3 MIN READ
Published 06/01/2021
The challenges facing private equity firms have been building for years. Understanding and responding to these risks will shape the firms’ futures.
1. Hard insurance market
More than a decade after the Great Recession, fallout from the financial crisis is catching up with private equity.
- Claims activity has gradually increased.
- Litigation funding is more readily available.
- Distrust of big business has deepened.
- Large awards and settlements are now normal.
What’s our response?
Partner with a carrier that understands PE firms’ unique risks and creates customized solutions.
2. Social responsibility
Today’s firms are held to higher standards in terms of their impact on the public and the planet.
- Firms and their portfolio companies must make positive contributions to society.
- Once a differentiator, this is now imperative.
- Firms must change internal policies and practices.
- The industry’s culture needs to evolve.
What’s our response?
Take the steps necessary to adopt ESG and DEI throughout the firm and its portfolio companies.
3. Special Purpose Acquisition Companies (SPACs)
Formed and funded by a group of investors, a SPAC is a shell company that raises capital in trust and buys or merges with a private company to take it public.
- Raised $64 billion in 2020, nearly matching total IPOs.
- Reached $40 billion in just the first two months of 2021.
- More companies are choosing SPACs over IPOs.
- Difficult to find coverage because of the market’s inherent risks.
- Potential for class-action lawsuits is elevated.
- Coverage is expensive, especially in a hard market.
What’s our response?
Communicate transparently and regularly with insurance partners to secure coverage.
4. Inaccurate valuations
Economic uncertainty brought on by the pandemic will make it difficult for private equity companies to accurately value their assets.
- Valuation is essential for completing an M&A transaction.
- Both parties must be satisfied with accuracy.
- Large and public-sector firms with access to stimulus have an advantage.
- PE firms may overvalue a company’s worth.
What’s our response?
Rely on third-party valuation to help determine worth accurately.
5. Communication challenges
To get ahead of emerging trends in claims, firms and brokers must develop close partnerships with insurance carriers.
- Portfolio companies span a broad range of industries.
- Profitability for PE firms is shaped by the industries they serve.
- Insurance partners must provide detailed information about loss trends.
- Firms should clearly explain how they handle litigation.
- Managing the costs of claims is essential for long-term profitability.
What’s our response?
Establish open communication with carriers to minimize the impact of claims.
6. Tighter timelines
As M&A activity increases, underwriters must have the capacity to respond quickly and effectively.
- Deal volume dropped 49% in the first half of 2020.
- Deal value decreased 22% during the same period.
- Megadeals declined more significantly than smaller deals.
What’s our response?
Seek an underwriter that offers exceptional speed, expertise and flexibility.
Whatever the future holds for private equity, our industry expertise and integrated solutions can help you prepare and adapt.
Contact your Liberty Mutual representative to learn how we can help.
Related insights
This website is general in nature, and is provided as a courtesy to you. Information is accurate to the best of Liberty Mutual’s knowledge, but companies and individuals should not rely on it to prevent and mitigate all risks as an explanation of coverage or benefits under an insurance policy. Consult your professional advisor regarding your particular facts and circumstance. By citing external authorities or linking to other websites, Liberty Mutual is not endorsing them.
