Services to support private equity
May 26, 2016
Mergers and acquisitions continue apace, driven by low interest rates. But the risks involved are broad and complex.
The year 2015 set a record for mergers and acquisitions, driven by an environment of low interest rates, low organic growth and shareholder pressure for value.
For private equity firms, those conditions presented opportunities for expansion, but also made it more challenging to deliver high returns for investors year after year. A quiet IPO market added to the pressure, robbing firms of their traditional exit strategy.
“IPOs launched within the past two years have been trading lower than their initial offering price,” said Andy Peterson, Head of Private Equity for Zurich Global Corporate in North America.
“Scale does matter, and it’s been increasingly hard to go it alone. Mergers and acquisitions are ways to help spur growth.”
Activity in the private equity field remains high and increased fundraising in 2015 means there is cash ready to keep M&A at the forefront of conversations in the deal room in 2016.
The risks involved in bringing two companies together are broad, complex and can diminish the value of any deal without proper mitigation. With far fewer IPOs, private equity firms are holding onto their portfolio companies longer, increasing their exposure.
Insurance not only protects PE firms from liability shouldered by acquired companies, but also acts as an asset to bring to a negotiation.
“The right carrier partner can provide value at every step of the investment cycle — deal generation, due diligence, post-acquisition and exit — through a mix of insurance products and enterprise risk solutions. Zurich has the best-in-class capabilities to support our customers’ goals at every phase,” Peterson said.
Enterprise risk solutions
Enterprise risk solutions help private equity firms conduct due diligence more thoroughly and can help them decide whether to continue with a deal or pull the plug.
Many of Zurich’s most valuable risk management insights relevant to private equity decision-makers come together in its proprietary Zurich Risk Room, an online aggregation of data that customers can reference as they research target companies, their industries and the risk exposures they may present at home and abroad. The tool can help customers identify the correlation between various risks and test assumptions before making a strategic decision.
The right carrier partner can provide value at every step of the investment cycle – deal generation, due diligence, post-acquisition and exit – through a mix of insurance products and enterprise risk solutions.
-- Andy Peterson, Head of Private Equity for Zurich Global Corporate in North America
“For example, a private equity customer is considering an acquisition in Germany. They can use tools in the Zurich Risk Room to create a flood map and determine flood exposure at the property. That could either bolster their confidence in the acquisition or convince them not to go through with the deal because the risk is too high,” Peterson said.
Zurich Onsite is another innovative tool that is changing the game for Risk Engineering solutions provided to many customers. The tool increases the transparency of the whole risk assessment process, and enables customers to obtain better insights from site visits than ever before.
These insights enable more informed conversations with the risk engineer during visits, prompting quicker action on risk improvement actions and helping businesses deliver on their loss-prevention strategies.
Once a deal gets the green light, PE firms familiar with the utilization of captive insurers may be positioned to leverage that experience to manage many, and perhaps all, of their risk portfolios. Building a self-insured structure for an entire portfolio within a captive can deliver a high degree of flexibility while providing coverage for the risks that a firm could inherit from its assets. In effect, a captive helps minimize risk and maximize financial freedom.
“How we structure a program will differ depending on a client’s unique goals and risk appetite, but captives provide a way to pull an array of risks under one roof,” Peterson said.
Companies looking to expand globally face additional challenges with local regulatory and compliance requirements. While North America still leads the way in terms of investment and deal generation, Europe is not far behind and Asia is gathering steam. Additionally, emerging markets offer more and more opportunities for companies to establish an international footprint.
“Your insurer has to have the capability to write local policies back to a U.S. master policy, and doing that well is a daunting task,” Peterson said.
He noted that Zurich is one of a few carriers with the international capabilities to support expansion and acquisitions abroad.
The information in this publication was compiled from sources believed to be reliable for informational purposes only. We do not guarantee the accuracy of this information or any results and further assume no liability in connection with this publication. We undertake no obligation to publicly update or revise any of this information. This is intended as a general description of certain types of insurance and services available to qualified customers through the companies of Zurich in North America, provided solely for informational purposes. Nothing herein should be construed as a solicitation, offer, advice, recommendation, or any other service with regard to any type of insurance product underwritten by individual member companies of Zurich in North America, including Zurich American Insurance Company, 1299 Zurich Way, Schaumburg, IL 60196-1056. The policy is the contract that specifically and fully describes the coverage, terms and conditions. Coverages and rates are subject to individual insured meeting our underwriting qualifications and product availability in applicable states. Some coverages may be written on a non admitted basis through licensed surplus lines brokers.