Understanding Private Equity and Venture Capital Insurance Needs
What is Venture Capital?
Startups and small businesses with long-term growth potential often depend on venture capital to insert a flow of cash and expertise to help catapult businesses forward via financial investments. Investment banks, financial institutions, and well-off investors provide the most VC funding. VC firms tend to take a larger risk with their investments with the potential for above-average returns.
For startups or new companies with a little experience under their belt, VC investors can offer vast amounts of industry guidance and knowledge. Plus, since these companies don’t usually have access to loans, VC funding is quickly becoming a go-to source for financial backing. Like PE, high net worth individuals—known as “angel investors”—and VC firms generally provide venture capital.
Venture capitalists know that not every company in their portfolio will produce a huge return on investment (ROI), and so to tip the hand in their favor, VCs do two things:
- They support the companies in their portfolio with resources like mentorship, board members, and strong management.
- They invest in companies that have excellent odds of being successful venture-quality companies.
What is Private Equity?
Private-equity is shared interest in companies that are not publicly listed or traded. High net worth individuals and firms typically provide investment capital for these private companies. The private-equity industry mainly consists of institutional investors, such as pension funds. Large private equity firms backed by accredited investors provide substantial amounts of funding, too.
Typically, a private-equity firm will raise pools of capital, or private equity funds that supply the equity contributions for these transactions. Private-equity firms will receive a share in the profits earned (carried interest) as well as a periodic management fee from each private equity fund managed.
How do these firms invest?
- PE and VC firms invest in multiple businesses called portfolio companies.
- PE and VC professional actively advise and guide portfolio companies.
- Investment funds tend to extend for 5-7 years
- Works as seed money to finance potentially fast-growing startups
- Finances early-stage entrepreneurs
- Provide funding for existing businesses who need capital to grow
- Private equity financially supports troubled companies
- Provides leveraged or management buyout transactions
- Industry consolidation
Private equity and VC firms face many challenges in the modern marketplace, such as:
- Investigations by the U.S. Securities and Exchange Commission (SEC)
- Conflicts of interest between the firm and portfolio companies
- Accusations that the PE or VC firm has either neglected or mismanaged the portfolio company
- Corporate governance issues in the firm or the portfolio companies
- Limited partners filing lawsuits because of misleading documents or mismanaging funds
- Inadequate due diligence
- Indemnification provisions in portfolio companies
Both private equity and venture capital firms face specific exposures. Experiencing indemnity or financial solvency could devastate any firm and the portfolio companies associated with it. As a result, both PE and VC firms need to protect themselves with the following insurance coverages.
Key Insurance Coverage
Professional liability is often known as “malpractice” insurance or more officially, Errors & Omissions (E&O) insurance. This coverage helps protect insured Private Equity and Venture Capital firms from claims alleging wrongful conduct as it relates to the performance of their activities in the firm.
Directors & Officers Liability
Directors & Officers’ liability (D&O) insurance provides coverage against specific claims alleging wrongful acts made against the insured company and its executives. Since Venture Capital and Private Equity professionals act as a director or officer of a portfolio company, this coverage serves as vital protection.
Employment Practices Liability Insurance
Employment practices liability insurance (EPLI) is another management liability insurance. It provides coverage for allegations against the insured company or individual regarding employment practices.
The policy typically includes coverage for claims of:
- Sexual harassment
- Hostile work environment
- Wrongful termination
- Other employment-related issues
Fiduciary Liability Insurance
It provides coverage for fiduciaries, professional administrators, employers, trustees, etc. Naturally, the administration of employee benefit programs falls under this coverage, as well.
If the insured PE or VC firm faces employee dishonesty—theft, forgery, computer fraud, etc.—fidelity bond insurance provides coverage for the loss.
Cyber & Data Privacy or cyber liability protects against third-party lawsuits as well as fines from regulators. Since most companies do most of their business online, coverage typically includes:
- Intellectual property infringement
- Privacy issues
- Data breaches
- Cyber ransom
- Business interruption
- Virus transmission
International Package Policy
If the firm has an international exposure, such as employee travel, employees overseas or perform work overseas, etc. Coverage could include the following:
- General liability
- Commercial Auto
Peter Dell’Olio – Advisor for both Personal and Commercial Lines
Peter comes to Daigle & Travers having spent 10+ years in the financial sector as an analyst of mortgage-backed securities. He brings with him a wealth of knowledge and an exceptional work ethic from the demands of the investment banking industry. His keen eye for detail and financial acumen ensures an accurate and meticulous process for his clients. Being resourceful, diligent, ahead of the curve, and finding customized solutions are hallmarks of Peter’s risk management assessment.
Get the coverage you need.
Daigle and Travers Insurance is based in beautiful Darien , nestled between Stamford, Norwalk, and New Canaan. We also serve Fairfield County, Greenwich, Weston, Westport, Wilton, Ridgefield, Redding, Easton, Fairfield, Southport, Trumbull, and parts of Westchester County and Long Island.
Here at Daigle & Travers Insurance, we will provide you with the right coverage to make sure your investments are safe during a disaster. When partnering with us, we will give you all the necessary information and options you need to make the best choice of insurance company and policy. Give us a call today at (203)-655-6974.