WSJ-PE Beat: Private Equity Embraces M&A Insurance

By Nicholas Elliott

Private equity deal activity may be lagging in the broader mergers & acquisitions boom, but private investors are ahead of the game when it comes to taking out insurance on deals.

In a report released last week, Marsh said there has been “dramatic growth” in transactional risk insurance this year in the U.S. market as well as worldwide growth overall.

Karen Beldy Torborg, global leader of the company’s Private Equity and M&A Services practice, was quoted saying that insurance is being used to complete deals “and we don’t see this trend subsiding any time soon.” Acquisitions involve risks of various kinds, but insurance is a way of reducing those risks and bringing both sides to a final agreement.

Marsh said private equity firms are the heaviest users of this type of insurance, a trend backed by a panel of brokers and insurance experts convened by risk information provider Advisen on Thursday.

They said demand for such products is dominated by “mid-market” firms doing deals as small as $20 million, with the cost of insurance sometimes making it prohibitive for larger M&A deals and corporate acquirers often preferring to “self-insure” or take on the risks for themselves.

But they cautioned that buyers can find underwriters insisting on exclusions from policies where due diligence on the target isn’t seen as sufficiently robust.

Such exclusions are made for one of two reasons, said Jeff Rubocki, a senior managing director at insurance brokerage firm Krauter & Co. and panel participant. One reason is a lack of information. The other is the underwriter doesn’t want to take on a known risk, “and there’s nothing you can do about that,” said Mr. Rubocki.