Private Equity firms - 3 reasons minding the risk gap will be your biggest equity value-add in 2023

Authored by Amy Gross, Global Private Equity Practice Leader - Liberty Mutual

Protecting your firm and portfolio companies is a major spend. Having a dedicated system in place – whether internal or external – to orchestrate that protection provides substantial value to the deal making process that can both help you tighten your finances and add-value for investors.

However, it’s not atypical to see private equity firms have an arguably disjointed risk management and insurance approach. Most don’t even have a formal risk manager role. There are three key reasons to mind this gap in 2023.

Not-so-obvious risks are looming large

Following the flurry of transactions over the last several years, smart firms are revisiting their coverage needs to ensure they are adequate. Cyber and property coverage remains important, but it’s imperative for firms to think more broadly about emerging risks specific to their portfolio companies, such as how workers’ comp is impacted by an aging workforce or ESG/DEI and the higher level of accountability for firms to make a positive social/environmental impact. This comprehensive approach will allow the firm to think about how to prevent losses and buy adequate coverage for those risks to make sure insurance is not costing their investors more than is necessary. 

Creative solutions are in demand for new acquisition trends

There is skyrocketing interest in add-on acquisitions this year, and those deals pose specific challenges and opportunities. It’s essential to partner with carriers to develop creative solutions to protect against these new and potentially unique risks, keeping the total spend in check while also making sure the right coverage is in place. This, ultimately, adds value and comfort to your investors and makes it easier to place coverage for subsequent add-on acquisitions.

Relationships should help, not hinder, deals

At the time of transaction, firms work incredibly rapidly. It’s critical that insurance doesn’t hold up the deal and savvy carrier partners understand the need to be fast, get quotes out quickly and accurately with limited information. A dedicated infrastructure for risk and insurance – whether an internal risk manager or trusted partner – is the best way to facilitate that process and leverage your firm’s size and scale to speed the process up.

Inadequate coverages that lead to uncovered losses become your losses, whether it’s the portfolio company’s loss or the firm’s loss or even your reputation being hindered.

Having someone who understands insurance and can look at the aggregated spend, understand the top partners, ensure adequate coverages, and address the quality of risk across the portfolio and how to prevent losses is critical.

Bottom line: you don’t want protecting your firm and portfolio to cost your investors more money, and a cohesive risk management strategy is integral in making sure that’s not the case.

Learn more about how we help private equity firms manage their unique risk needs HERE.