New Vista Report Highlights Key Risks for Private Equity Firms
Vista identifies current trends and emerging risks for PE firms globally.
We have worked on more than 60 deals in the past year, and we offer a unique service to each of our PE partners in the form of a detailed Insurance Due Diligence review of the target company. Reports give a professional and unbiased overview of the target company’s risk profile, exposures and insurance buying strategy, allowing the PE firm to make informed decisions about their investment.
These reports have created a pool of risk insights and have allowed us to identify key themes within the PE market.
Contractual risk is one of the key risks for PE firms, with target companies often being unaware of their obligations in connection to a variety of customer and supplier contracts. This can include the imposition of tough indemnity clauses and insurance requirements from major customers, or contracts where suppliers limit their risk such as many ISP contracts. A company contract often overlooked is the lease agreement with their landlords, where, if not dealt with correctly, tenants can find themselves the subject of legal action from a landlord’s insurers seeking to recover insurance monies post loss, which then leads to serious liability for the leaseholder.
Cyber Crime, and in particular deception fraud, is a significant and rapidly growing risk. This may involve a supplier being hacked and fake payment details being provided to their client. Importantly, not all Cyber policies will extend to include this risk. Smaller supplier firms are regularly targeted for this type of fraud, as many do not have a permanent employee monitoring invoicing and payments processes.
Poor professional advice is frequently cited as another risk for PE firms. For entrepreneurs, risk tolerance is commonplace, but this can translate to a lack of cogent buying strategy for transfer of insurable risk through insurance. Most frequently there is a lack of professional insurance advice, where owner-managers either arrange insurance buying themselves, often piecing together insurance bought online, or seek out the lowest cost solution rather than the right advice. Many business fail to get the quality of advice through in-depth investigation of the company’s needs and it is not until the Deal process that missing coverage is identified.
Our data shows that 20% of firms do not have Director and Officer Liability insurance, regarded as the most important cover for individuals in business, and something considered essential by PE firms when they join the board.
Many Private Equity transactions relate to helping businesses transition change: allowing an entrepreneur to have the funds necessary to achieve a buy and build strategy; facilitating management to take the business forward as a founder exits; or having the necessary support to scale the business. An over-arching theme in many of these deals is professionalisation. In addition to the direct support provided by the PE team, firms often need to strengthen the quality of advice they receive both internally and externally. This may involve an experienced Finance Director or Chief Executive joining the business to support strategy but will often also involve improving the quality of external advisors.
These insights are the result of a detailed knowledge base of risk reports from nearly 200 deals conducted on target firms based in the UK, US, Canada, South America, Europe, Middle East and Far East. Critically, the work we do includes analysis of health and safety risk and processes; contracts with suppliers and customers; financials including balance sheet, asset register and profits; leases; business structure; products; and existing insurances to provide us with an in-depth client view. Few insurance professionals analyse business in this depth.
“Comprehensive corporate insurance protection is not a commodity purchase. We help businesses understand why professional insurance advice is business-critical. As they transition, we can be a key partner, helping to protect the balance sheet through to exit.
It is a sad inditement of our industry that every one of the 200 reviews we have completed in the last five years has identified uninsured risk or substantial errors in how cover is arranged,” said Peter Warburton, Director at Vista Insurance Brokers.
“Peter and Gavin make the process of engaging with Vista a very easy one. Their knowledge and experience shine through. We know that when they give us, and our management teams, advice it is from the unique perspective in this space of being themselves both business owners and insurance deal specialists,” said Catherine Richards, Partner at Inflexion Private Equity Partners LLP.
We provide insurance Due Diligence, Transactional Products such as Warranty and Indemnity and/or placed portfolio insurance for a wide number of differing Private Equity investors in the UK, the USA and Europe. We have a deep understanding of how risks develop over the investment life cycle. Our team has over 35 years of experience in managing these evolving risks from initial assessment to exiting the investment. Our process allows them to quickly identify any “red flag” issues that could impact the deal and accurately forecast current and future insurance spend.