New report highlights key risks for private equity firms
A new report from insurance broking business Vista has highlighted the current and emerging risks faced by Private Equity (PE) firms’ investee businesses globally.
The report details the exposures most likely to impact deal value for PE firms investing in small and mid-size companies: contractual risk; cyber and cyber crime; and poor professional advice.
Vista, which specialises in mitigating risk for PE firms, has worked on more than 60 deals in the past year, and offers each of its PE Partners a detailed Insurance Due Diligence review of target companies. Reports give a professional and unbiased overview of the target company’s risk profile, exposures and insurance buying strategy, allowing the PE firm to make informed decisions about their investment. These reports have created a pool of risk insights available to the brokers at Vista, with the company identifying key themes within the PE market.
Contractual risk is one of the key risks for PE firms, with target companies often being unaware of their obligations in connection to a variety of customer and supplier contracts. This can include the imposition of tough indemnity clauses and insurance requirements from major customers, or contracts where suppliers limit their risk, such as many ISP contracts. A company contract often overlooked is the lease agreement with landlords, where, if not dealt with correctly, tenants can find themselves the subject of legal action from a landlord’s insurers seeking to recover insurance monies post loss, which then leads to serious liability for the leaseholder.
Cyber Crime, and in particular deception fraud, is a significant and rapidly growing risk This often involves a supplier being hacked and fake payment details being provided to their client. Importantly, not all Cyber insurance policies will extend to include this risk. Smaller supplier firms are regularly targeted for this type of fraud, as many do not have a permanent employee monitoring invoicing and payments processes.
Poor professional advice is frequently cited as another risk for PE firms. For entrepreneurs, risk tolerance is commonplace, but this can translate to a lack of cogent buying strategy for transfer of insurable risk through insurance. Most frequently there is a lack of professional insurance advice, where owner-managers either arrange insurance buying themselves, often piecing together insurance bought online, or seek out the lowest cost solution rather than the right advice. Many business fail to get the quality of advice through in-depth investigation of the company’s needs and it is not until the Deal process that missing coverage is identified.
Vista’s data shows that 20 per cent of firms do not have Director and Officer Liability insurance, regarded as the most important cover for individuals in business, and something considered essential by PE firms when they join the board.
Many PE transactions relate to helping businesses transition change: allowing an entrepreneur to have the funds necessary to achieve a buy and build strategy; facilitating management to take the business forward as a founder exits; or having the necessary support to scale the business. An over-arching theme in many of these deals is professionalisation. In addition to the direct support provided by the PE team, firms often need to strengthen the quality of advice they receive both internally and externally. This may involve an experienced Finance Director or Chief Executive joining the business to support strategy, but will often also involve improving the quality of external advisers.
These insights are the result of a detailed knowledge base of risk reports from nearly 200 deals conducted on target firms based in the UK, USA, Canada, South America, Europe, Middle East and Far East. Critically, the work Vista does includes analysis of health and safety risks and processes; contracts with suppliers and customers; financials including balance sheet, asset register and profits; leases; business structure; products; and existing insurances, which provide Vista with an in-depth client view. Few insurance professionals analyse business in this depth.
“Comprehensive corporate insurance protection is not a commodity purchase. We help businesses understand why professional insurance advice is business-critical. As they transition, we can be a key partner, helping to protect the balance sheet through to exit. It is a sad inditement of our industry that every one of the 200 reviews we have completed in the last five years has identified uninsured risk or substantial errors in how cover is arranged,” says Peter Warburton, Director at Vista Insurance Brokers.
“Peter and Gavin make the process of engaging with Vista a very easy one. Their knowledge and experience shine through. We know that when they give us, and our management teams, advice it is from the unique perspective in this space of being themselves both business owners and insurance deal specialists,” says Catherine Richards, Partner at Inflexion Private Equity Partners LLP.