Meeting property and casualty needs of private equity firms demands a holistic view

By Bill Fahy, Head of Private Equity, Zurich North America

While the continuing impacts of COVID-19, supply chain woes and global inflation clouded the performance for some business segments in 2021, you wouldn’t know it if your focus was on the private equity (PE) industry. By any measure, 2021 was a record year for PE activity, culminating in almost 9,300 deals worth more than $1.2 trillion globally — and coming close to doubling the roughly 5,700 deals valued at about $683 billion during 2020.¹ Average deal size pierced through the $1 billion mark in 2021 for the first time.²

Activity was off to a somewhat slower start in the first quarter of 2022, both in the U.S. and around the world, due to headwinds associated with increased inflation, geopolitical conflict and market volatility. However, the PE industry still managed to generate over 2,000 deals worth about $330 billion during that period.³ Capital in the PE marketplace has been more careful regarding  which deals are likely to deliver the best value, but players are by no means backing away from transactions that make economic sense.

Portfolios often differ in makeup from one PE firm to another. Some consist largely of acquired organizations with affinities to specific industry segments, such as technology. Others are more diverse, bringing together companies across multiple business and industry sectors. But all will come aboard with existing risk management and insurance frameworks requiring some degree of integration with the group.

A holistic viewpoint of PE risks

Helping PE firms manage risks presented by sometimes diverse portfolio companies requires brokers experienced in the market space and insurance providers with broad enough capabilities and risk appetites to accommodate the needs of this unique segment. Leveraging value across a portfolio demands a holistic view of risk factors presented by all constituent companies as a group. And achieving that holistic view requires close collaboration among all parties with a stake in formulating a sustainable risk management strategy for the portfolio.

Among the questions to be answered for any PE firm is the degree to which individual members will drive their own insurance and risk management destinies, versus incorporating a more unified portfolio insurance strategy that may deliver benefits such as increased purchasing power and shared best practices. Further, a truly holistic view will also help identify more challenging risks of some portfolio companies that may be outside the scope of those presented by the rest of the group — risks that may require special attention via Excess and Surplus insurance lines, retentions, alternative risk-transfer mechanisms, or other means.

Seek focused PE expertise

PE firms and brokers looking to manage the specific property and casualty needs of portfolio companies must build strong, collaborative relationships with insurance providers offering:

• Targeted PE knowledge – Customers and brokers should seek out insurers offering well-established subject matter and industry expertise that can be shared across the portfolio.
• Industry practice expertise – PE firms need to work with insurers possessing specific experience in the industry segments represented by the group of portfolio companies.
• Dedicated PE underwriting and service teams – Underwriting, risk engineering and claims professionals dedicated to serving PE firms will help ensure that best practices are shared across the portfolio.
• Responsiveness and creativity – Managing the property and casualty risks of portfolio companies, sometimes representing diverse risk characteristics, demands creativity. And meeting the notoriously fast-moving needs of PE firms requires a commitment to be responsive at all times.

Managing risk to increase portfolio value

No matter how good a fit a new acquisition may appear to be within the structure of an existing portfolio, every new addition comes aboard with its own property and casualty risks. Effectively addressing and managing those risks by engaging the PE customer, broker and insurer in a fully collaborative, holistic approach will both reduce loss potential for a new entrant and strengthen the overall value of the acquisition to the PE firm as a whole.

Whatever the assistance a PE customer and broker may require, Zurich has the knowledge, experience and dedicated resources to collaborate in the design of programs and alternatives that fast-moving PE firms demand. Customers and brokers are invited to learn more about Zurich’s Insurance for Private Equity Portfolios.