As the credit markets have tightened and deal flow has slowed, Private
Equity firms have begun to focus on the operational efficiencies that
may exist within their portfolio of companies. While Private Equity
firms have historically looked to leverage a number of “low hanging
fruit” areas (office supplies, payroll administration, etc), until
recently there had been hesitation to tackle one of the largest items
on each company’s P&L: Employee Benefit plan costs.
Why are there so few EB Portfolio
Programs to date?
- Firms were too busy doing deals
- A particularly sensitive control consideration; portfolio
company decision makers and Private Equity firms have been
reluctant to force the issue regardless of potential savings
- Lack of Private Equity firm willingness to take on
administrative duties associated with a consolidated program
- Concerns about perceived barriers for portfolio companies to
spin-off once sold
Why is now the right time
for pursuing this opportunity?
- Slow down of new deals have turned Private Equity firms’ focus
to operational efficiencies within their portfolio
- Investor ROI demands are increasingly overruling political
sensitivity barriers
- Few additional administrative duties are required; all of which
can be outsourced
- Portfolio Programs can be structured to facilitate spinning off
divested companies
- Health insurance carrier market consolidation has reduced the
number of viable plan vendors, increasing the likelihood of
commonality of carriers and plan designs within the portfolio
In addition, Equity Risk Partners (ERP) has begun to see smaller
companies within a given portfolio (i.e., less than 200 employees,
which are the most susceptible to market pricing cycles and coverage
restrictions, and receive little or no benefit from favorable loss
experience), as well as potential acquisition targets, pressing
for the opportunity to participate in a portfolio program.
ERP’s objectives in working with our Private Equity clients on
this front, the basics of a portfolio program structure, and next step
considerations are as follows:
Objectives
- Evaluate a leveraged group purchasing alternative to the current
employee benefits programs in force at the various portfolio
companies
- Recommend a strategy that achieves premium cost reductions and
maintains the flexibility to address individual company needs
- Develop an implementation timeline
Portfolio Program Basics
- All portfolio companies purchase coverage from the same
insurance carrier/administrator (group aggregation purchasing);
eliminates underwriting concern of risk fragmentation
- Pooling of employee base/leveraging affiliation with the Private
Equity firm
- Streamline the type and the amount of benefits being offered
Next Steps
The Portfolio Program development process is a three-phase
operation. While it would appear that the second phase, the marketing
and securing of costs of the programs, would be the most important, we
believe that the first phase is the most critical to ensuring a
successful program. It is in this first phase that the input of the
decision makers at each portfolio company on their benefit program
philosophies are solicited and their sign-off on the structure of the
recommended plan designs and objectives is secured before the
marketing process is begun. Our experiences have consistently shown
that portfolio company decision makers have a more defensive position
towards the program if they are not engaged at the outset.
- Phase One - Initial Employee Benefits Analysis
- Gather information and analyze current and historical benefit
programs and claims for common themes and trends to leverage and
/ or address
- Meet with each portfolio company’s management team to gain
an understanding of the strategy and goals for that company’s
employee benefit plans
- Identify and recommend go forward modifications and capacity
for standardization of current coverages for the portfolio
companies as an aggregated group
- Phase Two – Marketing of Portfolio Program
- Prepare Request for Proposal (RFP); distribute to viable
carriers/vendors
- Evaluate responses for competitiveness and appropriateness
- Present results to all portfolio companies; coordinate
finalist presentations
- Phase Three – Decisions, Communication and Implementation
- Select best carrier/vendor partner to operate the Portfolio
Program
- Develop multi-faceted communication campaign to facilitate
open enrollment process
- Establish administrative implementation and on-going plan
management parameters
Timeline
The development of a portfolio program, from initiation through
implementation, is a six month time process. Critical points in the
timeline are as follows:
| Agreement to Proceed (Phase
1) |
Day 1 |
| Data Collection Process |
Days 30 - 45 |
| Meetings with Portfolio Companies and
PE Firm Decision Makers |
Days 45 - 60 |
| Marketing Process (Phase 2) |
Days 60 - 120 |
| Presentation of Results and Finalist
Meetings |
Days 120 - 130 |
| Employee Communication and Open
Enrollment Meetings (Phase 3) |
Days 130 - 180 |
Please contact your Equity Risk Partners
representative to arrange a more detailed discussion on Employee
Benefit Portfolio Programs.
John Hill is a Managing Director of Employee Benefits at Equity
Risk Partners, the only full service insurance brokerage and risk
management advisory firm dedicated exclusively to the needs of the
private equity industry and its portfolio companies. For more
information, visit www.equityrisk.com. John Hill can be reached at
646-942-1533 or jhill@equityrisk.com
