A leading global U.S. based Private Equity firm secures its investment in one of its portfolio companies through ongoing operational risk management & transfer with the goal of meeting or exceeding its target IRR and its investors’ expectations.
Challenge
Directors of a leading Private Equity firm based out of New York were keen on managing Operational Risk for one of their large portfolio companies. They were also interested in knowing how their insurance coverage responded to the portfolio company’s operational loss scenarios.
Discovery
We discovered that one of the portfolio company’s insurance products, which was also its largest insurance purchase, had Insurance Basis Risk* of over 90%. We devised a plan of initiatives for the portfolio company to adopt in order to (a) increase the probability of payout on its existing insurance coverage; (b) manage and transfer its operational risks for the ultimate security of the PE firm; and (c) provide the PE firm with the ability to trigger the portfolio company’s insurance in the event of an alarming underperformance in IRR.
Impact
- The existing portfolio company insurance was re-structured into an Operational Risk Swap.
- Insurance Basis Risk* was lowered to below 10% and maintained at that level at each renewal.
- Strategic operational changes were made based on the portfolio company’s newly measured operational risk premium.
- The PE firm is looking to integrate a lower risk premium within its valuation models upon the sale of the portfolio company in order to boost its marketability and yield a higher Sale price.
*Insurance Basis Risk: probability of non-payment or delay in payment of Insurance.