Management and Professional Liability Insurance For Independent Sponsors

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Independent Sponsors (“Sponsors”) are experienced investment professionals or senior industry executives who seek to acquire companies in targeted industries using personal capital as well as capital raised from third parties.  Once a prospective acquisition has been identified, the Sponsor presents the opportunity to potential investors. The Sponsor raises capital and holds the portfolio company investment utilizing a special purpose vehicle (“SPV”).  This deal-by-deal SPV approach is an alternative to a traditional commingled investment vehicle (or “Fund”) where investors agree to commit capital to a “blind-pool” that the Private Equity or Venture Capital Fund manager will use to make multiple investments over a stated investment period (typically 5 – 7 years).

 

The SPV model can be very attractive for sophisticated investors, family offices and even private equity funds for a variety of reasons including, but not limited to, the following:

  • No capital commitment up front.
  • Access to investment opportunities that may be overlooked by larger Fund managers.
  • Shorter investment duration; the typical Fund’s lifecycle may last up to 20 years.
  • Investment discretion remains with the investors. The control over investment decisions may be critical to investors with social or environmental investment mandates.
  • Reduced management fee expenses.

 

Regardless of the model’s advantages, the Sponsor’s fundraising and investment activities create liability exposures similar to a Fund manager.  Whether the Sponsor manages one asset or multiple investments, raising capital and investing in Portfolio Companies subjects the Sponsor to possible legal action from many sources including, but not limited to, SPV investors, Portfolio Company founders, management and employees, creditors, vendors, securities regulators and other governmental agencies.  Settlements and defense expenses can be extraordinary even for frivolous complaints.  Despite the litigation exposure, many Sponsors do not avail themselves to prudent risk management tools such as management and professional liability insurance.  This product, commonly referred to as General Partners’ Liability (or “GPL”), was originally developed for Fund managers; however, the product has evolved to address the coverage needs of all types of asset managers including Sponsors.

 

In response to increased Sponsor interest, One80 has worked with our carrier partners to expand and enhance existing GPL policy language to provide the broadest coverage possible as well as introducing a flexible premium feature that is unique to the Sponsor investing model. With respect to coverage, One80 has crafted a manuscript endorsement offering the following benefits:

  • Broad definition of Asset Management Services
  • Expanded scope of Investment Fund/Operating Entity encompassing all types of investment vehicles including SPVs
  • Favorable ODL language
  • Automatic coverage for new SPVs created during the Policy Period
  • Flexible payment options
  • Inquiry Coverage
  • Successor-in-Interest Coverage
  • Crisis Fund Coverage
  • Employment Practices Liability and Fiduciary Liability are optional coverage features

 

With respect to policy premiums. insurers calculate the premium using a base rate that is attributable to committed capital and then consider such other factors as investment strategy, industry focus, portfolio company performance, leverage and prior litigation history.  While there are common underwriting considerations, Sponsors do not utilize commingled fund vehicles and raise capital for each and every deal.  In recognition of this rating base issue, One80 has developed a flexible premium plan that considers how insurers assess GPL premium for Sponsors.

 

For more information on GPL coverage and the flexible premium plan, please contact:

Jonathan Legge

Senior Managing Director

Private Equity and Transactional Liability Practice

e: jlegge@one80.com

p: 203-315-3499 (ext. 5908)