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Insurance for private equity funds:
Everything you need from a specialist broker


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The private equity industry is a driver of change in many areas of the global and German economy. While buy-and-build strategies have also found their way into our industry of insurance brokers, we as Risk Partners are the specialists for PE funds themselves when it comes to their own risk management. Last but not least, the challenging interest rate environment shows that the wind can change quickly and investors have to deal with disappointing returns. The will to claim damages is palpable.

The increasing complexity of regulations poses a growing risk for private equity funds, and not only at the portfolio company level. Fund structures, regulatory and tax systems are subject to constant change. Furthermore, the rules for marketing alternative funds and compliance requirements relating to FATCA/CRS, AML/KYC, security and data protection have introduced additional layers of complexity. We have also seen an increase in cyber criminals targeting private equity funds for years, which will certainly continue to increase in times of technologies such as ChatGPT or Alibaba's Ernie Bot. In addition, we are seeing cases of loss in secondary buyout transactions in particular, partly driven by the new fund's failure to achieve its return targets.

Risk Partners offer you comprehensive solutions for insurance and risk management over the entire life cycle of investments. In the second half of the year, together with our partner for M&A insurance, we will be taking a closer look at exits in particular - whether private (M&A insurance such as W&I insurance) or public (M&A insurance / POSI insurance & D&O insurance where applicable) - as well as best practices in a webinar specially designed for VC and PE funds.

Our partners

In order to insure even complex fund constructs, we are in personal contact with all leading risk carriers in continental Europe and the UK insurance market to find innovative solutions that suit your needs.

 

Structured risk dialog according to four fields:

In a holistic dialog with our clients from the private equity sector, we cluster the strategic risk dialog according to four subject areas, for which we then discuss potential risk transfer.

  • Civil law claims against the fund or the management and/or distribution company (a)
  • Civil law claims against the fund management (private liability) (b)
  • Risk from cybercrime (e.g. the redirected capital call, CEO fraud / "fake president") (c)
  • Criminal claims and regulatory investigations against employees or the fund management (d)

The answers to the risk discussion can be very individual. Compared to our VC clients, risk management at deal level also plays a more important role on both the buy and sell side (keyword: M&A insurance). For example, one GP may know a reliable network of criminal lawyers and prefer to bear the costs of such a process himself, while the added value of criminal legal protection insurance outweighs this for other GPs.

D&O / E&O insurance as a central component

The risk transfer of civil law claims from (a) and (b) is less controversial. Irrespective of whether a KVG is set up as a German GmbH & Co. KG structure or, for example, a Luxembourg SICAV, the transfer of these risks via special E&O and D&O insurance policies is particularly widespread among risk-conscious GPs. While E&O insurance essentially has the task of examining and, if necessary, defending against claims arising from errors in professional services or advice, e.g. based on marketing/contractual documents (presentations, Limited Partnership Agreement (LPA), Private Placement Memorandum (PPM)), or indemnifying against such claims in justified cases, D&O insurance has the important function of covering personal liability (including that of board members) both internally and externally. We frequently see claims against the management of funds in connection with the misuse of company funds, misrepresentations of fund assets in investor reporting, breaches of fiduciary duties and non-compliance with regulatory provisions as well as allegations of non-compliance.

In addition, it is advisable for private equity companies to strive for harmonization of insurance cover between portfolio companies and the private equity company itself ("don't put all your eggs in one basket"), as there are advantages to forming a different insurer or different D&O insurance consortia. One keyword here is accumulation clauses in terms and conditions, which could then become relevant in the event of a claim.

Sidekick: The "Whistleblower Protection Act" came into force on July 2, 2023. This should also make it necessary for your capital management company to set up a whistleblower system, as otherwise there is a risk of substantial fines. Is your D&O/E&O insurance equipped for this? We would be happy to check this for you.

Our broker terms and conditions "Risk Partners D&O/E&O Moonshot Protect" offers leading insurance cover

Risk Partners D&O / E&O Moonshot Protect for private equity funds from a specialist broker

  • In order to avoid confusion between two insurers in the event of a claim, we see the added value of so-called "blended cover" for our PE clients, in which the Directors & Officers (D&O) insurance is combined with the Errors & Omissions (E&O) insurance in one insurance cover. With our "Risk Partners D&O/E&O Moonshot Protect", we are one of the very few specialist insurance brokers to offer this central cornerstone of civil law cover (a) and (b ) with a fully written set of terms and conditions. However, an advanced risk management strategy can also justify the choice of two separate insurance policies, especially if the D&O insurance requires a higher level of risk or security than the operational E&O risk. In this case, there would be two Risk Partners terms and conditions.
  • Accurately covering and securing positions in portfolio companies is essential. Through our partnership with LegalTech Fides Technology, you have access to advanced governance and compliance software solutions that enable clear and simple management of legal housekeeping issues while reducing your personal liability risk. We would be happy to explain how this is ideally integrated and how you can benefit from discounts on your D&O insurance premiums by using the Fides software. (Risk Partners offers a premium discount for the use of Fides software).
  • Worldwide industrial criminal legal protection insurance (as required as partial cover for management or as stand-alone insurance for all employees), e.g. for comprehensive (criminal) legal investigations by (supervisory) authorities and regulators (e.g. BaFin, CSSF).
  • Automatic pension cover for newly launched, additional funds or co-investment vehicles ("SPV clause") under the fund structure/holding company.
  • Automatic co-insurance of third-party mandates for new portfolio companies / investments.
  • Additional limit on defense costs for third-party mandates at a portfolio company.
  • Additional limit on defense costs for employees in IPO committees.
  • Comprehensive follow-up liability regulation in the event of an exit through the sale or IPO of a portfolio company/investment.
  • Preparatory actions in the context of an IPO of the portfolio company are also insured for clarification purposes.

What influence does the fund profile have on your insurance premium?

When insuring private equity funds, insurers take several key factors into account when calculating premiums:

  • Fund volume: The target fund volume of your PE fund has a significant impact on the risk profile from the insurer's perspective. With growing fund volume / AuM, the insurer assumes changing internal structures, including compliance and accounting requirements as well as an increasing number of investments to be managed in portfolio companies. Larger funds mean more complex investment strategies and management tasks, which can increase the susceptibility to errors, but in any case lead to higher loss amounts.
  • Investment strategy: As part of the investment profile, insurers look in particular at the sector and geographic focus, the ticket size and the GP's value creation strategies. As an example, funds with investments in the USA have a somewhat more difficult time, as do restructuring funds (insolvency risk), which have a more challenging time on the insurance market.
  • (Presumed) management experience: The quality of management is a decisive factor for above-average fund returns. The experience of the management team, their professional background and track record are important "proxies" for the insurer's risk assessment, which in turn influences the setting of premiums and fundamental underwriting decisions. This is particularly relevant for a team's first PE fund.

Highlight GP-led secondaries: We are also increasingly seeing this type of secondary buy-out among our clients. As an exit route for LPs, however, this has caused additional costs for LPs in the standard terms and conditions, which we could now "capture" with our Risk Partners D&O / E&O Moonshot Protect 2024, so that our clients no longer incur any additional costs - despite the new fund construct.

Special criminal legal protection insurance for private equity funds

Criminal liability insurance is the ideal complement to the liability cover provided by D&O and E&O insurance. It is particularly essential in the case of investigations by supervisory authorities, which are carried out due to the criminal nature of these investigations. This is because partial cover under D&O insurance generally does not offer comprehensive protection - this also applies to the offers under our Risk Partner D&O / E&O Moonshot Protect. 

Why is this the case? D&O insurance, the insurance cover of which is normally regulated in a comprehensive set of terms and conditions of around 30 pages, is to be simplified and summarized on half a page. This does not necessarily provide for truly customer-friendly regulations. We therefore recommend that our clients actively remove these benefits from the terms and conditions in order to reduce the obligations (keyword: reduction of obligations). On the other hand, partial coverage in the area of criminal law protection within the D&O insurance can be decisive if there is no possibility of separate coverage. It should be noted that legal expenses insurers classify private equity funds and banks as financial institutions and that claims such as cum-ex or cum-cum are unfortunately also relevant for PE funds. In this context, we at Risk Partners are conducting educational discussions about the business models in order to distinguish PE funds from this loss-prone industry on insurers' books.

In conclusion, we recommend that every client investigate the legal protection market with regard to this option and ideally take out special criminal legal protection insurance.

What added value does special criminal legal protection insurance offer?

  • Legal costs cover: Special criminal legal protection insurance covers the costs of legal representation of your company or yourself in criminal or regulatory offense matters.
  • Protection against unfounded accusations: GPs or investment managers are often involved in legal disputes that later turn out to be unfounded. This insurance protects you against financial losses in such cases, which, depending on the initial situation, a KVG may not cover.
  • Expert support: You have access to experienced lawyers who specialize in criminal law matters.
  • Early conflict resolution: The insurance can also cover the costs of alternative dispute resolution procedures such as mediation or arbitration in order to resolve conflicts early and cost-effectively.
  • Customizable policies: The insurance can be tailored to the specific needs and risks of your KVG and fund construct(s), so you only pay for the protection you need.
hacker_mind

Cyber insurance / crime insurance for private equity

Private equity clients are considered "high-value" targets for cyber criminals. Legislators have also addressed this risk and are raising the requirements with the Digital Operational Resilience Act (DORA Regulation) for fully regulated capital management companies and harmonizing them in the EU single market. The importance of cyber security has certainly increased dramatically in today's digital landscape, including in the increasingly digital PE business models (keyword: deal sourcing). However, despite our ongoing advice to our PE / VC clients, we continue to see a reluctance to install comprehensive protection through interlinked cyber and fidelity insurance. On the other hand, there is an increasing number of cyber insurers who have refrained from taking on new risks in the PE / VC environment due to an accumulation of claims.

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What KVGs should be aware of with regard to preventive measures and risk transfer:

 

  • Sensitive information: Private equity firms often have access to sensitive information about their portfolio companies, such as financial information, customer data and confidential business plans. This information can be valuable to attackers as it can be used for financial gain, to gain a competitive advantage or simply for blackmail (see EY).
  • High assets: Private equity firms often manage large sums of money, which makes a successful attack correspondingly profitable.
  • Limited security resources: Private equity firms often do not have the same level of security resources as some of their portfolio companies (vice versa), which makes them more vulnerable to attack.
  • Outsourcing: Private equity firms often have complex service provider structures, including third party providers and other law firms (also a focus for cyber criminals!). This can be a security weakness as attackers can exploit vulnerabilities in third party systems to gain access to a private equity firm's networks.
  • Remotework: With the increase in remote work, it has become easier for attackers to exploit vulnerabilities in home networks to gain access to a private equity firm's network.


The combination of crime and cyber insurance protects against financial losses caused by fraud, embezzlement, theft, social engineering, phishing and other crimes committed by external perpetrators as well as by your own employees or trusted individuals. Discover more about these real threats, fraud schemes and the best preventative measures to effectively counter these risks in our webinar with the experts from Control Risks. In addition, prepare your KVG for the new possibilities in times of AI mentioned at the beginning, which will enable new attack scenarios and unfortunately also be successful.

In the event of a #cyberattack, the company affected initially bears the main responsibility. However, managers can still be held liable if they do not take sufficient steps to ensure #cybersecurity.

Webinar agenda :

  • What is the basis of liability for managing directors?
  • What are the main personal liability traps for directors and officers?
  • In focus: We show you how managers can avoid liability traps in the event of cyber incidents
    Q&A: Space and time for your questions to us

Our Managing Director Florian and Reiner Wetzel (Account Manager at Control Risks) discuss this in #29 Minutes. 

Play video

Guide: How private equity funds and their fund managers protect themselves against liability risks

Risk Partners GmbH's PE guidelines, which we update regularly, provide sound information on the necessary (and less necessary) insurance policies that you as a fund manager need for effective (personal) risk management. This helps you to avoid liability risks and to ensure the protection of the fund assets or the PE fund company. In addition, we offer an anonymized analysis from our benchmark database, which provides you with more transparency and opportunities for comparison with your colleagues in terms of:

  • Amount of the sums insured
  • Structure of the limit structure (maximization and "shared limits" vs. "separate limits")
  • Premium comparisons
  • Claims (anonymized)

We relate these parameters to the fund volume, investment focus and the year in which the D&O/E&O insurance was first placed. A valuable tool for your next GP meeting.

Public liability (office liability insurance)

Office liability insurance is a form of liability insurance that protects private equity companies against financial risks that may result from third-party liability claims. In contrast to E&O insurance, however, it explicitly does not cover "genuine financial losses", but "non-genuine financial losses" (e.g. compensation for a guest's laptop destroyed by a glass of water being knocked over). Due to the lower risk, office liability insurance also costs only a fraction of E&O insurance and is recommended as cover due to the low premium.

Added value of office liability insurance:

  1. Liability cover: Office liability insurance protects you against the financial consequences of claims for damages if you or your employees inadvertently cause damage to third parties, be it physical injury, property damage or financial loss.
  2. Personal injury and property damage: Office liability insurance also protects you against the financial consequences of personal injury and property damage. This means that damage to persons (e.g. bodily injury) or property (e.g. damaged property) caused by third parties is covered if it is caused during your professional activity.
  3. Damage to rented property: This point is particularly relevant if you rent office space. Office liability insurance can also cover damage to rented premises if it is caused in your office. For example, if a fire breaks out or water leaks occur and damage is caused to the rented property.
Our services

A holistic approach to risk management

We place identified and insurable risks on the global insurance markets for you in the best possible way. We know that this does not always solve all your challenges. Strong growth can lead to bottlenecks in the insurance department and/or a professionalization of risk management may be necessary. We can help you with this.

For startups, scaleups & life sciences companies

Risk management as a service

It is particularly important for start-ups and pre-IPO companies to develop simple and less complex (risk management) concepts. These must identify, evaluate and transfer the key risks in order to avoid the insolvency of the business model in the worst case scenario.
-> see the Watchmaster case, for example.

From a risk management perspective, it is essential to create a common risk awareness in the first step, which is largely supported by the risk strategy. Convince your investors in the due diligence process of your next financing round with a risk report and a deep understanding of your risks, thereby safeguarding against risks that could threaten your company's existence.

On the basis of sound risk and insurance management, we develop a decision-making basis for your company. You decide what to insure and what not to insure. Because not every risk is worth insuring. Here is our basic approach:

  • Risk identification in joint risk workshops, coupled with our experience in industry-typical risks for life sciences, FinTech, tech companies and venture capital firms
  • Risk analysis and assessment (software supported on request)
  • Development of a joint risk management strategy (Which risks can be accepted, avoided, reduced or transferred?)
  • Determination of your company's risk-bearing capacity and risk acceptance and impact analysis on KPIs in your balance sheet (how much risk can you afford or do you want to take?)
  • Creation of an insurance strategy (what risk should be borne by the company, what should be insured? Goal: Minimization of risk premiums)
  • Implementation and placement of risk and insurance strategies on the insurance market

 

Your added value through active risk and insurance management:

  • Sustainably increase the security level for your company
  • Value-oriented risk management will boost your valuation in the next financing round
  • Significantly reduce your insurance costs
  • Manage and process claims more efficiently
  • CONSCIOUSLY take risks and promote growth!

 

The importance of this for young growth companies was demonstrated not least by the Silicon Valley Bank case, which was identified as part of a risk management process and - if necessary - would have led to an adjustment of the banking/treasury strategy.

For listed corporations and SMEs

Rent-an-Insurance-Manager

We place identified and insurable risks on the global insurance markets for you in the best possible way. We know that this does not always solve all your challenges. Strong growth can lead to bottlenecks in the insurance department and/or a professionalization of risk management may be necessary. We can help you with this.

On the other hand, many companies do not (yet) have an insurance department with their own staff or cannot find suitable personnel. Above a certain size, your industrial risk and insurance issues require professional support to ensure that your investments and strategies are adequately protected. This is where we provide you with support tailored to your needs.

Building up your own staff to deal with your internal insurance issues is time-consuming and cost-intensive. This work is often carried out by the head of finance or legal, for example, but not by professionally trained insurance staff.

Our solution for your company: Rent-an-Insurance-Manager

  • Rent your "own" insurance department for a certain period of the year
  • Simply outsource the management and administration of insurance contracts
  • Reduce costs - increase security

Our "Rent-an-Insurance-Manager" concept allows you to hire core competencies in the field of insurance for a limited period of time and tailored to your needs, as if you had your own staff in place.

As an outsourced insurance department, Risk Partners manages and handles your company's insurance work, e.g. as an in-house contact for insurance issues, an interface to your insurance broker or to your insurers.

Your added value through Rent-an-Insurance-Manager:

  • Efficient use of personnel and costs. Existing processes are optimized while at the same time freeing up your internal resources in their specialist areas (legal/finance)
  • "Bookable on a temporary basis", for example if you have staff shortages during peak periods such as renewals or annual financial statements and need support at short notice
  • Saves time: freed-up capacity can be used in other core areas of your company
  • "Professional sparring" relieves and supports your existing team with a second opinion
  • Professional support for your insurance issues through the use of qualified insurance expertise
  • By increasing the quality of work, you also reduce risks for your management's liability
Table of contents

Blog / News

Finance Day 2024

Growth capital for biotechnology and life sciences - Finance Day 2024 A few days ago, Jutta and Florian from our team attended Finance Day 2024 at the analytica trade fair in Munich. The event once again offered exciting expert panels on current financing and capital market issues for life sciences companies. As the panels focused on three of our key consulting areas, namely life sciences, venture capital and IPOs, a visit was of course a must for us as a specialist insurance broker. Our team has

Read more "
April 19, 2024

We provide information on liability risks for VC funds in the VC Magazine

In December, we were asked by VC-Magazin whether we could provide insights into liability and risk management issues relating to venture capital funds. With pleasure! Together with the team, Florian not only provided insights into current challenges, but also suggested practical solutions to effectively minimize and sensibly transfer the risks of a VC fund. You will therefore find in the VC-Magazin article: Added value of customized insurance concepts for VC funds (focus: D&O/E&O insurance #Moonshotprotect), key measures for risk prevention

Read more "
January 26, 2024

Digital and effective prevention of directors' and officers' liability by Risk Partners & Fides Technology

Innovation by Risk Partners & Fides Technology Now on Vimeo and Soundcloud: get practical tips from experts with high relevance for avoiding liability for business managers. Question unanswered? Content: Personal liability is a constant sword of Damocles hovering over managing directors in everyday life. The standard of care is strict and directors bear the burden of proof. In cooperation with the distinguished corporate lawyer Eva Homborg (Esche Schümann Commichau) and the governance expert Philippa Peters (Fides Technology GmbH)

Read more "
January 12, 2024
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Guide to insurance
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Best practices and benchmarks for purchased insurance, sums insured, annual costs for private equity funds.