Global Due Diligence Coordination - Why Using Local Providers Matters
More than ever, private equity firms and portfolio companies are looking outside of their home country for their next acquisition, and it’s not just the BRIC’s or Mexico anymore. Locations like South Africa, Turkey, Latin America, and the Middle East are being mentioned in conversation as often as Florida, California, New York and Missouri.
In most countries, the level of sophistication and competitiveness of the insurance and private equity markets follow a corollary path. Robust markets come with heavy regulation that makes them evolve and react slowly. Developing markets make basic Western standards difficult to implement and accept. Either type of market creates challenges and opportunities for insurance brokers and investors alike.
Less than ten years ago some regions of the world did not have a competitive insurance market and, as a result of the limited product offering, it was easy for a non-resident broker to review the insurance that was in place. Today, those same markets are developing new products and services rapidly, which makes it vital to have real time local knowledge during the due diligence process. That can only be obtained by using an insurance broker that is located in the same country as the target company.
In addition to their insurance knowledge and experience, local brokers can draw on and leverage resources in order to complete an assignment on time. Examples of those resources, and their unique motivating factors, are as follows:
- Informational Advantages: Having access to local periodicals, negotiating terms and conditions in the insurance market every day, and understanding the culture and language of the country brings tremendous value to the due diligence process.
- Network Advantages: Some times it is important to call on trusted advisors during due diligence in order to discuss deal related issues on a “no-name” basis. These individuals can include lawyers, accountants, underwriters, and even other insurance brokers.
- Reputational Incentives: Professionals that are located within close proximity to a target company clearly have more to lose and gain from a reputational perspective than outsiders.
- Geographic Proximity: A site inspection or face-to-face meeting with management may be necessary in order to complete a due diligence assignment. The only way that this can realistically happen is if the broker performing the analysis is within close proximity to the target.
In addition to the resources and tools at their disposal, local brokers have a real time understanding of important insurance concepts that can have a significant impact on cost and the level of protection provided. Being able to understand and articulate the salient issues in an insurance program are essential to performing a thorough and meaningful analysis. Some examples of these concepts and issues include:
- Employee Benefits: Common, and typically high priced items, such as medical, retirement plans, and workers’ compensation are afterthoughts in many countries because the coverage is compulsory and provided by the government through their tax scheme. In many countries, the same government organization handles the payment of claims irrespective of the cause of the illness/injury (e.g., whether work related or personal).
- Legal and Regulatory Uncertainty: There can be a tremendous amount of uncertainty regarding the legal and regulatory landscape in foreign jurisdictions. As a result, our clients typically obtain as much insurance protection as possible around the transaction. Warranty & Indemnity insurance (also known as “Reps & Warranties”) can provide enough comfort for a new owner to make a transaction possible.
- Low Premiums: Many times there is an inverse correlation between the type of coverage that a policy provides and the amount of premium that is charged. It is possible that a policy that costs $100,000 in the U.S. will cost $2,500 in another country yet offer very similar coverage.
- Non-Compliance Penalties: While the premiums may be low, the ramifications for being out of compliance at the time of loss are very high. Depending on the jurisdiction, penalties can include incarceration, travel restrictions, excessive taxation, or even death (no kidding).
- Terminology: Some of the most basic words used in the insurance market every day have completely different meanings in other countries. Some very important coverage issues can be missed if they are misunderstood by the person performing the review.
- Lack of Efficiency: A typical U.S. insurance program includes one insurance company for all states and for all lines of coverage with the final purchasing decision made by one person. Middle market multi-national companies tend to let local management make their own insurance purchasing decisions without taking into consideration potential redundancies in coverage, effort, and cost. A local broker knows in real time what coverages can be controlled from their country and can communicate that to the brokers in the other countries where the target company operates.
In 2010, we created Equity Risk Partners Global – the only independent insurance broker network focused exclusively on the needs of private equity firms and portfolio companies. In the Equity Risk Partners Global model, a broker in the target company’s jurisdiction will follow the Equity Risk Partners process and perform due diligence on your behalf. This results in an unmatched level of attention to detail on every deal – regardless of size – which no other insurance broker will provide on a global scale. Equtiy Risk Partners is also a member of the Worldwide Broker Network. The largest and most prestigious insurance broker network in the world.