Private Equity Firms and Portfolio Companies

Spotlighting the role a risk management firm plays on portfolio analysis for private equity firms

Many private equity firms and their portfolio companies are not in a position to hire a full-time risk manager. However, they can hire independent risk management consultants for the advice they need and to help them achieve their risk management goals. Risk management consultants can also help to counter the “silo effect” that occurs when the insurance industry underwrites within industry-specific guidelines only. This doesn’t allow for any creative solutions and yields repetitive transfer structures with the same results year after year.

The numbers tell the story. As an example, one of CohnReznick’s private equity firm clients hired an independent risk management consultant to conduct due diligence on prospective acquisitions for its 18 portfolio companies. The relationship saved the private equity firm more than $40 million in insurance premiums and increased the portfolio company valuations by more than $100 million.

An Independent Perspective

Independent risk management consultants often start with a full audit of a portfolio company’s exposure to risk through a review of its existing insurance contracts. They often find that the insurance companies are offering relatively generic policies and can recommend changes to the company’s coverage to better target the company’s specific needs. Many companies also find themselves over-exposed and/or under-covered. They may be buying insurance for risks that they won’t realistically face, and components of their current insurance program may not align with their particular risk profile. The consequence of this is payment of excess premiums that could total millions of dollars, reduce the portfolio company’s earnings, and lower the private equity fund’s total return. Gaps in coverage could be even more disastrous.

Independent risk management consulting firms bring a unique perspective to the analysis, negotiation, purchasing, and performance oversight of insurance products and services. Operating from a vantage point that is outside of the insurance sales and distribution system, these consultants can strengthen a financial officer’s ability to obtain optimal transfer-of-risk products and services at the most competitive terms. The risk management consultant will also identify coverage gaps, recommend enhancements, negotiate rates and, most importantly, help the insurance “system” work to the company’s advantage.

Reading the Policy

Most executives from private equity firms and portfolio companies simply don’t have the time to read their insurance policies. A typical insurance policy can run from 100 to 200 pages of highly technical contractual language. Risk management consultants are hired to carefully read through the insurance policies purchased by their clients – often starting with the exclusions and endorsements in the back. Each policy begins with a summary of the insurance coverage followed by page after page of definitions, conditions, exclusions, and endorsements that can often substantially alter, reduce, or even eliminate coverage that the buyer thought was purchased.

“One of CohnReznick’s clients hired an independent risk management consultant to conduct due diligence on prospective acquisitions for its 18 portfolio companies. The relationship saved the private equity firm more than $40 million in insurance premiums and increased the portfolio company valuations by more than $100 million.”

Negotiating the Coverage

Risk management consultants guide their clients through the process of negotiating with their existing brokers and insurance providers, or soliciting and evaluating bids from alternate providers. When the written insurance policy arrives from the insurance company, they carefully review and verify the policy, with all of its exclusions and endorsements, for their clients. They will also carefully examine the levels of exposure that their clients choose to retain through the purchase of high-deductible or high-retention insurance policies. Typically, the formal administration of these self-insured or retained claims is carried out by an insurance company or a Third Party Administrator (TPA). Risk management consultants carefully track the cost of claims and help to ensure that the claims administrator has the resources to handle these self-insurance claims from both a staff experience and an overall workload perspective.

The Due Diligence Review

The value of engaging an independent risk management consultant is especially significant for the due diligence process, when every dollar saved in operating cost can add multiple dollars to the valuation of the company. If private equity firms and their portfolio companies do not carefully understand their exposures and how to request/negotiate for their insurance, they can miss out on discounts, credits, or coverage that insurance companies offer to companies with a similar risk profile. Some portfolio companies with more than $700,000 a year in insurance costs (other than health and pension insurance) have often achieved annual savings from 4 to more than 12 times the amount of the annual fee they pay for the service.

Finally, when a private equity firm is evaluating a potential acquisition, the risk management consultant conducts a due diligence process that analyzes the risk management issues involved and recommends both insurance and non-insurance-related actions where necessary. In many cases, the consultants find significant potential insurance savings that can make a financial impact in getting a deal done.

If you believe your firm can benefit from the services of a risk management consultant, CohnReznick can help by referring you to one of the independent consultants we work with. To learn more, please visit