During the boom times that preceded the current economic crisis, private equity firms across Asia invested billions of dollars into a portfolio of companies, hoping to ride the region’s economic growth. There seemed to be no shortage of opportunities, with the big investors gunning for prime assets.

All that has changed now and what was once unbridled optimism has been replaced by considerable caution. In fact, one of the most concerning issues among private equity firms today is the increasing threat of fraud, especially as the global economic crisis bears down on Asian companies.

With share prices remaining volatile and demand across all sectors drying up, fraud is a very real prospect. Corporate fraud can be particularly hard to detect, especially in developing economies that have less pronounced compliance and risk management systems. A fraud case that enters into the public sphere in a prominent way can absolutely devastate a company and its share price, as the recent Satyam case in India demonstrated.

Whether in good times or bad times, the dangers of fraud have always been there. Increased pressure can cause firms to rush their due diligence in order to close deals. These days the threat is that of employees having to tamper with the books to keep top executives and key shareholders happy.

To protect themselves, private equity firms can purchase a range of insurances that provide cover, both at the fund and the investee company level. The cover can be tailored to meet specific concerns and typically includes:

Insurance for the private equity firm

Private Equity Management Liability Insurance (PEML) or similarly branded products are essentially a one-stop solution for the private equity firm, offering a combined policy approach that comprises management (directors' and officers' liability), management indemnification, outside directorships and professional services liability.

Insurance products available to the portfolio company

Comprehensive Crime Insurance covers claims with regard to employee infidelity and third party fraud.

Professional Liability Insurance covers, claims relating to errors or omissions - this coverage protects against liability issues and can also help to defray legal defence costs. This would be of particular relevance to professional, technology and related service sectors.

Portfolio Company Directors’ and Officers’ Liability Insurance is a policy coverage customised to the client’s needs and requirements. The exposures faced by private equity-backed businesses are significantly different from that of privately held companies. This policy can provide protection to existing board directors as well as new directors who are added to the board by the private equity firm.

JLT works with private equity firms on an ongoing basis to assist with their exit strategy, through an Initial Public Offering (IPO) or sale of the company and we have available a range of additional products and services tailored to private equity firms (including their portfolio companies).

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