Financial R&R: What's Next for Private Equity Firms?
By Alliant Specialty
Ron Borys and Ryan Farnsworth, Alliant Financial Institutions, welcome the newest member to the Alliant team, Tim McAndrew and discuss the “hot button” exposures private equity firms and portfolio companies should be thinking about in 2022. Coming off a headlong post-pandemic rebound, what’s up next for private equity firms?
Welcome to Financial R&R, a show dedicated to financial insurance and risk management solutions and trends shaping the market today. Here are your hosts, Ron Borys and Ryan Farnsworth.
Ron Borys (00:14):
Welcome, everyone. This is Ron Borys and thank you for tuning in to the latest edition of the R and R Financial podcast, here today with Ryan Farnsworth and a special guest, the newest addition to our Alliant team, Tim McAndrew. Tim, welcome to Alliant. We are thrilled to have you here, and we're really excited about what you are going to bring to us, particularly in the area of private equity and general partnership liability, which is what we brought you into, to focus on an leadfor us. So welcome.
Tim McAndrew (00:43):
Thank you, Ron. Really excited to be here with Alliant.
Ron Borys (00:45):
Great. So, Tim, let's just talk a little bit about your career, right? I mean, clearly, you bring a lot to the table. You've spent some time on the underwriting side, you've spent some time on the brokerage side. Talk to us a little bit about what you've been sort of focused on over the last five years or so for those of us in the industry who haven't kept up with you, talk a little bit about what you've done and what your plans and expectations are for yourself and for our practice. now that you've joined our team at Alliant.
Tim McAndrew (01:12):
Sure. Thanks, Ron. So, I've spent most of my career on the underwriting side and during that time a lot of my focus was on underwriting the exposure within private equity venture capital base. So, really looking at funds of all sizes from the large buyout to the small venture capital firms and ultimately oversaw a team of underwriters where we had grown that area to over 400 private equity venture capital firms. Again, really focused on the various layers within the PEVC space from the relationship with their investors, the portfolio company investment and the regulatory exposure. So, over the course of that underwriting time, I saw a lot of the evolution of whether it was the large buyout deals to the growing SEC interest in the private equity funds during the mid-2014, 2013 timeframe. And then the past five years I've been on the brokering side, working not only with the private equity funds themselves but also the portfolio companies that are fund clients we're investing in.
Ron Borys (02:22):
Tim, I know as soon as your news became somewhat public in the industry, our phones started blowing up because we were inundated with people in the industry who were so excited for us to be working together with you. And, even in just the few days we've worked together, we've seen what a tremendous impact you can have with private equity clients, prospects, etcetera. And maybe just tell us a little bit more about what you think private equity firms and their insurance buyers should be thinking about from a risk standpoint.
Tim McAndrew (02:53):
From a risk standpoint, I think one of the big exposures that I've seen is just kind of the portfolio company exposures. Just the monitoring relationships with those companies. I mean, depending on the ownership interest in the portfolio companies, you have potential for kind of a parent company controlling shareholder capacity. Some of the other exposures that they should be thinking about are just from a regulatory standpoint, the SEC I think even heading into 2022 seems to have even a more of a heightened focus on enhancing the transparency obligations for these private equity funds. So, by that, I mean just the disclosure about fees and expenses that are charged to investors. So are some of the allocated expenses, how is that measured against some of the disclosures in their offering of partnership agreements. So those expenses could include overhead for advisor personnel, compliance expenses, regulatory filings. So, I do think that's one area where we could see, particularly as a result of more SEC exams, there could be potential for follow up formal proceedings against funds. And I think that kind of dovetails with our focus on making sure the coverage is market-leading for our private equity fund clients, as well as prospects, making sure that key definitions within the policy specifically around claim definition, investigation definition, adequately address that potential claim scenario and whether or not there's a subpoena involved, whether or not there's a wrongful act alleged and making sure that the policy is responding in a responsible fashion.
Ron Borys (04:24):
Yes, one of the things we've definitely seen and have been driving is reimbursement coverage for firms that are performing mock exams, certainly, routine exams are becoming more and more prevalent in the private equity space. They've been around forever in the 40 Act mutual funds space. We certainly had been driving that in the hedge fund space and are now also trying to push carriers to provide that coverage to private equity firms, given the increased regulatory oversight and scrutiny. WellTim, you talked about what private equity sponsors and clients should be thinking about from a risk standpoint. Let's make that transition as we think about 2022 from an insurance marketplace standpoint for private equity firms and the private equity industry, whether it's GPL or otherwise. What are some of the hot-button items that you think they should be thinking about or expecting from an insurance marketplace that is still in flex a little bit.
Tim McAndrew (05:12):
Yes, and as I said earlier, I think the underwriting community is still going to be focused on whether or not the funds have had any recent exams they're going to be focused on looking at some of the fund documents, partnership agreements that are shared with investors and making sure that there is adequate disclosure about fees and expenses in those documents. I also think that they're going to be continuing to look closely just at the financial condition of the private equity funds portfolio companies, particularly around the health of the balance sheet, depending on what industry the fund is focused on. I think we've seen, since the pandemic, for the most part, a lot of the portfolio companies actually surprisingly being able to. In the aggregate chapter 11 filings seem to have been certainly less than maybe what was expected at the onset of the pandemic as there was a lot of the monetary policies were providing a lot of capital to help companies restructure or stay afloat where they could now with the winding down of that and the associated rising interest rates in 2022. I think underwriters will probably as they tend to do, trying to look around the corner about what up next with that backdrop is their potential for an increase in possible financial distress or an increase in chapter 11 filings. As we've seen in terms of claims experience, the severity really with these GPL policies is on those instances where you have companies that filed for bankruptcy. You have a creditor committee that gets formed soon thereafter, and they go up the chain to kind of the deep pockets, which are the financial sponsors, the private equity funds. And just from a cost of defense standpoint, we've seen that be very material and painful for the underwriting community. So, despite the fact that there's been kind of favorable results overall from a Chapter 11 standpoint and results there, since the pandemic, I do think that the underwriters will continue to have a focus on that exposure.
Ron Borys (07:04):
I can tell you, Tim, for those who have followed the Alliant growth in the M&A world, one of the reasons we were really excited to have you join our team is that you really kind of were that missing piece, that complementary piece to the GPL, private equity product. I mean, if you look at the work that John Gilbert has done, I would say over the last 5 to 7 to 10 years in the area of due diligence and servicing sort of firms at the portfolio company level, certainly very focused on transactional risk. And then in the last 12 to 24 months, we go out and we hire Dan Schoenberg, who is certainly considered by many as the industry leader, when it comes to tax liability issues, you got a guy like Larry Shapiro, who we hired, who really has a brand and name for himself in traditional rep warranty insurance and has done a great job leading that practice for us. So, we're coming off a record year in our practice in financial institutions. We certainly had probably what could be considered and measured as a record year in our M&A group and having you join our team to start the new year, really kind of kickstarted our energy and our excitement about what we're going potentially to do focusing on this sector.
Tim McAndrew (08:08):
No, absolutely and I'm really excited to work with the Alliant M&A practice with that team and finding ways where we can collaborate on both the portfolio company level in terms of pre and post closed services, as well as over the life cycle of our fund client’s ownership in those companies. And I think with private equity, as we know, as an asset class continues to grow by all estimates, it seems to be about a trillion dollars in dry powder that's out there. So, despite the fact that there might be rising interest rates ahead of us, I still think that money has to be put to work at some point. And I think result in another robust M&A year for 2022.
Ron Borys (08:45):
Well, listen Tim I think it goes without saying, we're certainly thrilled and excited for this next chapter in your career. And there's no doubt that having you join our team and complementing the work that's being done out of our M&A practice clearly be instrumental in helping our clients find a more rewarding way to manage risk. Thanks for taking some time with us, with me and Ryan here today. Definitely plan on getting you out there more often as you sort of get your feet settled and get working on some of the things that we brought you in to do for those of you who looking for more on Alliant and our financial institutions practice or M&A practice, you visit our website www.Alliant.com, but again, be prepared, more to come. You know Tim, I think you're still within your first 30 days, and I'm really excited to see what the future has for us with you as our latest teammates. So, thanks again for joining us here and welcome to Alliant.
Alliant note and disclaimer: This document is designed to provide general information and guidance. Please note that prior to implementation your legal counsel should review all details or policy information. Alliant Insurance Services does not provide legal advice or legal opinions. If a legal opinion is needed, please seek the services of your own legal advisor or ask Alliant Insurance Services for a referral. This document is provided on an “as is” basis without any warranty of any kind. Alliant Insurance Services disclaims any liability for any loss or damage from reliance on this document.
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