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 5. 6 Risk Management Strategies for Private Equity Firms


6 RISK MANAGEMENT STRATEGIES FOR PRIVATE EQUITY FIRMS

By Travelers
6 minutes
Industry Resources
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Private equity is a fast-growing segment of the financial services sector, with
the potential to deliver strong returns for investors and help fuel business
growth. With performance comes greater scrutiny – and greater risk. A private
equity firm’s portfolio of businesses faces challenges on multiple fronts, from
cybercrime to data privacy to new regulatory standards. It’s essential for firms
to monitor and respond to this changing risk landscape while continuing to
remain focused on financial growth.

Here are the six risk management strategies for private equity firms to help
manage portfolio company risks.


1. CRISIS MANAGEMENT

Many unforeseen factors can disrupt a business – from natural disasters and data
breaches to supply chain issues and system failures. When confronting unexpected
crises, a company needs to respond and recover as quickly as possible.
Otherwise, they face significant financial, regulatory and reputational risks.

With so much at stake, having a business continuity plan in place before a
crisis or disaster strikes is essential to help minimize losses. It helps
eliminate confusion during an event by providing a clear plan of action. Armed
with a business continuity plan, the company and its management team can
increase the likelihood of recovering from an event with minimal losses.

Developing a comprehensive business continuity plan includes:

 * Evaluating the potential risks to the operation, property and people that
   could leave a company vulnerable.
 * Identifying critical business functions and the people and processes that
   support them to consider what is necessary to restore critical operations.
 * Adopting controls to prevent or mitigate loss.
 * Creating, documenting and communicating an incident response plan that
   provides a clear blueprint of the specific roles and responsibilities in
   executing the plan.
 * Regularly testing the plan, evaluating policies and updating as necessary.


2. EMERGING TECHNOLOGY

Emerging technologies, integrated through the Internet of Things (IoT), can
provide a portfolio company with new opportunities to connect and optimize their
operations and streamline fundraising, deal management and investor relations.
This digital transformation can be vital to remaining competitive. However, the
benefits of expanding a company’s digital footprint often come with risks.

Before investing in new technology, it’s imperative to ensure you’re making the
right investment for a portfolio company. Consider these key questions:

 * Will the new technology fulfill the business’s needs and expectations?
 * Will the outcome be worth the cost of purchase and implementation?
 * Can the technology integrate seamlessly with your current systems and
   equipment?
 * Will the technology be able to grow with your business and adapt to its
   changing needs?
 * What employee training will be required, and what will it cost?

Legacy systems, in particular, warrant careful review. They are often essential
to day-to-day operations, but may be outdated, inefficient or present security
risks. Yet, replacing them with new technology can be costly and time-consuming.

Before deciding to replace any systems, assess if they:

 * Support real-time transactions.
 * Continue to support the workflow at maximum efficiency and with minimal
   downtime.
 * Are compatible with new technologies that are essential to the firm.
 * Can benefit from updates to outdated security protocols.
 * Are still supported by the vendor if problems arise.

If the answers to these questions are unsatisfactory, it may be time to
modernize with new technology. Be sure you do so with a well-strategized road
map that promotes collaboration and productivity, safeguards data security and
upholds customer service.


3. CYBERSECURITY

Cyber incidents are a near certainty for businesses today. They can range from
barely perceptible port scans looking for vulnerabilities, to devastating
ransomware attacks that can shutter a business. 

Should even one portfolio company experience a cyber event, it has the potential
to negatively impact the entire private equity firm’s bottom line and
reputation. Preparation is key to effectively reducing a portfolio company’s
risk of a cyber event:

 * Begin by making a strong commitment to cybersecurity; include cybersecurity
   in the firm’s overall risk management program.
 * Adopt a minimum set of cybersecurity controls.
 * Perform due-diligence risk assessments of potential portfolio companies and
   reassess annually or upon significant change to the partner’s infrastructure
   or environment. Pay particular attention to portfolio companies with higher
   cybersecurity exposures or unique security challenges.
 * Develop or update a cyber incident response plan that prescribes how the firm
   will respond in the event of an attack. This should include a response plan
   for when a portfolio member is the target.
 * Consider making it a requirement for portfolio companies to purchase cyber
   insurance, which includes both pre- and post-breach services.


4. CONSUMER PRIVACY

Cybersecurity isn’t the only concern for private equity firms. Ensuring consumer
data privacy is equally critical. Location tracking and personally identifiable
information can provide valuable insights for marketing and sales purposes, but
companies may be legally responsible for protecting the information they gather.
Failure to properly secure and address consumer privacy can lead to action by
customers, regulators and others.

To fulfill consumer privacy/data protection requirements and minimize risk to
your financial company:

 * Ensure you understand and comply with all local, national and even
   international privacy requirements. 
 * Collect only the data you need for the service you’re providing and keep the
   data only as long as you need it.
 * Encrypt consumer data, and any sensitive data at rest, in transit and in use.
 * Let customers know when and why their data is being collected.
 * Sell or share data only with the owner’s consent.
 * Have clear procedures in place to provide consumers access to their data, and
   to request its deletion.


5. SUPPLIERS, VENDORS AND THIRD-PARTY OBLIGATIONS

Outsourcing may be an option for portfolio companies that want to leverage
outside expertise while remaining focused on core investment-related activities.
However, be mindful that third-party management can present a significant area
of risk and it can be imperative that firms maintain strict oversight of their
providers.

A formalized oversight program can help companies evaluate how well their
providers are managing risk. For each provider:

 * Define the scope of the risk.
 * Determine the amount of due diligence required for vetting prospective
   providers.
 * Engage providers with a written contract with a service level agreement that
   clearly defines the provider’s responsibilities and deliverables.
 * Establish a formal contractual risk transfer program that addresses, among
   other things, your specific insurance requirements. This will help protect a
   company from liabilities and related costs that may arise from the provider’s
   service or work activity.
 * Monitor the provider’s performance on a routine basis and maintain written
   documentation of the results.


6. ERGONOMICS, POST-INJURY MANAGEMENT AND EMPLOYEE SAFETY

Acquisitions often lead to capital improvements to the acquired company’s
physical plants and warehouses. Any time there is a substantial change to a
business’s physical environment, it’s important to review and update company
safety policies and procedures for any risks that are introduced. Taking a
proactive approach can help prevent workplace injuries, improve compliance with
laws and regulations, and reduce costs, especially when it comes to workers
compensation claims.

Evaluate these areas for possible updates and improvements: 

 * Safety training for new employees.
 * Continuous training and support for existing employees.
 * Remote worker safety.
 * Ergonomics in the office and on the road.
 * Post-injury response and management.

Travelers can tailor insurance coverages to meet the unique needs of your
private equity firm’s portfolio of companies. Our “value creation through risk
mitigation” approach features a dedicated private equity service team that can
work with each portfolio company to identify a tailored suite of services
designed to help mitigate losses.

Speak to your insurance agent or broker about managing private equity risks.

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