Private Equity Firms Can Find Synergies in Risk Management
When a private equity company considers an acquisition for its portfolio, whether as a stand-alone operating entity or a bolt-on to existing portfolio companies, the PE firm has an urgency to create value. The nature of private equity funding means that each investment has a finite number of years to deliver returns before the PE firm exits. One way to enhance and protect value in portfolio acquisitions is through effective risk management.
PE firms are sophisticated investors with well-established due diligence processes for sourcing acquisitions. They consider and evaluate risks during due diligence, but ongoing risk management is also needed once a target joins the portfolio. Having a clear picture of an acquisition’s risk management program and risk transfer strategies can help PE firms support the target’s value creation.
Synergies in Risk Management
Factors that PE firms should take into consideration when analyzing risk management synergies include:
Risk identification and assessment
The first step in managing risk involving portfolio acquisitions is to identify and assess the potential risks that could negatively impact the PE firm or its portfolio companies. This includes both financial and non-financial risks.
Understand overall risk tolerance
Culturally and financially, every organization is different when it comes to risk tolerance. Even within the same industry, businesses may differ widely on how much risk they are willing to retain. Determining risk tolerance for a portfolio company involves considering the entity’s financial capacity to bear the risk and the potential impact of that risk on operations and strategic objectives.
For example, a PE firm might acquire a target company that prefers to retain risk rather than purchase insurance. In this case, a careful analysis of the target’s risk management operations is vital. What is the target’s loss experience? How does it fund the losses it retains? High-risk tolerance generally requires an equally high level of risk management to preserve assets and opportunities to create future value.
Regulatory and legal considerations
The PE firm should consider any regulatory or legal issues associated with acquiring a portfolio company. This includes understanding the regulatory requirements to which the target company, or combined entity if bolted onto an existing portfolio company, may be subject.
Operational considerations
A bolt-on acquisition for an existing portfolio company can create significant value and scale but integrating those operations can be tricky. PE firms should examine both operations closely to identify potential barriers to a smooth integration.
Cultural compatibility
A target company’s culture should be compatible with the General Partner for a successful private equity investment. A clash between operating and risk cultures can lead to difficulties that may unravel the investment.
LineSlip’s Private Equity Solution
LineSlip offers a centralized view of risk management and insurance data for PE funds and their portfolio companies. Tracking, managing, and analyzing current and historical data in real-time gives PE firms a significant advantage in enhancing their risk management programs. For more information on how LineSlip Solutions helps risk decision-makers in private equity, please reach out here.
And if you’re interested in how private equity firms can create and enhance valuation with insurance and risk technology, check out the recording of our latest webinar, “Creating Value through Insurance & Technology — Beyond Procurement". If you’re interested in becoming better equipped to navigate and thrive in today's challenging landscape that private equity firms operate in, download our eBook, “Insurance Cost Optimization Strategies for Private Equity”.