For the Insurance Industry, PE and BPO Partnerships Provide Innovative Source of Capital Optimization and Increased Multiples
The Insurance Industry is a vast and largely untapped source of potential wealth for private equity investors. Traditionally, the insurance businesses have relied on equity markets, fixed income funds, hedge funds, and investment banks for growth capital. Increasingly, however, insurance firms are attracting capital from PE investors. There are several reasons for the trend, including newer regulations that make it more difficult for investment banks to deploy fresh capital in the insurance market.
I’ve spent the past three decades providing global strategy to insurance, banking and capital markets. I’ve had the opportunity to act both as buyer and seller of the services of the BPO industry. From my vantage point, I see an unprecedented opening in which unrealized efficiencies in the insurance industry can translate into new income for private equity.
Number of PE Investments in Insurance Companies
Private equity investment in the insurance space has been a large factor in recent years, especially of annuity businesses, brokers and service companies. If certain regulatory concerns can be addressed, it has the potential to really accelerate the pace of M&A insurance transactions "Eddie Best, partner, Mayer Brown LLP"
The paucity of traditional sources of capital for the Insurance Industry creates lucrative opportunities for PE investors, and they are showing keen interest in pursuing deals with insurance companies. The mutual attraction makes good business sense on many levels. PE firms naturally seek non-commoditized targets for investments; insurance companies offer a perfect blend of safety, predictable returns and growth potential.
Diversification in investment strategies and attractive yields has led to increased investment in insurance and reinsurance vehicles by hedge funds and PE funds. Premiums for insurance and reinsurance products have increased, owing to catastrophic losses and Hurricane Sandy.
PE funds are also homing in on insurance and reinsurance assets and the investments are prevalent both in insurance underwriting and distribution. A number of PE funds have established specialist financial institution groups to evaluate investment in both private and public insurance companies, many of which are trading at a discount to their book value.
Additionally, since PE firms typically don’t hold majority interests in their portfolio companies, they are not held accountable for regulatory issues.
New and upcoming regulations, however, are geared towards strengthening the policy holder protections as well as more scrutiny and transparency from PE firms.
Nevertheless, the timing is nearly perfect for both sides: PE firms are looking for great investments and insurance companies are looking for reliable sources of capital.
This trend of accelerated PE investments in Insurance firms also excites us here at Sutherland Global Services, one of the world’s largest knowledge- and technology-driven BPO companies. Our research clearly indicates that carefully assembled partnerships among PE, insurance and BPO firms can unleash untapped synergistic value worth billions of dollars.
What would be required to establish those kinds of potentially high-profit partnerships? The key is having an exceptionally strong business process outsourcing organization that understands the needs of both insurance companies and PE investment firms, while having the requisite domain knowledge and operational capabilities for delivering measurable and tangible efficiencies on a rapid timetable.
Our team at Sutherland has identified six specific s categories of Private Equity related activities that can be efficiently leveraged using the services of a Knowledge based BPO partner. We believe these are the foundation for successfully initiating, managing and sustaining PE investments within the insurance segment or for that matter in any industry segment. Here is a summary list of those six partnering opportunities:
- Identify Fund Opportunities –- Evaluate investment themes, prepare detailed presentations highlighting investment opportunities, and establish the niche investment value–proposition.
- Investment Target Identification and Evaluation -- Develop detailed reports to highlight key investment themes leading to a comprehensive short list of target investments; screen investment opportunities based on specific criteria developed in consultation with the fund manager; perform detailed business valuation of targeted companies with a review of value chain, operating and financial parameters. Develop a detailed financial model with revenue and operating drivers, financial projections, valuation using various methodologies; assessing market attractiveness, performing detailed competitive landscape / value chain analysis and commercial due diligence support including checks on suppliers / customers and market trends/risks.
- Optimizing Portfolio Company Performance to Increase Fund Alpha -- Create specialized industry / cluster-based shared services models to help derive synergies from consolidation of enabling functions. Consolidate similar functions of portfolio companies in the same (or similar) sector to improve operational efficiency and rationalize investments in multiple systems and redundant processes; provide analytics support for business transformation, benchmark performance across marketing and operations and evaluate sentiment across the entire value-chain, including stakeholders, investors and customers.
- Portfolio Monitoring and Management -- Assist in active management of portfolio by tracking changing geography/ sector compositions of competitor/ benchmark indices, identifying investment alternatives, modifying investments based on under and over-valued themes/ geographies/ sectors/ companies; assist fund manager by continuous tracking of sector/ portfolio companies recent events news-flow and performance, periodic performance evaluation, market performance monitoring relative to sector/ benchmark indices and evaluation of strategic investment alternatives.
- Manage Investor Relations -- Support the marketing and investor relations desk by developing periodic newsletters supported by industry analysis and white papers on emerging investment themes. Prepare fund presentations for the board and Portfolio Company’s management
- Exit Strategy Support -- Help develop suitable exit strategy for portfolio companies based on market timings, identify divestment route including IPO, stake sale, strategic acquirers, etc.; help prepare investor communications including investment memos and prospectus; carry out IRR analysis based on divestment scenarios.
Clearly, the time is right for a closer relationship between the PE and insurance industries. The financial incentives exist and the market seems primed for making deals. Until recently, the missing ingredient was an experienced BPO partner with domain driven Insurance expertise and a deep knowledge of Business Process Reengineering. A partner that can efficiently, promptly and economically support the PE firms in all facets of operational due diligence and then partner with them to execute and generate cost savings of 30% or more, thereby accelerating the invested entity’s multiple growth. Today, we do have that proven expertise and global infrastructure available in s companies like Sutherland Global Services that can be leveraged at an instance. Knowing the inherent value proposition of this partnership, I predict that its’ just a matter of time before it catches on but the smart money is already leveraging this partnership as we speak!