The headlines on the business pages trumpet a deregulatory attitude in the current White House, but private-equity firms know better.
For them, regulatory scrutiny has only intensified.
Just ask the firm that ended up in hot water for not properly allocating tax-return preparation expenses between the firm and the funds it advised.
Or the advisory firm that drew a rebuke for charging funds for employee costs that fell outside of the allowable expenses outlined in its limited partnership agreement.
The SEC’s Office of Compliance Inspections and Examinations has definitely put PE firms under the microscope and it’s not expected to turn down the heat any time soon.
OCIE isn’t interested in just fees and expenses. There’s also been increased scrutiny surrounding blockchain technology, with a special focus on registration violations involving Initial Coin Offerings, or ICOs, and cryptocurrencies.
Regulators also have been paying close attention to cybersecurity issues. Under the law, registered investment advisers are required to adopt written policies and procedures designed to prevent and detect cyber breaches. More than a few have yet to do so.
There are, of course, insurance policies that can help PE firms defend themselves when they run into regulatory issues. While always smart to have, these policies don’t go far enough, especially when we know that insurers will sometimes try to exclude or severely limit coverage for government investigations.
So, what’s a PE firm to do? How can it do a better job of protecting itself, its partners and investors?
It starts by understanding that any broker can place a Directors’ and Officers’ Liability insurance policy. The important question to ask is, does the broker you’re about to hire have the insights to identify risks in your deal and can they help you evaluate, facilitate and close potential transactions?
The only way to do the above is to apply the same principals of accounting and legal due diligence to the host of questions related to risk and insurance.
Risk and insurance due diligence services require a disciplined analysis that allows PE firms to evaluate the adequacy of their target’s risk and insurance programs as well as project post-close costs.
Ideally, risk and insurance due diligence involves:
Beyond that analysis, there’s another critical area to examine – the ability of your broker to bring to bear economies of scale to get the most from your buying power and lower your insurance costs over the life of your firm’s investment and beyond.
There’s more we can say here, but the bottom line is this: Understanding and managing the risks involved in any deal can be challenging. The right insurance broker, however, can help identify and tackle exposures – whether fee-, blockchain- or cyber-related, among others – to help a buyer properly determine the value of an asset and protect against post-transaction liabilities.
In other words, what we want, ultimately, is make those OCIE audits a non-event.
Andrew Mahoney is an Executive Vice President at CCIG. Reach him at Andrew.Mahoney@thinkccig.com or 720-330-7925.
CCIG is a Denver-area insurance brokerage with personal and business insurance clients nationwide. We do more than make sure you have the right policy. We also help you lower your long-term cost of insurance with our risk and claims management expertise and a commitment to service excellence.Back to Resources