think about it as it being instigated by a company A, usually a multinational or what could it be a multinational targeting company B. And it all stems from there.
It was interesting and refreshing to see that you’ve got a government controlled entity that is doing what they can to accelerate the process or assist there in domestic companies in that kind of expansion. That’s a great set of services that are available. Tell me about the mission for the Department for International Trade for the UK.
Jacob Whitish: Sure, absolutely. At the end of the day, my role is really to I guess primarily add economic value to the UK taxpayer. We’re entirely funded by taxpayers. We are a part of the actual government, so at the end of the day we have to be able to draw some line back to having provided value to the UK. Now, how we do that is a little bit more reform in terms of we can help companies expand internationally from the US to the UK, and thereby adding jobs into the UK. We can help UK companies grow into the US, and then therefore hopefully helping add more tax revenue back to the UK entity.
A lot of kind of playing matchmaker, introducing different people, doing some kind of upfront market research to help companies even understand if this is the right decision for them. One of the biggest things that I don’t ever want to see is a company that’s gung-ho on coming out here, spend all of the overall CAPEX and operational expenses and time, and just all of this energy to try and get into a new market, only to find out that it wasn’t the right market for them.
So hopefully upfront we can do a lot of things like helping out these companies just to figure out if this is even the right decision for them. And then if they decide it is, hopefully make that process a little bit easier through our networks, our connections, our just experience of watching companies do it over and over again.
Patrick Stroth: Almost like being a liaison. It’s an extension of the ambassadorship where they’re coming into an unfamiliar territory, you’ve got a presence here, and you can guide them and mentor them through the process that are unique to that geographic location.
Jacob Whitish: Yeah, absolutely. Absolutely. I mean, you could think of the ambassador as being the political side of what we do on the commercial side. And in fact the Department of International Trade operates out of several different consulates and offices all around the US under the purview of the ambassador. But then our kind of specific remit is the commercial side, whereas the actual consul’s general and the ambassador are a lot more about the political and policy side.
Patrick Stroth: And it’s interesting too because you’ve got a much more favorable or positive view of overseas expansion, where in America we keep thinking about it as expansion means, oh, we’re outsourcing jobs, we’re outsourcing activities that we should be keeping here. Conversely, you’re looking at, well, if we can expand internationally then our UK domicile businesses can grow, and that’s how it will benefit the home country or the headquartered company there in the UK, is through growth in revenues.
Jacob Whitish: Yeah, absolutely. We don’t see it as a win or lose scenario. There’s absolutely win-wins here. We can provide jobs for the home country, we can provide jobs in the new country that they’re expanding to. At the end of the day, we don’t care that much as to exactly what this line looks like from point A to point B, as long as somewhere along the way we can say, “Hey, we’ve helped out the UK taxpayers.”
Patrick Stroth: So then when you’re describing what you do with providing information and mentoring services and informational resource, so what specific services do you provide to UK companies looking to come here? They’re coming on over here, they look to you for assistance. Specifically, what can you do for them?
Jacob Whitish: Sure. I think I can also kind of give it a little bit bigger picture of an approach at the same time. So probing a little bit more context in my specific role, which is I specialize in all things financial services. So anything from a traditional bank asset manager, insurance, all the way up to these brand new cutting edge FinTech, InsureTech, RegTech, you name it. If it touches money or the compliance of money in some way, shape, or form that’s kind of my industry.
Geographically I represent the entire Western US, so the 11 Western states. And then I have several colleagues across the US who cover different geographic regions. Now within all of those different regions, each of us kind of have our own specialties of things that we’re particularly just good at as individuals. The kind of standard sort of things would be like providing access to reports on the cost of real estate, or the cost of talents, or even the availability of talent and how it might be distributed throughout a particular region.
So that would fall under that heading of helping companies figure out if it’s the right decision for them and where they should go. So a lot of times companies will come out, I’m located in San Francisco. Everybody wants to come out to San Francisco just because it’s the tech capital and people want to be out here and see the VC money and hopefully magic will happen.
But it’s not always the right decision for everyone. For some companies Denver, or Seattle, or Phoenix, or LA might be better choices, just depending on where they are as a company, what industry they’re in, and really the resources that they have available. It’s pretty darn expensive living out here. So not always is it the right decision for a company to come here. So that’s kind of the advice and sort of research portion.
In terms of just kind of like more softer sort of resources, I have my own personal network out here that I’ve built up. I’ve got different organizations that we’ve worked with to build out this community that we can help introduce these different founders and companies into to try and help make their transition a little bit softer. And then of course just a very extensive network of different service providers and experts that we’re able to connect people with for whatever their particular situation may be.
Maybe it’s immigration attorneys, maybe it’s someone helps them set up their US entity, or insurance, or and M&A specialist, private equity, VC. You name it, we probably have somebody in our network somewhere that will be a good fit for connecting up those people and hopefully making all that happen.
Patrick Stroth: So you’re not just providing services to startups or super huge company. You’re available for a variety of companies through whatever stage in their life cycle they’re in.
Jacob Whitish: Yes, absolutely. It goes the whole gamut, and those different services change a fair bit as you go across that different spectrum. So we’ve got people from maybe 5 or 10 just random folks in a small little one-room office. They’ve got one round of funding under their belts and they’re eager to get into the market, all the way up to some of the biggest household brand multinational names that anybody would have heard of.
At that earlier business stage, so the smaller companies all the way up to kind of the middle-sized companies or so, a lot of that tends to be more around that advice, resources, networks, things like that. That’s where it’s providing a lot more value to those companies. As companies get larger they have the financial resources, they have their own in-house specialists and experts. They don’t necessarily need us to tell them what the cost of a new developer is going to be in San Francisco versus Seattle.
At that stage what tends to be a lot more valuable is having a voice in policy discussions. So it’s not to say that we go and stick these people right in the room with the ministers back in London, though it has happened. But a lot of times we’ll bring experts out here or we’ll bring different members of the government out here to do kind of a tour of different businesses.
And they want to hear usually what are the current concerns, what are companies seeing, what are they liking, what are they not liking, what do they wish was different. And from having those different kind of open channels of communication, then they’re able to go back to the policy makers and the government officials. They’re able to then go back to London, and as they’re working on new policies or reviewing old policies, they’ve got these different connections to the larger institutions and have those kind of in-market points of view to pull from as they’re trying to determine what kinds of things are or aren’t important or what directions.
So right now actually is a great example where we have just in about two weeks’ time a senior trade policy official coming out from the East Coast to do a tour of the West Coast, just talk with different institutions and see what kinds of things would be important to them in a future US UK financial services trade agreement. Now, of course they’re not going to be making this agreement in the room. They’re not going to be pulling these people in and saying, “We promise that we’re going to do this thing for you.”
But they want those voices, and the companies like having their voice at that table also because these are massive decisions that are going to affect them pretty drastically. So having that opportunity is a really great resource that we’re able to provide a lot of these larger companies.
Patrick Stroth: That’s absolutely a channel that can’t be found elsewhere. So that’s one huge benefit. As I think about, you mentioned with the expensive of San Francisco particularly, but the Bay Area in general, I keep wondering why companies overseas would look to come to the US, just because it’s prohibitively expensive. Less of a concern with regard to culture or language. But just the cost of doing business here, I can imagine the regulatory is pretty steep compared to other places. But what drives the demand or drives UK companies to look to the United States for expansion?
Jacob Whitish: You kind of nailed part of it all already in the question. Just in terms of language and ease of doing business to a certain extent are translatable from, especially in this case, from the UK. But really from a lot of different countries around the world. If you don’t have to change the language that you’re working in, that’s already a big benefit.
On top of that, the US is a massive market. Most companies will eventually find their way to either doing business with someone in the US or full-on opening a new office or trying to get access into this market. It’s just such a great opportunity. And then likewise for US companies looking at the UK, business laws are very friendly, corporate tax rate is pretty darn low and falling. It’s one of the largest economies in total investments behind the US and China. So there’s just tons of great opportunities around the markets themselves.
But then on top of that, when you’re looking at especially UK company coming back to the US, access to capital is a massive driver. Most tech startups, I think, at least the ones that are going to be larger names eventually, always find their way to Silicon Valley or New York, or for some other sectors. Like life sciences going up to Boston, or the payments industry out to Atlanta. These companies will make their way out to the US to just try and get that growth capital to really fuel their overall growth as a company.
I think one of the kind of gaps in the market for the UK that’s also a great opportunity is that there is a pretty good amount of early stage capital around, but not as much later stage capital. In terms of like the CDE plus rounds, these massive rounds that take a lot more kind of institutional capital and knowledge to really be able to drive those sorts of deals.
There’s also a really good component, it ties into that in terms of talent. Tons and tons and tons of talent that have been through the entire life cycle of a company out here. They’ve gone from two folks in a room all the way up through IPO, exited, and started over again. The UK has a great tech scene and still growing. But they don’t have just as much of that sort of multigenerational founder and institutional knowledge of how do you go from this small company in one room all the way up to something like an IPO.
They have a great amount of talent that is kind of going up through mid-stage, and then going through different mergers, acquisitions, or other sorts of liquidity events or exit. Not as many that have taken it from that sort of mid cap to massive company. So, yeah, a lot of companies.
Patrick Stroth: The pool of … Yeah, I think the pool of serial entrepreneurs every year it gets deeper and deeper. And one thing that’s unique about being out here in Silicon Valley is that I keep seeing these people become enormously successful, enormously wealthy, and think to myself, “Well, they’re going to get their clean exit, which we try to do with the insuring their M&A transaction, and think they would ride off into the sunset. Buy an island, go shopping for yachts, and all that fun stuff.”
And what do they do? They get bored. They turn right around and open up another firm and start participating in that. And that’s been going on now for the past 20 plus years. And so, yeah, there is definitely that talent pool has gotten much, much deeper.
Jacob Whitish: Definitely. Definitely. So you get a lot of people that will bring their companies out here just to try and tap into those kinds of networks and resources that come along with all of that. They’re getting better. They’re starting to very slowly move in that direction. I’m seeing a lot more founders in the UK network go back and start to do that next generation of businesses. Not as mature as say West Coast US, but it’s getting there.
In the meantime, you’re still going to see a ton of these companies coming out here to the US for either that access to capital, access to talent, or just access to market overall.
Patrick Stroth: What about the talent on the entry level, and I’m thinking about this just from your opinion, slightly off topic. But if a US company were looking to expand into the UK, and there would be a need for entry level tech talent there, I’d imagine that talent pool in the UK is broadening and deepening as well.
Jacob Whitish: Oh, absolutely. It’s actually some of the best minds in their industries are coming out of the UK. Things like DeepMind and some of these great artificial intelligence and deep learning companies, they’re coming straight out of that Oxford, Cambridge areas, right out of the universities. Overall, the UK definitely has pretty much anything that you’re going to be looking for. If you want the financial talent, London has it, as well as just kind of a nice mix of a little bit of everything.
The Manchester Midlands area has some great kind of back-end, back-office talent. Scotland has the financial and asset management experience. Northern Ireland is starting to become this really interesting tech sort of little paradise. In fact, they’ve got some really great programs out there where they’ll … Actually, the government will go out to … Or I guess lack of government, sorry. Will go out to universities to work with them and create custom programs to train individuals specifically for companies, if a company is willing to put a large enough investment into their local economy.
And so there’s some really interesting little sub sectors. And you look at it, Wales, or you get this awesome hardware talent in the semiconductor space. And so there’s a little bit of everything all over. And you can find pretty much whatever talent you want somewhere within the UK.
Patrick Stroth: Well, on the US side we’ve got this huge market. It’s not only large, it’s wealthy. And it’s deeply wealthy, which attracts a lot of suitors here. But it can’t be all great. What are some of the challenges that companies face coming here? And don’t just list the challenges for me, but support that with what can you do to help companies overcome these challenges?
Jacob Whitish: Sure. I mean, I can kind of actually play a little bit off of that last question even and say that talent is a double-edged sword. Out here you have a ton of great talent, but it’s also really expensive and in very high demand. So for a smaller company coming in, especially if they’ve maybe only got a couple rounds of funding under their belts and not terribly deep pockets, might be shocked at what the total comp packages are for, especially like really hardcore development talent.
But really anybody out here in the Bay Area is going to be a lot more expensive than somewhere else. Which is kind of also then why a lot of times I’ll be working with these companies and kind of pushing back a little bit to say, “Is this the right place for you? Maybe you should look at Phoenix and go check out Arizona’s new FinTech sandbox and see what you can do with that. Or go up to Seattle and-
Patrick Stroth: Idaho-
Jacob Whitish: … find out what’s going on up there.”
Idaho. Yeah, there’s tons of great kind of second-tier cities that have lots of opportunities, lots of great talent. Maybe not quite Bay Area level talent, but still great talent. And even that’s changing. People are getting sick of living here in the Bay Area and they’re moving out. So those people are still looking for jobs, and they’re still great talent. So that’s definitely one of the bigger challenges.
Within the financial services sector specifically, I would say one of the biggest things is just the regulatory environment. It is absolutely insane for companies coming out here that are used to having one overarching regulatory regime for the entire country, and then they get out here to the US and see that there’s 50 different states, which are basically 50 different countries, even though it’s all one massive country.
And all of a sudden they just kind of get paralyzed and don’t know what to do. How do you handle 50 different regulatory regimes? And not to mention just the paperwork involved in all of those sort of applications and compliance measures that are required for all of that. So that’s definitely the number one thing that I hear from anyone within the financial industry, is just trying to figure out that sort of environment.
Now, on that side of things there’s all kinds of different opportunities like working with private equity groups to find things like reverse merger opportunities, or even just straight-out purchase opportunities to basically find a company in the US that is maybe not doing so hot financially but already has those licenses in place. So that’s a great opportunity for companies coming into the US to be able to, I won’t say circumvents the rules, because it’s not circumventing it. It’s all perfectly legal. But sort of accelerate the process of getting into market quickly.
There’s also different strategies like just saying target New York and California, go after the biggest economies, or find local partners that you can just partner up with on deals. All of these are different things that we would bring in a lot of the experts from our network to help identify these opportunities, or to just try and figure out what opportunities are available for a particular situation.
Patrick Stroth: Great. So you’ve got not only the network of service providers that you probably, just in addition to the service providers you’ve got the law firms, you’ve got other advisors. And then you’ve got relations with private equity firms and other organizations such as that.
Jacob Whitish: Absolutely, absolutely. If you are a service provider out there or any sort of firm that works with other companies, frankly, we want to have you in our network. We want to know who you are, what you’re doing, where you’re at, and what kinds of companies are you looking for. And we may or may not have a lot of referrals for you, but maybe we will.
That’s just kind of part of our game is knowing who’s out there, who’s doing what, how we can be of help, so that when a company approaches us or gets referred into us and they say, :Hey, I have a problem with X,” hopefully we’re going to know someone who can fix X. So that’s at the end of the day the biggest value that we can provide.
Patrick Stroth: Yeah. I mean, the analogy I have with that and the importance of having a good network like that and the value you add there, it’s no simpler analogy than if you were to leave your home or your work and move across the state or to another country. You just want to find somebody who says, “Well, where’s a good pizza place? Where do I go shopping, and where can I get my hair done?
Jacob Whitish: Yeah. Exactly
Patrick Stroth: And they’re really mundane things, but everybody needs them. So I think that’s a great source. And you’re a trusted advisor in this because your objective is to help out the taxpayers and add value for the UK companies. And so you’re a real credible resource because you’re looking out for their best interests.
The idea on the reverse mergers is real interesting, just because it’s nothing more than a workaround. But it’s also, if you’ve got owners and founders or investors that have a company that is maybe not doing well financially, they can leverage an asset that they didn’t realize they had, which are their licenses, that maybe they did not have as great value in them. Now suddenly there’s some great added value in the licenses and so forth to facilitate a reverse merger.
So with that in mind, who’s an ideal candidate for UK companies to partner with? On the reverse merger in that scope?
Jacob Whitish: You know, it really depends a lot on the company that is … So like the UK side company that’s coming in and what sort of services that they’re doing. It wouldn’t make a whole lot of sense for an insurance company to try and partner up with a bank because they’re not going to have the same licenses. So a lot of times it’s going to be kind of the smaller to midsize regional institutions. Perhaps they’ve been around for a while and maybe it’s a generational shift sort of thing.
There’s this great opportunity right now where there’s this massive shift from one generation to the next of assets and businesses. And sometimes the younger generations don’t necessarily want to step into the family business. So you have this older generation of maybe the founder who they want some liquidity to be able to go off and fund their retirement, and they just don’t really want to operate it anymore as the day-to-day person.
So maybe this is a great opportunity for a company to come in and partner with them, reverse merger with them. All kinds of different creative arrangements that you could find. But in the end of the day, then you have this UK company coming in being able to relatively easily get access to these licenses. Perhaps even to built-in clients. And then for the merging company, then they have a liquidity event. They have the ability to, maybe if it’s this kind of generational issue, walk away to a nicely funded retirement and not have to worry about it anymore.
Or there’s a lot of kind of fun, creative ways that companies can approach this and find different partners that maybe they wouldn’t have even expected. Maybe it’s a card issuer looking to partner up with a small regional bank and be able to cross promote each other’s products into each other’s clients. The opportunities are really just very wide open.
Patrick Stroth: I was thinking just that the small regional banks as being one of those ideas or candidates out there, because there are fewer and fewer of those out here. But they don’t want to get rolled up by the major banks. They’d prefer to have something else happen. But what’s usually the situation is one regional bank is acquiring another regional bank.
So I think that would be an ideal opportunity for a UK-based financial institution who wants to get a foothold where they don’t have to be in New York, where they can be in a couple of other regions. I think that would be an ideal place, particularly in the South, and in some parts of California.
The other idea I was just saying off the top of my head, accounting firms.
Jacob Whitish: Accounting firms, wealth management, anything that has some sort of licensure or governmental oversight, great opportunities.
Patrick Stroth: Okay. I can see that both in the insurance agency and brokerage business and in the accounting space you have a lot of independent small regional organizations. They are going through this very specific generational change, and you’re not having the next generation coming in, stepping in in the shoes of the predecessor. So those opportunities are going to be around for the next several years. What trends do you see in UK expansion to the US going forward?
Jacob Whitish: You know, kind of overall, I’ve seen companies coming out a lot earlier in their life cycle. Used to be waiting a little bit longer, getting a little bit more mature in their home market. More and more it’s been a lot of companies coming out earlier and earlier wanting to not quite necessarily shun their own market, but they want a piece of the US pie earlier and earlier in their life cycles.
So a lot of times they’ll be coming out, maybe even too early at times. And I’ve had that conversation with companies before of saying, “Do you really think that right now is the right opportunity for you to come out?” Of course earlier and earlier for funding, as the overall funding climate is changing. And I know we said we weren’t going to go there, but I think this fall the political situation in the UK is going to probably decide a lot of what the future direction of those different trends are going to be looking like.
Patrick Stroth: Is there also just a byproduct, not to pump you guys up too much with you guys, but I mean is there a growing awareness of the services that you’re providing in the Department for International Trade, where your resources are clearly providing some benefits. And there’s got to be more awareness. So if you’ve got somebody who’s going to help you out, I mean that could probably speed up the decision process too.
Jacob Whitish: I mean, that would definitely be … I wish I could say that. I’m not sure what the kind of overall volumes are. But based on just kind of our own internal metrics, there’s definitely been a growth in the number of companies that have started to figure out that we’re out here and we exist. I know we’ve, as the Department for International Trade specifically, only been around for a few years. There have been some other incarnations in the past. But as far a name recognition goes, it’s definitely a growing trend. But I think we’re on the right track.
We’ve got some really great leadership in place that’s not tied to politics, so they’re going to be around for a little while. And it’s definitely a great resource. I wish that more companies knew that we were out here. Almost everything that we do is absolutely free. And we are all sworn to secrecy. We take actual, have to get our actual security clearances and everything to be here, and everything that we do is considered commercially confidential.
So unless the company tells us that we can talk about them publicly, or they have said something publicly themselves, we keep tight-lipped on it, everybody’s plans.
Patrick Stroth: Well, I’m new to the knowing about what the Department for International Trade does, and it’s a shame that you are one of the best kept secrets out there in the UK government. And the more we can advocate for you, and the more people learn about the services you have, both here and abroad, I think the better it’s going to be for a lot of organizations and a lot of people. Because one of the thing is just really unique and the reason why Silicon Valley is the epicenter for all this great tech innovation and growth and so forth, is unlike generations past where in order to succeed you had to literally do it yourself. If you couldn’t steal it from somebody else, you did it yourself, and you grew bigger and bigger and you did it on your own for yourself. And you wouldn’t because of competitive reasons or envy or fear, you wouldn’t share the secret sauce with anybody else.
That’s how what happens here. This is probably one of the most a collaborative environments out here where there are always people looking to provide some kind of support, some kind of assistance, mentorship, whatever. Sometimes for obvious profit motives, others for altruistic because they have the vision that you know the rising tide lifts all boats.
So from accelerators, to incubators, to mentors, to angels, sources of funding and everything. There are so many resources out here getting founders from zero to one, and then from one to two, and then from two to Google. You know, this is just another great resource out there, and it’s been an absolute pleasure learning about this. And Jacob, if there are people out here that would like to just benefit from all the things you have, how can they get ahold of you?
Jacob Whitish: Sure. I am on LinkedIn is probably the easiest place to find me under my name, Jacob Whitish. W-H-I-T-I-S-H. Likewise anybody can feel free to email me directly at firstname.lastname@example.org. You can probably put that in the show notes or something.
Patrick Stroth: We’ll make sure we have that whole mouthful in the show notes and so forth. And I would also say, unlike me from time to time, I may not be on my LinkedIn on a daily basis. Jacob is on it hourly. So if you put a connect request out there you’re going to get a response almost in real time. So I can personally vouch for that. Jacob, thank you. It’s been a pleasure speaking with you and we will speak again.
Jacob Whitish: Absolutely. Thank you so much, Patrick.
As more players in the world of M&A come to realize its tremendous value, there have been several big changes in the use of Representations and Warranty (R&W) insurance to protect Buyers and Sellers post-transaction. (Any financial loss resulting from a breach of the Seller’s representations in the purchase-sale agreement are paid by the insurer because they take on the indemnity obligation from the Seller.)
I’ve mentioned previously that the number of insurance companies offering this specialized type of coverage is more than 20 today, compared to just four in 2014.
There are also more policies being written than ever before. A part of that is the fact that just a few years ago insurers only felt comfortable insuring deals of $100M or more, and then only with audited financials.
Now, they are offering coverage for deals under $20M… in fact, they’ll now go as low as $15M… without requiring a strict financial audit during the due diligence process.
The reason? The R&W market has matured, so to speak. Insurance companies are more comfortable with it as they’ve had successful experiences with larger deals. Underwriters are familiar with the product and the claims process. (Only about 20% of deals result in claims.)
Now, insurers are looking to increase their bandwidth and increase the number of clients they cover. And that means they have to look at smaller clients.
The risks are smaller and can’t be mitigated as much as with larger clients. But by bringing down the rates enough, they can cover the small deals. And because the amounts involved are so low, there isn’t much financial risk.
Still, sub-$20M deals are different in a few key ways:
There are many more M&A deals on the smaller side that don’t get the press of the big-name transactions. And I think the use of R&W insurance to cover transactions at any level can only go up as it becomes more well-known, especially among PE firms and VC funds.
I’m an optimist by nature. But if there is a slowdown in the economy, you will see a lot of owners and founders running to the door to close out business – that’ll cause a spike in sub-$100M transactions.
And in order to capitalize on their return and secure more cash at closing in uncertain economic times, they’ll want an R&W policy covering the deal.
If you’re involved in an M&A deal under $20M and are interested in the protection that comes with Representations and Warranty insurance, I’d invite you call me, Patrick Stroth, at 415-806-2356 or send an email to email@example.com. I’m experienced in deals of all sizes and I have the contacts at the insurers to secure the coverage you need.
When we usually see cross-border deals, it’s a U.S. company acquiring a foreign business. But increasingly the reverse is happening, says Craig Lilly, corporate partner at the Palo Alto office of Baker McKenzie, and there are three primary drivers for that trend.
But cross-border deals with foreign buyers aren’t without their pitfalls, especially with newly enacted regulatory and anti-trust and merger controls – at that’s just the start. Just look at what is happening with Chinese telecom giant Huawei.
Cross-border M&A is far from a done deal. Foreign companies are still acquiring U.S. companies, says Craig, but just engaging experts like his company to shepherd the transaction.
We talk about where cross-border M&A is headed in 2019 and beyond, as well as…
Mentioned in This Episode: www.bakermckenzie.com and Winning Strategies in Cross Border Deals Tips for Success Presentation
Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters where I speak to the leading experts in mergers and acquisitions and we’re all about one thing here. That’s a clean exit for owners, founders, and their investors. Today I’m joined by Craig Lilly, M&A and corporate partner at the law firm Baker McKenzie in their Palo Alto office. Craig’s practice focuses on acquisitions, divestitures, joint ventures, and strategic investments.
But it’s in complex cross border deals where he’s really developed great expertise and he’s now thought of as an industry leader. Craig’s been a regular contributor on Bloomberg, the Wall Street Journal, and other M&A specific publications. Craig, welcome to the program and thanks for joining me today.
Craig Lilly: Thank you, Patrick. I’m glad to be on the program.
Patrick Stroth: Well, Craig, now that we’re getting past the first quarter here in 2019 rather than just focusing on cross border deals which we’re going to get into in depth. Tell me what your perspective is as an expert on what the state of M&A is here in 2019.
Craig Lilly: Well, I think MNA is very strong and still in 2019, the values is increasing even though the volume may be slightly lower. 79% of executives say that the M&A will increase in or remain the same in 2019. We’re seeing record amounts of a private equity raise as well as venture raise which is really good for the ecosystem in mergers and acquisitions. In the last 12 months alone, we’ve seen over 3.6 trillion in deal value over 19,000 deals in US and Europe. So that’s a very strong technology M&A is up 20%.
Also, we’re seeing M&A more institutionalized. 20% of all targets, Pat, are backed by either private equity venture firms or professional investors. Also, there’s record levels of what we’d call dry powder or money to make acquisitions. The PE dry powder is estimated to be over 1.7 trillion and also, the top five tech companies alone have over 340 billion in dry powder. And that includes Apple, Google, Microsoft, Facebook, and Amazon. So the key M&A drivers that we’re seeing are really for strategics are customer expansion and diversification. And so those are all I think big drivers for M&A and which will continue in 2019.
Patrick Stroth: Well, we’ve got just a confluence of changes that have been happening over the world where you’ve got either the world getting flatter or a lot of capital looking for places to be put and maybe people aren’t looking at their backyards anymore. They’re looking overseas. They’re looking cross border. And which is why I wanted to come speak with you about this. But before we get into the technical issues on cross border and the ins and outs of it. Give us a little bit of context for you. What brought you into becoming an M&A attorney first and then to specialize in cross border acquisitions?
Craig Lilly: Well, I had a background in financing and accounting so I was always interested in M&A and investments which really drew me into it. I originally worked in private equity back in the cottage days of private equity when it was a very early industry. And then I started working in technology over the last 16 years or so. And one of the things to that really interests me about the technology and in M&A is that companies at earlier and earlier stages are expanding internationally which is a big driver of cross border M&A. So those are the things that really interest me is the international aspects, the complexity, and also getting to learn new industries and verticals.
Patrick Stroth: So what makes a deal a cross border transaction? Is it as simple as we think just anything outside the US borders?
Craig Lilly: Well, really it’s really any deal with foreign aspects. It could be the buyer or the seller or material assets or it could be a US company acquiring another US company that has material foreign assets as subsidiaries. So typically almost every kind of major US corporation has some type of foreign aspects. So all those acquisitions even though it may be a domestic acquisition really is a cross border because of the foreign aspects or subsidiaries that a US company may have.
And we’re seeing this in an earlier stages of the companies. A lot of early companies are young companies are expanding overseas whether to develop technology, develop manufacturing or to acquire customers through diversification.
Patrick Stroth: A lot of times we’re thinking of US going outside and looking to foreign markets for acquisition targets. But it’s also on the flip side, according to what you just told us where you’ve got foreign-owned companies coming to the US which intuitively we think that the US is too expensive a market for targets. But that’s not necessarily the case. There are things that must be driving these foreign-owned companies to come and invest in the US. What drives the demand from their side to come here?
Craig Lilly: I think it’s three primary drivers for foreign companies to want to make acquisitions in the US. The first one obviously is technology. We’re seeing the fourth industrial revolution happen here in United States where technology is embedded in almost every different vertical or industry whether it’s automotive or manufacturing or artificial intelligence within industrial manufacturing. And so that’s spurring a lot of the investments and acquisitions by foreign acquirers here in the US.
The second is just customer acquisition. Companies are looking to acquire customers and essentially diversify their base. And a third driver really is not only the diversification within a customer base but diversifying their own different revenue streams where they could be diversifying in a new analogous business that maybe is very synergistic with your existing line of businesses.
Patrick Stroth: I agree. One of the things that changed my perspective when we talked about this a while ago was that the focus always on customer basis and so forth. People immediately think China or India where they’re billions of potential customers out there completely overlooking the fact that while we may not have the largest population. We probably have one of the richest. So if you can make a stand here in America with a very friendly consumer base, you’ll do very, very well. And that was one of the things that really came up when you and I were talking about the US being such a great target for them. This can’t all be that easy. What are the challenges that are germane to cross border deals versus ups or domestic deal?
Craig Lilly: Well, there’s definitely changes or challenges in regulatory, whether they are antitrust or merger controls. Obviously, CFIUS which we’ll get into later is a major challenge for companies investing in the US and CFIUS is the Committee on Foreign Investments in the United States. And also, structure and tax issues. Furthermore, key issues when a foreign company comes here is complying with employment laws. It could be unions or the WARN Act. When you want to terminate employees. Intellectual property, data privacy, and security are a major concern as well.
You’re seeing often more and more companies are having inadvertent data breaches. So that’s a key issue for any company in any type of transaction particularly for cross border where you could have cultural issues and other different challenges in data privacy. Also, anti-corruption is always a big challenge for companies and having internal compliance programs implemented to correctly deal with those types of issues. And obviously, in any type of transaction diligence, culture, deal execution, and also, post-closing integration is a major issue. And in post-closing integration, something doesn’t start after closing. It really starts very early in the acquisition process.
Patrick Stroth: Can I ask you this is a little off topic but with all of those challenges that are there that’s probably a role that you and your firm will give guidance to if you can’t have absolute on the ground consulting recommendations you have resources or can provide resources to companies to address those various areas of concern?
Craig Lilly: All right. We have great breadth in over 45 countries around the world and have over 70 offices. So we have experts in all these areas. And really that’s what you need is a specialist or cross border specialist teams because of the numerous landlines involved in foreign deals and some of the really kind of two big areas that companies are very concerned a bit right now obviously is data privacy. But also the anti-corruption issues that are involved and because of the stiff penalties can be imposed and that’s really you outbound or inbound.
And so we see companies take a very in-depth look at that. One of the things we also look at every transaction, we try to very early on the process is sit down with a client and discuss what are the really high-risk areas, where is really the concerns for the company, where’s the value? It could be in the intellectual property and so we’re going to really take a deep dive in intellectual property to potentially a freedom operate analysis to make sure that they’re protected. And if they do buy the company that they have the freedom to use it the way that they intended to have synergies with their existing businesses.
Patrick Stroth: Talk about CFIUS a little bit. Should every company now be aware of it, not just the ones that are the traditional chemicals and military applications number one? And then number two, CFIUS is US. Explain what happens if other countries have something similar.
Craig Lilly: Well, the Committee on Foreign Investments in the US or CFIUS is where a foreign company proposes to acquire a target a US business that generally either produces designs, test, manufactures, fabricates or develops one or more critical technologies. And because of the recent changes in the law, even a 1% investment in a company with critical technologies could trigger a CFIUS filing. So its critical technologies has been expanded for CFIUS and includes such things as defense articles, and defense services, commodity software, and technologies on commerce control list or controlled for reasons relating to the national security, chemical or biological weapons, missile technologies or for reasons relating to regional stability or surreptitious listening.
It also can include energy and things subject to Department of Energy regulations such as nuclear equipment, software, and technologies, and also includes emerging and foundational technologies which is not to be defined which is very broad. There’s actually currently 27 pilot program industries identified by NAICS code which will require mandatory filings. Also, CFIUS applies if the target owns, operates or manufacturers or supplies critical infrastructure or real estate.
And critical infrastructure is broadly defined. It can include systems and assets so vital to the United States that the incapacity or destruction would have a debilitating impact on national security. For example, the purchase or lease or incession of a foreign person to a foreign person or any of real estate is located in the United States and is located within an airport or a maritime port or close in proximity to a US military installation that is sensitive for national security reasons.
And why should an acquirer be concerned about CFIUS? Well, US Treasury which oversees this can unwind the transaction or impose very harsh equitable remedies and fine. Also, each party can pay up to the amount of the purchase price for the fine. And yes, other countries do have similar laws. The EU also has a similar law. Seven transactions last year were blocked by the EU and we had over 14 deals either blocked or abandoned during the last few years. Over 240 deals were actually formally reviewed by the US in last year. And so CFIUS has very wide overreaching kind of application.
Previously before the recent changes, a company that was making an acquisition in the US could make an investment of 9.9% or less without being subject to CFIUS. But now it applies even to a 1% investment in critical technologies and that’s a mandatory filing. So it’s a very broad expansive type of law and it’s not just only in the US. EU also has these laws as well and a lot of people also are also concerned about China. And why is China’s such a huge presence in cross border here over the last decade? Well, in 2008, China inbound was 1 billion. However, eight years later, by 2016 inbound was 48 billion.
So that alone has led to a lot of the concern over CFIUS. Also, there are a lot of changes in capital markets and venture capital. Previously DARPA was very heavily involved if there was some type of sensitive technology being developed. But because of the expansion in private markets and venture capital, there’s all types of new technologies that are being developed where DARPA is not involved at all anymore. It used to be decades ago, DARPA would be almost involved in any type of development of critical technologies because it was usually done by larger companies. Because of the expansive venture capital over the last 20 or more years. Now we’re seeing critical technologies being developed even with very small companies.
Patrick Stroth: At what stage are you filing for CFIUS? Is this where you pass a letter of intent and you’re beginning to get things structured up there or is it something where it can be preemptively checked before advancing too far into an M&A transaction?
Craig Lilly: Well, generally, we will recommend clients to do a CFIUS assessment of the risk very early on prior to the letter of intent stage. Typically, companies will be even talking with the Treasury even during this letter of intent stage. And that’s generally what we recommend so that we can basically get some initial advice from the Treasury as to whether this is a very high-risk type of assessment which would require a filing. And in most cases, it can be a mandatory filing.
But typically, you will file this generally right around or medially before the execution of the contract. And that’s just to sign a contract where you may later do the acquisition usually in a two-step type transaction.
Patrick Stroth: The other question for you. Its something we didn’t talk about. But you triggered my thought process here. Compared to a US deal, I know every deal is different depending in industry and size and everything but are cross border deals routinely larger? And if so, how much larger than a domestic deal for technology or pick a case study?
Craig Lilly: Well, historically, we saw a lot of large investments but now we’re seeing even the very small investments. There has been just a rush of investments over the last decade of all types of foreign and Asian investors in the US it was particularly with technology companies and so that’s helped a big surge in venture capital investment as well. But we’re seeing across the board obviously, some of the investments by some of the Asian investors has decreased over the last year just because of some of the CFIUS concerns in the regulatory landscape. But there’s no particular size for cross border or a foreign investment we’re seeing across the board all different shapes and sizes just like you would see with a domestic acquisition.
Patrick Stroth: And assuming that CFIUS gets taken care of. There are the other kinds of risks out there that are germane to M&A. A lot of those risks can be mitigated or controlled or completely eliminated with ensuring a deal through rep and warranty insurance and it’s been used at an increasing rate in domestic deals. How has rep and warranty impacted cross border M&A?
Craig Lilly: Well, representation and warranty insurance actually was more expensive in the EU and in Europe before it really came to the US. And so it’s very prevalent in Europe and generally, there’s lower price premiums as well. As you know, representation and warranty insurance essentially allows sellers to walk away with more cash at closing while giving buyer’s interest protected in the form of an insurance policy against loss.
So typically whether it’s in domestic buyers in Europe or otherwise, there’s been the landscape for representation and warranty insurance and in Europe, particularly is fairly widely accepted. And because it’s a less litigious type environment to typically the prices and premiums and risk retention’s are much lower for a Europe-type acquisition.
Patrick Stroth: Craig, you mentioned China before and how they ramped up very extensively of going from a billion dollars in deals and then a very short term, they come up to $48 billion in transactions. What do you see aside from the slow down right now which could be temporary but what do you see going forward both in Asia and cross border M&A overall? What trends do you see there?
Craig Lilly: Well, it definitely a cross border M&A has slowed down because of CFIUS and you’ve seen with the recent trade restrictions that were imposed on the Huawei by the US that that’s a definitely an impact on perception at least for Asian investors here in the US. I definitely think it’ll probably be very slow for a lot of the Asian investments in the US. I do think you’ll see more and more US buyers throughout the world whether it’s in Asia or in Europe. I think some of the big drivers for that though is just because there’s a lot of dry powder available for not only private equity funds but also a lot of the large institutional and strategics.
As I mentioned before, the top five tech companies are 340 billion in dry powder. But also you’re seeing a lot of kind of old-line companies that are really trying to expand whether it’s through technology whether it’s a FinTech or an agricultural tech or some other kind of emerging tech or they’re trying to diversify their customer base or their revenue streams. And also you’re seeing obviously you see continued outsourcing whether it’s through manufacturing or assembling happen and that’s throughout Asia. And also we’re even seeing a lot more in Mexico and Latin America because of the close proximity and probably the more respect or for the cultural aspects of the United States including protection of IP.
So I think we’ll see kind of more and more US companies do a lot more cross border. The acquisition of tech is obviously a very driving aspect but obviously, the customers diversification, aqua hires, and other things too. And I think you’re seeing this across all different types of verticals whether its artificial intelligence or robotics, FinTech. Of course, auto tech’s been a very big area servicing a lot more of different transportation companies that are trying to expand and drilling through multiple verticals here. It’s a whole… Electric car, autonomous vehicles. The communication slash smart car and also ride sharing too as well. Those are all things that are kind of driving the transportation industry and I think we’ll continue to see that.
Patrick Stroth: So we’ll be doing a lot more US buying outside our borders as opposed to the last couple of years where we’ve had predominantly Asians coming and buying into the US. That trend looks supportive because it seems that there are more and more service providers out there and advisors such as Baker McKenzie that can make things easier for US buyers to go abroad where they probably were reluctant to do that because of a lot of the bear traps out there that they didn’t know what they didn’t know. And they’ve got resources like yours now that they can bring to bear that will help. At the same time, CFIUS is making it harder for the foreign-owned companies to come in and maybe easier for us to go out. So it may have not the same sustainability or robust outlook as you do domestic but it’s still fairly positive. Would you agree?
Craig Lilly: No, I agree. And also we’re seeing kind of a trend that’s really developed over the last few years is that you’ll see a US slash Delaware Corporation basically as a holding company but really their operations are really abroad and even though any M&A or acquisition is of the Delaware company as a domestic acquisition, essentially the company is a foreign company. And so we’ve seen a lot more of those types of transactions and that’s obviously been spurred by the not a venture capital investment here in the United States as well. And I think we’ll see that continue.
That’s why I’m saying M&A is also becoming more institutional-wise where 20% of all targets are backed by some type of institutional investor whether its private equity or venture capital. So I think we’ll see that continue. Obviously, we’ll see a lot of I think secondary private equity sales. And what that means is one private equity funds selling a portfolio company to another private equity fund. Now those type of exits account for somewhere close to 30% now of all private equity exits. I think that trend will continue as well.
Patrick Stroth: Well, you’ve got a lot there for us to consider, particularly just not the cultural differences but a lot of the other regulatory and compliance traps and so forth and just how things are different outside. But that shouldn’t stop you from taking advantage of some great opportunities out there. And if there are organizations like you and Baker McKenzie that can be brought to help smooth that transition, that’s all the better for a lot of owners and founders out there. Craig, how can our audience reach you? Because I’m sure they’ve got a lot more questions than I can give you.
Craig Lilly: Well, I’ll have a presentation which I’ll have on Rubicon’s website after this. And then also you can reach me at our website or my email address which is just firstname.lastname@example.org. Also, you can reach me through my phone number 650-251-5947 plus I’ll have a cross border presentation that I’ll post on Rubicon’s website that can be accessible and will have my information as well.
Patrick Stroth: Well, that’s absolutely fantastic. Thank you very much. And you can check the show notes here under the insights tab at Rubicon, R-U-B-I-C-O-N-I-N-S as in Sam, rubiconins.com. Go to the insights tab there and you’ll have the show notes along with a link to Craig’s presentation and you can also reach out to Craig directly. Craig, very informative. You cracked open a lot of different avenues of thought there so I greatly appreciate it. My audience will appreciate it as well. Have a good day. Thanks so much for joining us today.
Craig Lilly: Thank you, Patrick, very much.
There is nothing venture capital funds like more than a clean exit in which they can take their money from sales of portfolio companies, distribute funds as necessary to investors, and then move on to new acquisitions with the money they earned from the sale.
But sometimes there’s an issue and a VC fund can be sued by a third party well after the sale of the portfolio companies… with the fund being on the hook for millions.
That’s not such a clean exit.
Here’s the scenario.
A VC fund has a portfolio of 10 tech companies. They were all promising startups. Some fared poorly. Some did okay. With such early stage companies, that’s just the cost of doing business. Nobody can tell for certain what startups will crash and burn.
But some of the portfolio companies did very well in growing quickly and seeing revenues soar, thanks to breakthrough tech products, not to mention guidance from the fund.
After a few years, the fund had plenty of potential Buyers come calling. The VC fund was happy to offload several of the portfolio companies, resulting in a tidy profit overall. The fund managers are happy. The investors are happy to see a return on their seed capital.
Unfortunately, that fund, a legal vehicle for having equity in those portfolio companies, is still liable for lawsuits from third parties. And the fund also retained an obligation to indemnify the Buyer for contingent liabilities they were unwilling to assume.
And because a good portion of the capital from the sale of the portfolio companies is still held in reserve for contingent and/or tax liabilities that might come up, that capital is at risk and they are unable to make a final distribution.
It’s like if you had a bank account for several vacation rental properties you owned. You’ve already sold the properties. But because you still have that bank account with the sale proceeds, you are still linked legally to the properties.
If this lawsuit from an outside party is successful, the proceeds will come – be “clawed back” – from your reserves held in escrow against potential liabilities.
But there is a way to speed-up the liquidation of the fund so that all the proceeds can be distributed to investors instead of being held in case of potential clawbacks.
Fund managers can make a final distribution to the fund’s partners or interest holders without fear.
With this “fund liquidation insurance” in place, VC funds are able to close the “liquidity gap” after the sale of their portfolio companies and get a clean exit while still meeting the reserve requirement, which is what they’re after, of course, and maximize their returns.
This coverage can also be expanded to cover heirs, assigns, estates, spouses, and domestic partners of fund managers. With this insurance in place, policyholders are covered for identified and unidentified contingent obligations that fund managers would otherwise prepare for with reserves or holdbacks.
Fund liquidation insurance unlocks the millions (in some cases tens of millions) of dollars VCs are forced to keep in escrow/reserve to cover the cost of these potential liabilities.
Some Private Equity and similar investment funds are also using fund liquidation insurance rather than holdbacks during windups to cover back-end risks and to enable the efficient distribution of a fund’s proceeds to investors.
Divestments, which can be multi-year liabilities, can be insured, with the risk of clawback transferred completely to an insurance company. This is not Representations and Warranty Insurance (R&W), although the two types of policies can work in tandem.
This policy will be set up during the final stages of the liquidation process.
Potential liabilities, which can include sell indemnity caps, escrows, and excesses, are added up to form the policy limit. Premiums for this insurance are 1.3% to 3% of that limit, with an additional premium of 3% to 5% for unknown risks. It’s a low cost, considering all the benefits.
Another benefit: this specialized type of insurance could also be a deductible expense. Consult with your tax professional.
For more information on fund liquidation insurance, contact me, Patrick Stroth, at email@example.com or 415-806-2356.