Professional indemnity insurance (PII) is key for private equity (PE) portfolio companies due to the unique risks they face, especially in high-stakes, regulated, and fast-evolving environments. Here's a breakdown of why it's important and the challenges involved:
Private equity firms aim to maximise the value of their investments. A legal claim against a portfolio company could:
Professional Indemnity Insurance (PII) is designed to provide protection against firms in the event of a claim being made against them for failure to provide and/or negligence in providing a professional service. Portfolio Companies vary in activity and sector, and it is vital that the policy wording is tailored to meet the specific needs of the entity. By engaging with a specialist Broker, the PE house will make sure that the needs of each of its investments are met and that the correct coverage is provided.
Willis has dedicated specialists for sectors like:
This will make sure your PII policy is precisely tailored to the unique risks your portfolio company faces, reducing exposure and enhancing coverage. We have recently developed a bespoke excess cover solution offering up to GBP40m in capacity, which is ideal for fast-growing or transitioning portfolio companies needing adaptable, cost-effective coverage.
In the event of a claim, Willis has in-house claims advocate teams with deep industry knowledge, who can provide efficient handling and support during the negotiation and settlement of the claim.
PI claims can impact investments in various ways at all stages of the investment lifecycle, whether pre-acquisition, during the hold period or at the point of exit:
After identifying a target, if the professional risks are not appropriately assessed during due diligence, vulnerabilities may not be identified, and the deal value can be overestimated. Willis has seen PI claims during a transaction process and, in such instances been able to quantify the potential exposure from a valuation perspective.
PI policies are written on a claims‑made basis, so it’s important to establish where the acquired target’s liabilities will sit for any acts committed prior to completion of the purchase
The costs of a PI claim can be considerable; including legal fees, compensation of damages, fines and penalties. A PI claim can have long‑lasting consequences, including reputational damage. This reputational damage could go further than one portfolio company and could affect the private equity firm by impacting investor confidence at the fund level and even future fundraising.
Claims can take a long time to resolve, senior management may become distracted and inward‑facing, which may lead to missed opportunities and potential loss of revenue.
A robust and mature risk management approach within a company can mean it is perceived as more resilient and capable of long-term growth, which can increase market value at the time of exit. Conversely, portfolio companies with inadequate risk management measures are less attractive to potential buyers and often seen as higher risk; this may result in fewer interested bidders and a greater challenge in obtaining the maximum valuation.
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Comprehensive risk assessments of target companies to understand their maturity will assist with negotiations and avoid deal delays.
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Addressing the unique PI risk exposures at each portfolio company is crucial to protect and maximise the investment value. However, viewing the portfolio holistically rather than as individual investments can deliver benefits such as:
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PE firms remain exposed during the hold period; ensure you respond to any new PI risk management threats or regulations.
At Willis, we understand Private Equity and Professional Risks. By integrating Willis’ expertise in the Private Equity practice – spanning professional indemnity due diligence, portfolio management and tailored insurance solutions - PE firms can mitigate risks, maximise exit valuations and protect investor confidence. Please contact us to find out more.
