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Protecting potential: Key insurance coverage for startup private equity sponsors

Starting a private equity fund? Protect your organization with a robust insurance program. Identify the right coverage for long-term risk management.

02/21/2024 · 7 minute read

Starting a private equity (PE) fund is an exciting prospect. But with opportunities also come new challenges, underscoring the importance of a robust insurance program to protect your organization. The team of specialists within Marsh’s Private Equity and Mergers & Acquisitions Practice can help you identify the right coverage for your organization and assist you in designing a program suited to your long-term risk management needs.

Amid increased market volatility, growing cyber threats, and heightened scrutiny from the Securities and Exchange Commission (SEC), PE firms face a complex risk environment. Today’s challenging landscape can be more difficult to navigate when you’re laying the groundwork for success. And since PE firms tend to take on additional financial risk, it’s important to have foundational insurance coverage in place to protect both your organization and your partners from the consequences of challenging investment decisions.

As you set out to build an effective insurance program for your fund, you should seek to answer these questions:

·       What kind of coverage do I need?

·       When should I purchase each type of coverage?

·       How does this initial coverage help my fund become more resilient?

Marsh’s team of PE specialists has extensive experience helping emerging funds like yours build robust insurance programs to help mitigate risk throughout your growth journey. We will work with you to understand the risks specific to your organization and recommend an insurance program that is tailored to your risk profile. As your fund continues to grow and make investments, we will continue to assist you in making necessary adjustments to the program so that it remains relevant to your evolving risks. The main coverage lines that organizations like yours should consider include:

General partnership liability. Providing protection for your fund and senior leaders is critical. A general partnership liability (GPL) policy is a blended policy form containing both directors and officer liability (D&O) as well as professional liability coverage. This protects the general partners and investment advisor of an insured fund in the event of a claim from an investor, other plaintiff, or informal investigation by a regulatory body. GPL coverage is particularly critical as you begin managing daily operations, developing relationships with investors, and executing investment opportunities.

Cyber insurance. Designed to help you understand, measure, and manage cyber risk, our team can assist you in building a cyber program that supports you in transferring risk out of your organization and preparing for the future as you build your firm. Our dedicated cyber advisors provide in-depth knowledge and expertise to help you navigate the complex cyber risk landscape and identify which policies are most relevant to you.

Contractually required coverages, such as workers’ compensation or property. As your fund grows and evolves, you may find yourself contractually obligated to purchase certain types of insurance, such as property insurance, which, as an example, may be required by your landlord when leasing space. Additionally, purchase of workers’ compensation insurance is compulsory for most employments in most states — so as soon as you hire employees, you must have this type of coverage in place. Our specialists can assist you with identifying, analyzing, and prioritizing risks to protect your business and the people who power it.

The timeline for protecting your fund

Aside from statutory requirements, there’s no specific trigger for when a fund should purchase coverage. It is, however, a best practice — and prudent — to secure a policy during fundraising, especially since the SEC pays particular attention to representations made in the fundraising phase. However, sponsors will often delay purchasing coverage until it is requested by a limited partner (LP), when starting the diligence process on a target, or when the firm makes an investment. Regardless of when you make the decision to purchase coverage, your Marsh team can help you with any of your coverage needs.

Additional coverages to consider

Once you have these insurance building blocks in place, you may begin to consider additional policies that support your growth-oriented goals, especially as you begin to deploy capital — for example, you may wish to consider transactional risk insurance. Our team can help you identify the coverage that best fit your growth needs.

Protecting potential: Key insurance coverage for startup private equity sponsors

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