By Lou Sokolovskiy
In today’s dynamic M&A landscape, a fresh wave of innovation is reshaping deal-making, with Representation and Warranty (R&W) insurance emerging as a game-changer and bonding requirements in sectors like infrastructure and construction presenting novel challenges, according to some leading M&A professionals who participated at a virtual Opus Connect roundtable last month.
Attended by nearly two dozen seasoned dealmakers, the discussion focused on how these tools were transforming transactions at a time when more than 50 insurers have driven R&W premium rates below 2% and an anticipated surge in 2025 deal activity have pushed dealmakers to navigating uncharted territory where strategic use of these mechanisms can make or break a deal.
R&W Insurance: A Deal Sweetener or Double-Edged Sword?
R&W insurance, long considered a safeguard in private equity transactions, is becoming a de facto component of the U.S. dealmaking playbook, the participants noted. “Everyone kind of talks about and thinks about it,” one remarked. “A lot of LOIs, without any lawyers looking at them, just talk about rep and warranty insurance and that they’re going to get it.”
This shift is happening against a backdrop of rising M&A volumes in 2025. Industry analysts, including AJ Gallagher and Deloitte, project an upswing in U.S. deal activity this year, with “nine out of ten insurance companies” anticipating closing more deals this year compared to 2024. This likely surge in transactions is expected to further drive demand for R&W coverage.
Still, the product remains a nuanced tool. While it can be a decisive differentiator, offering buyers recourse against “an insurance company you can go after for satisfaction of your claim” also has its trade-offs as buyers, for instance, may absorb significant out-of-pocket costs. One participant cited a $190,000 premium for a $3.1 million policy on a $31 million enterprise value transaction.
That’s consistent with market data: In 2024, average premium rates for U.S. R&W insurance were below 2% of enterprise value, with excess coverage levels dropping to 0.4%—a result of fierce competition among more than 50 insurers. Pricing advantages, however, are often offset by deal complexity. “It tends to make the diligence process longer,” one executive said, adding that legal expenses climb accordingly.
Another point of contention: the diligence burden. “You can’t do that with rep and warranty insurance,” a buyer said, pushing back against any notion that the product enables shortcuts. Insurers require full diligence documentation and legal memos—raising questions about the incremental value of R&W in deals with already complex structures like seller notes or significant earn-outs.
Nevertheless, skepticism around claim reliability appears to be softening. “We actually were shocked that there was no issue with the insurance company paying it,” one participant said of a recent claim involving “a large litigation.” This outcome may reflect insurers’ growing sophistication and reputational considerations with brokers increasingly focused on placing deals with underwriters that are known to honor claims, participants said.
Bonding Requirements: The Underappreciated Deal Barrier
For acquirers eyeing project-driven businesses—especially in construction and public infrastructure—bonding remains a formidable challenge, often misunderstood or avoided altogether by traditional PE firms.
“Bonding is essential,” one participant emphasized. “It’s a tough one and a significant hurdle.”
Unlike typical credit arrangements, bonding requires guarantees from surety providers, which often impose strict cash retention standards. That cash—deemed “effectively restricted”—is viewed as working capital that must remain on the company’s balance sheet post-closing. Sellers, accustomed to operating with large cash buffers, frequently balk at this requirement, creating tension in negotiations.
Complicating matters, surety providers usually hold a “springing lien” that can leapfrog senior lenders in the event of a bond call. This subordination risk unnerves debt providers. “Senior debt acquisition financing can also be challenging,” one executive admitted, as lenders lose their first-priority claim status.
Despite the friction, those who crack the code on bonding can carve out a unique advantage. One family office, not a traditional independent sponsor, was able to acquire bonded businesses at “very low multiples”—some as low as 2.5x to 4x EBITDA.
“It’s a bit of a moat for sure,” said the buyer, who saw opportunity in firms others wouldn’t touch, emphasizing cash flow rather than high exit multiples.
Another topic of the roundtable discussion revealed how independent sponsors have been seizing the moment in a quieter M&A over the past few months, you can read about it here.
The Bottom Line
In a competitive M&A market expected to expand in 2025, R&W insurance has become both a tactical edge and a logistical obstacle. While its prevalence is rising, so too are questions about cost, process burdens, and diminishing marginal value in complex deal structures.
At the same time, bonding challenges in sectors like infrastructure are quietly reshaping the calculus for acquirers. The requirement to maintain balance sheet cash and give bonding companies springing liens (priority over assets if things go wrong) may deter some buyers —but for those with the expertise and patience, these complexities can serve as entry barriers to attractive, underpriced assets.
As dealmakers press beyond the LOI stage, the message from seasoned professionals is clear: mastery of these tools isn’t optional—it’s the new table stakes.
But do you think it’s worth the price? Share your views in the comments below.
Where But Is It Worth the Price?
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June 2025
