John Kavanagh
Ireland Development Leader
In recent years, global private equity firms have emerged as a significant force in the world of high finance. With buy-in from the high-net-worth individuals and funds they enlist in various ventures, they've made successful moves to take control of trillions in assets under management. Some project private equity holdings to reach $5 trillion or higher by 2025.
In a highly competitive business world, private equity firms and public and private companies are looking for every growth opportunity they can possibly pursue. This includes acquiring other companies, merging with actual or potential competitors, or divesting assets that no longer deliver value. These courses of action have major potential for revenue generation — and in some cases are essential for survival.
Mergers, acquisitions, and divestments are among the riskiest and most complex business transactions. Many often fail because market conditions change, deals are never closed, or businesses encounter insurmountable difficulties afterwards. Private equity firms face an additional risk – the institutional shielding of a firm may not always insulate partners from the financial consequences of ill-advised investment decisions.
Our global private equity, mergers, and acquisitions team has more than 25 years’ experience providing insights to evaluate, facilitate, and close cross-border and domestic transactions, while managing buy- and sell-side risks. We can help buyers differentiate their bids and sellers exit with minimal warranty exposure.
Our specialists are driven to solving your insurance and risk management challenges by understanding, quantifying, and mitigating risk throughout the investment life cycle. From pre-acquisition, transaction, and integration solutions, to portfolio servicing and post-acquisition transactions, we can help you enhance deal value, improve valuation outcomes, and achieve portfolio operational excellence.
Related insights
Three Key Trends in Warranty and Indemnity Insurance
FAQs
The private equity sector continues to face evolving risks, including:
- Operational risks
- Increased investor pressure related to environmental, social, and governance (ESG) factors
- Cyber threats
- Geopolitical risks
- Developing talent management strategies that encourage technological capabilities
To contain costs, preserve liquidity, protect assets, and strengthen talent, private equity firms should take steps to optimize their insurance and risk mitigation strategies.
The global risk landscape is changing for mergers and acquisitions. Challenges that dealmakers face include:
- Operational risks: Trade errors, compliance issues, or failure to properly vet various parties can lead to financial losses.
- Environmental, social, and governance (ESG) factors: In response to increased pressure from investors, dealmakers need to evaluate their ESG efforts to be an appealing deal partner.
- Talent management: Managing workplace cultural differences and ensuring a workforce can adapt to new technology plays a role in an acquisition’s success.
- Cybersecurity risks: As firms implement new technologies to provide a more connected customer experience, businesses are facing increasing cyber threats.
- Policy changes: It’s difficult to keep up with regulatory shifts, such as changing tax insurance requirements, and failure to comply can result in hefty penalties.
To overcome these challenges, you should consider engaging a broker who can optimize risk mitigation measures and help you navigate this evolving risk landscape.
Any M&A transaction faces a range of exposures or complications with financial implications. A lack of due diligence and sophisticated risk and insurance planning can lead to surprises or incorrect valuations. Potential risks can include:
- Not ensuring insurance increases are factored into the insurance budget.
- Inadequate or no provisions for self-funded losses in the opening balance sheet.
- Gaps in the seller’s insurance program or coverage provisions.
- Ambiguities in the sale and purchase agreement.
Being aware of, quantifying, and making provisions for these issues can lead to cost efficiencies, an improved ability to negotiate on price, a smoother and faster integration, an improved sale and purchase agreement, and a reduced exposure to unexpected costs.
A sophisticated broker with a depth of experience and the ability to conduct in-depth due diligence, such as Marsh, can identify these potential exposures and turn obstacles into opportunities to support a successful deal.
Simply put, any organization entering a merger or preparing to acquire one or more companies needs the safety net that insurance can provide. The sheer number of ways in which transactions like these can (and do) go wrong makes a coverage and risk management plan all but mandatory.
That being said, going into the M&A process with this acknowledged doesn't mean you can proceed as if success is guaranteed. It is vital that you work with risk practitioners who have helped others achieve the best outcomes for their M&As.
Insurers are becoming more aware of private equity risk issues and priorities. There is no "one-size-fits-all" coverage option. You must choose the protections you want for the businesses and other assets that comprise your portfolio.
However, several insurance solutions may be particularly beneficial to private equity firms, including:
- M&A and transactional risk insurance: This facilitates transactions and transfers liabilities to the insurance market.
- Representations and warranties insurance or warranty and indemnity insurance: This protects a buyer against a breach of the seller’s representations.
- Tax insurance: This can help manage identified tax risks and any unexpected financial exposures of a deal as well as other contingent risks that could impact the success of a transaction.
- Portfolio insurance solutions: These offer an aggregated approach to risk management across your portfolio.
A sophisticated broker can build tailored insurance policies specific to your risks, so you can execute deals with confidence and protect your portfolio for the long term.
From fundraising, acquisition, and asset management to divestment activities and exit stages, a strategically designed insurance portfolio program can help private equity firms achieve financial success.
Exploring these services can improve the value of a firm’s portfolio across the investment life cycle:
- When raising capital: Comprehensive general partnership liability coverage can protect fund and investment professionals from inherent risks.
- When deploying capital, pre- and post-acquisition: Risk and insurance due diligence can help avoid pitfalls, transactional risk solutions can enable deals to close, and post-acquisition integration support can ensure a smooth transition.
- When managing capital: Employing risk optimization and loss cost reduction strategies during the ownership period may improve financial outcomes. Having dedicated claims advocacy resources can support a smooth claims process.
- Upon exit: Vendor risk and insurance due diligence can uncover potential risks, reviewing seller-focused transactional risk insurance solutions can support a positive deal outcome, and IPO and SPAC coverage can support a smooth exit.
M&A and transactional risk insurance, coupled with a comprehensive risk management solution, are vital components to help achieve a successful deal outcome. Risk and insurance due diligence services are imperative to address areas of exposure or hidden liabilities.
Given the complexities of tax legislation, globally and locally, products that cover tax liabilities are particularly beneficial to de-risk a transaction. Related solutions to achieve a successful deal outcome include representations and warranties coverage and contingent tax liability insurance.
Using an aggregated approach to risk management through a portfolio purchasing insurance program can help control costs and manage volatility. By teaming with the right insurance advisor, private equity firms can take a holistic, coordinated approach to risk, which in turn can yield better outcomes.
Using a portfolio insurance purchasing platform not only provides centralized oversight of your entire portfolio, but also helps you better quantify and manage your portfolio risk – leading to cost savings, greater operational efficiency, and improved valuations upon exit.
The increasing financial power of private equity firms coincides with risks that are growing steadily by the day. It's critical for any organization operating in this field to obtain specialized coverage for its portfolio holdings.
In addition, your organization may face greater scrutiny — from the general public and government regulators — regarding its practices. Even if you are confident in the strength and security of your deals, unexpected legal, regulatory, and financial surprises could emerge.
By enlisting our private equity team to develop a tailored risk assessment, management, and transfer solution, you can submit bids or divest assets with greater confidence.
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