We all have insurance. But savvy managers are starting to realize that their insurance relationships are unmined sources of fundraising and deal value. As interest rates fall worldwide, insurers have been emerging as reliable and thoughtful LPs, sometimes more willing than other LPs to support first-time fund managers. And it doesn’t stop there – creative insurers are now becoming exceptional deal allies, working with managers on creative liquidity solutions. If this is an avenue you haven’t yet explored, it’s time to pick up the phone.
Fundraising is a struggle. While it sometimes gets easier as you grow into your second and third funds, it still takes up significant human capital. Many managers we have been working with lately have found success looking beyond the typical LP sources of pension funds and family offices. Insurance companies sit on large piles of cash. They bring in premiums, but often years pass before they have to pay out. Alternative investments provide insurance companies with an avenue for effectively utilizing the cash on their books while at the same time avoiding additional regulatory scrutiny – as insurance regulators typically do not have to approve fund investments. According to Goldman Sachs Asset Management’s Insurance Survey 2019, these investments are only going to grow in 2020, with private equity being the largest target.
But there is another reason to get your insurer on the phone: creating deal value. While most financial sponsors are comfortable with representation and warranty insurance, many are unfamiliar with other forms of insurance risk transfer. Carriers are increasingly willing to write bespoke policies to transfer known risks related to pending litigation or tax issues. A manager may also be able to transfer directly to capital markets (e.g., hedge funds and other financial sponsors) risk that falls outside a traditional insurer’s appetite. For example, insurance brokers and investment bankers at newly formed CAC Specialty work together to find the best home for difficult risks. These bespoke solutions can allow a manager to improve the value of its target by transferring an array of balance sheet reserves to free up cash.
Fundraising and deal diligence take up the majority of time at most funds. That makes finding partners like insurance companies, which can help you with both, incredibly valuable.
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