Insurance Designed For Private Equity

As private equity (PE) firms work with their portfolio companies to help them grow and ultimately maximise returns, they will invariably need to manage a large degree of change – integration of bolt-on acquisitions, entering new territories or operational overhauls. This creates not only great opportunities but also certain circumstances from a risk and insurance perspective that need to be addressed.

The following three themes should be at the core of the risk and insurance strategy for any PE portfolio company:

Design the insurance programme to reflect the investment lifecycle

Investors in portfolio companies can play a role in ensuring an insurance programme is in place that is fully enhanced to reflect the nature of PE backing. This should include:

• Enhanced protection through wider than standard coverage – Avoid uninsured losses and allow room for the evolution of the business through wordings tailored for PE ownership.
• Flexibility for growth – Avoid additional insurance costs associated with organic growth and bolt-on acquisitions.
  
• Support in the event of a major loss – Agree terms with insurers that provide cash flow support and reflect the increased likelihood of leverage and existence of bank covenants.
  
• Financial contribution towards improving risk management – Limit potential for reputational damage that can impact EBITDA*.
  
• Ease of transition at exit – Ensuring insurance is portable and transparent in the event of a transaction will provide comfort and predictability for management, seller and buyer.

Consider how cyber risk could impact the company

New mandatory data breach notification legislation which will come into force in 2018 means companies will face new requirements and significantly higher fines of up to $1.8 million. Beyond this direct cost, reputational damage caused by a major breach could impact a portfolio company’s value, particularly if it occurs immediately prior to an exit.

Helping investee companies gain a clearer picture of their risk landscape will ensure appropriate protection for the business, and subsequently the PE firm’s investment.

Seek clarity on exposures faced by directors of portfolio companies

Even a high quality “off-the-shelf” directors and officers policy may fail to pick up on the nuances of PE ownership structure leaving individuals, including representatives from the PE firm, potentially exposed. We often see a lack of clarity in relation to issues such as:

• Who is offering indemnities to directors? Are they covered by insurance?
  
• Definitions of key items including “directors” and “transaction”.
  
• What happens in the event of a change in ownership or insolvency?

Insurance is often not a high priority for investment teams when working with portfolio companies, however, by giving consideration to the above issues now, investors and management teams will be better positioned to optimise the upside of growth, whilst minimising the potential downside associated with an unforeseen event.

For more information on this topic, contact Cory Ormsby.

Disclaimer: This is a general overview of the insurance issues. Please call us and ask for a copy of the insurer’s policy wording.  We recommend you read the policy wording so you have an understanding of the policy terms, conditions and exclusions before you decide whether a policy suits your needs. Statements concerning legal matters should be understood to be general observations based solely on our experience as insurance brokers and risk consultants and should not be relied upon as legal advice, which we are not authorized to provide. All such matters should be reviewed with your own qualified legal advisors.  
Marsh Pty Ltd (ABN 86 004 651 512, AFSL 238983) arrange the insurance and is not the insurer.