Insights on Private Equity & Principal Investors
The newest edition of DHS Ventures & Holdings on Investing examines a year of tumultuous change and its implications for investors, businesses, sectors, and the world in which we live.
Private acquisitions of in-force books are growing. Here’s a playbook for those considering market entry, those already. Unprecedented private equity deal flow means more leaders than ever are stepping into the portfolio-company CEO role.
By applying the right criteria, investors can identify digitally native brands with the potential to outperform.
The insurance trends private-equity investors should understand in 2021
The uncertainty that plagued the industry in 2020 is clearing. Here’s where performance is trending—and how private-equity investors can double down.
As the contours of a postpandemic economy begin to take shape, the implications for private-equity (PE) investors in the insurance sector are also coming into focus. When we last published our perspective on this space, in November 2020, insurance-industry M&A activity was on the rise, insurtech IPOs and special-purpose acquisition companies (SPACs) were taking off, and uncertainty around the timing of COVID-19 vaccines and the “next normal” loomed large. Today, many players in US and European markets are applying insights from their 2020 performance to emerge stronger amid increased consolidation, digitization, and specialization, as well as persistently low interest rates.
Insurance investment priorities in 2021
The uncertainty of 2020 caused industry-wide disruption. The SNL US Life Insurance Index closed the year more than 20 percent below the S&P 500 Index, and property and casualty (P&C) insurers, while slightly higher on a year-over-year basis, also closed significantly below the S&P 500. But the first half of 2021 showed notable improvement (Exhibit 1).
Insurance stocks recovered, with life insurers and software providers leading the way. And while pre-IPO and pre-SPAC insurtech valuations remained high, publicly traded insurtech companies were a notable outlier in the first half of 2021, as investors reevaluated their appetite in this space because of increased concerns about long-term profitability.
How is a portfolio company CEO’s job unique?
EOs who helm companies owned by private equity (PE) firms face a leadership challenge unlike any other. They must master everything a great public- or private-company CEO does, all while operating at a higher metabolic rate. A newcomer to PE also faces the conundrum of having limited access to insight about the road ahead, because there is so little specific guidance in print about the portfolio-company CEO role. Its unique demands and nuances, however, need not be a mystery.
The world’s top PE firms can’t afford to skimp on CEO talent. The partners who hire, manage, and sometimes dismiss their portfolio-company CEOs think deeply about what sets their investment philosophy and ideal leaders apart.
“In short, we are constantly looking for the CEO with an ownership mentality,” said one PE-firm executive in Asia. In the interview process, this executive hopes “they will ask, ‘What is your underwriting base case and expected holding period? How much value do you expect to generate?’”
Climbing the private-equity learning curve
Our research has shown that public companies and PE portfolio companies alike can have engaged boards. However, boards of PE portfolio companies tend to systematically take a coleader role with the CEO on important topics; engaged directors not only help set strategy and manage performance but also master the details needed to stress-test, push back on, reset, and dramatically improve the business.
Indeed, PE board members feel like owners themselves. Senior managers of the portfolio company typically own about 5 to 8 percent of the company stock, and the PE firm votes the rest of the shares, which are owned by the PE fund (in which the PE firm is a major investor). While there is no uniform board size or lineup, the boards of PE portfolio companies usually include the “deal partner,” who is typically a midcareer financier, and one other member of the PE firm.
There is typically a chair, who is frequently an ex-CEO, often from a much larger company than the portfolio company in question. Additionally, the boards will include one or two other nonexecutives—for example, experienced external nonexecutive directors with specific know-how in the company’s core sector or in a functional topic, such as digitization or artificial intelligence, that is key to the company’s future.
PE portfolio company boards are generally younger and smaller than public-company boards, thereby increasing each individual’s engagement. This engagement and PE company board members’ bias toward active ownership are what drive much of the “alpha”—outperformance relative to quoted peers—in any deal.
Purpose for asset owners: Climbing a taller mountain
In the wake of the pandemic, the world’s long-term investors are reexamining their purpose.
Funding infrastructure investment in a post-COVID-19 economy
Harvard economists Larry Summers and Ed Glaeser debate how to fund infrastructure investment in a post-COVID world.
Investing in infrastructure for a ‘green recovery’
Asset managers must understand the impact of climate change on their portfolios. Doing so can result in a more sustainable built.
Rise of the platform era: The next chapter in construction technology
The construction technology ecosystem is shifting toward integrated software platforms that better serve customer needs.