Growth and changing middle market dynamics mean evolving underwriting

Recent insights and data from Pitchbook paint an intriguing picture of the middle market landscape for private equity. Overall, the middle market has become an increasingly attractive prospect for large firms as a result of high inflation, interest rate hikes, and valuation volatility, as deals in this space are relatively easier to finance and execute. Case in point: in 2022, firms closed or announced 3,314 middle-market deals totaling $443.8 billion in value and middle market funds (funds between $100M and $5B in size) have outperformed mega funds (funds of $5B or more) for three consecutive quarters.

Notably, as I’ve explored in previous blogs, this environment is driving more add-ons. Pitchbook even said “Add-on activity in 2022 ended at its highest-ever level, representing 72.3% of all US PE middle-market deal count, while making up 58.7% of total middle-market deal value—another record level.”

In response to this growth and changing dynamics in the market, and in line with how we’re observing brokers focus their operations, we are confident now is the time to centralize private equity (PE) underwriting at Liberty Mutual for our middle market property and casualty business. We’ve created a dedicated underwriting team that will develop insurance solutions for mid-size businesses owned by PE companies with an emphasis on taking a holistic view of the private equity portfolio. They will work hand in hand with our dedicated PE verticals for professional lines.

While some underwriters with PE practices have elements of dedicated underwriting units in the mid-market space, our team stands apart with the global perspective and experience we bring to the table. What’s more, underwriting is not often integrated into the distribution team.

Centralizing our PE underwriting and distribution functions will add focus, expertise, and attention in this segment so that we can better serve our clients. Ultimately, the goal is two-fold: streamline the underwriting process for all and tap the unparalleled expertise of PE underwriters.

Dealmaking happens quickly and underwriters who have witnessed just how fast things might move understand that insurance shouldn’t hold up a deal.

A typical mid-market underwriter may not feel comfortable writing a deal without a complete picture, something that’s often not possible during the diligence phase of a deal. An underwriter who doesn’t see a lot of PE may potentially move the deal to the side or continue to go back to the broker requesting missing information – an unrealistic ask. However, underwriters with PE experience are comfortable working in the gray. They are determined and resourceful, coupling a knack for sourcing more info in alternative ways with gut instinct on viable deals to write a quote.

Our PE underwriters have a holistic view of goings-on across the country, not just in regional siloes. Looking at the relationship and insurance needs as a whole, and what’s going on across the market broadly, ultimately benefits firms and brokers when it comes to writing insurance.

The idea of focused PE capabilities is taking shape with brokers, too. Peter Ballas and Bryan Pritchett, Co-Leaders of Aon’s Private Equity Practice, shared their team’s approach:

“At Aon we believe dedicated resources are critical to the Private Equity space and our best relationships are with insurance carriers that align with this thought process.  We have created a focused PE broking practice within Middle Market which specializes in understanding the needs of our PE clients and providing applicable solutions.   Our teams are closely aligned with our carrier partners which equips us to work under a different set of rules and expectations versus the traditional insurance model.  Within the PE space we can work under condensed timeframes and with limited information.  Our dedicated PE vertical within Middle Market allows us to provide solution-oriented results in an ever-changing market.”

The PE mid-market landscape is dynamic. There is recognized potential for big growth for smart PE firms. As with any growth strategy, insurance and risk management is a key component to long-term success. My team and I are excited to be a part of that process, working with firms in a streamlined way that brings the best of our specialization to each deal and makes doing business smooth and quick.

To learn more about how Liberty can help private equity firms manage risk and grow, visit our private equity page.