Case Studies Case Studies: Private Equity Due Diligence October 20, 2020 Risk Advisory Services partners with numerous private equity firms to deliver a specialist insurance due diligence service on potential acquisitions. Insurance is often overlooked or added as an afterthought to due diligence because financial and legal firms lack deep commercial expertise. The reality is that insurance costs can not simply be carried over to an entity under new ownership in many cases, and a target’s insurance arrangements have the potential to raise red flags for the transaction in terms of both coverage and cost. Below are a few examples of situations RAS has encountered while conducting insurance due diligence on over 500 transactions. Identification of Cost Savings A target company was paying $47 million per annum in insurance costs, including workers compensation. During due diligence RAS identified opportunities for improvement to reduce this cost by $10 million. Following the successful acquisition RAS was engaged to implement the recommendations in our DD report. The savings ended up being $17.1 million per annum. Discovery of Uninsured Assets A private equity target had unusually low insurance costs compared to RAS benchmarks. During the insurance due diligence we found that 73% of the target’s fixed assets were uninsured, because they were poorly maintained and the target could not obtain insurance over them without significant capital expenditure. As a result of our findings, the PE firm withdrew from the sale. Excessive Broking Fees As part of an insurance due diligence review, RAS found that the target’s insurance broker was charging excessive fees and commission ($0.4m) for the scope of services provided. Following the successful acquisition RAS arranged the appointment of a new broker in a tender process where the fixed fee for an agreed scope (with no commission) was $0.1m. Flagging Cost Increases RAS was engaged for insurance due diligence on the potential acquisition of the Australian operations of a large global corporation. The target was insured under the parent company’s global policies and paid a total of $6 million per annum for insurance. Our report found that the cost of procuring standalone insurance cover for the target would be significantly higher ($9m) due to less purchasing power and vulnerability to local market conditions. Furthermore, all new policies would need to be in place by the financial close date of the transaction, so we provided a detailed scope of work and timeline to implement the placement.