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Private Equity Focuses on Financials and a Trusted BPO Partner

Does the Rest:A Proven Mantra for Business Profitability

A Conversation with VIK RENJEN

In partnership with

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Private Equity Focuses on Financials and a Trusted BPO Partner Does the Rest:

A Proven Mantra for Business Profitability

Private equity firms are as busy today as they have ever been. Almost 3,000 U.S.-based investments closed last year totaling $522.6 billion in value, according to Pitchbook Data.

What’s more, going forward dealmakers expect private equity transactions in financial services, insurance and real estate (FIRE) deals to be plentiful, according to the latest reading of SourceMedia’s Mid-Market Pulse (MMP)1.

Dealmakers polled at the end of 2014 expect M&A to expand significantly in the FIRE sector in 2015. FIRE’s 12-month score of 87.2 surpassed the overall index score of 69.7. The sector score also was the highest 12-month score of the six fast-growth industries measured by the MMP.

Insurance in particular is one of the reasons FIRE is a hot sector. Top private equity firms such as Apollo Global Management, Ares Private Equity Group, KKR, The Blackstone Group and The Carlyle Group have all made investments in insurance companies recently. In the past two years, there have been around 30 private equity deals completed primarily in the insurance sector, according to Thompson One Banker.

Private Equity Shows Interest in InsurancePrivate equity firms are zeroing in on the insurance sector because insurers need capital. With low interest rates profit margins have been squeezed, which has in turn required insurers to inject more capital into their businesses or risk being downgraded. Compounding this issue, newer, more stringent regulations are making it more difficult for traditional banks to deploy fresh capital in the insurance market leaving the door wide open for private equity firms to enter. Private equity firms like the investment opportunity because insurance firms offer the perfect blend of safety, predictable returns and growth potential.

“There’s no question that private equity firms are becoming increasingly interested in the insurance assets due to predictable returns and the availability of cheap capital. There is liquidity in the market and their book values are not fully mon-etized,” says Vik Renjen, Senior Vice President and Global Head of Banking, Financial Services and Insurance at Sutherland Global Services. “Private equity’s push into the insurance sector makes sense and will only become greater.”

There has been a slew of global private equity transactions in the insurance sector completed recently. For example, in 2014, New York-based KKR bought Sedgwick Claims Management from Stone Point and Hellman & Friedman in a $2.4 billion deal. Additionally, European private equity firm AnaCap Financial Partners completed the acquisitions of Brightside Group, a U.K. insurance broker, and AssurOne, a French insurance broker. On the retail brokerage side of the insurance space, private equity firms have been trying to emulate the model established by AssuredPartners Inc. in Lake Mary, Florida, with the idea of combining enough smaller brokerages to create a national platform that one day can be taken public. AssuredPartners, backed by Chicago-based private equity firm GTCR, has made more than 75 acquisitions since launching in 2011, including more than 20 in 2014.

Dealmakers expect private equity transactions in financial services, insurance and real estate to expand significantly over the next 12 months1

“There’s no question that private equity firms are becoming increasingly interested in the insurance assets due to predictable returns and the availability of cheap capital”– Vik Renjen

1The MMP, published by Mergers & Acquisitions, in partnership with McGladrey, LLC. is a forward-looking sentiment indicator that monitors near-and intermediate-term outlook for merger and acquisition activity within the middle market.

Danielle FugazyContributor, American Banker

Vik RenjenSenior Vice President and Global Head of Banking, Financial Services and InsuranceSutherland Global Services

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Private Equity Focuses on Financials and a Trusted BPO Partner Does the Rest:

A Proven Mantra for Business Profitability

With its sticky customer base, reoccurring revenue streams and growth potential it certainly does make sense for private equity firms to get in on the action. However, generating returns from insurance investments is not an easy task. Insurance is a very nuanced business and margins can be tight. “It takes very strong industry knowledge to grow insurance businesses correctly and generate the type of returns that private equity firms need to produce for their limited partners,” says Renjen.

BPO companies can helpThe good news is there’s no need for private equity firms to go at it alone. Experienced Business Processing Outsourcing (BPO) companies like Sutherland Global Services can provide the solution by helping private equity firms interested in investing in the insurance sector produce solid returns for their investors.

“Private equity firms need to focus on fund generation and optimizing the financials of their portfolio companies. A BPO company can partner with private equity firms, taking on the non-core operational tasks that are time consuming, repeatable and complex, thus, freeing private equity firms up to focus on their core deliverables,” says Renjen.

A qualified BPO company can add value from the beginning to the end of the investment process. First, a good BPO company can identify and perform due diligence on potential insurance acquisition targets on demand, cheaper and faster than a private equity firm could do on their own. It’s important to partner with a BPO company that already has sector knowledge. With so many intricacies that come with investing in insurance companies private equity firms need to be sure that they are paying the right price for an asset and getting exactly what they paid for. Only a BPO company with prior experience in the insurance sector is able to make those determinations.

“With tight margins one mistake can blow a private equity firm’s investment thesis and with it diminish its return prospects. Conducting stellar due diligence is critical,” says Renjen. “In addition to finding all the company’s good and bad attributes, Sutherland is able to highlight, almost immediately, where the value lies and how to unlock it.”

Of course this process needs to be undertaken with specific criteria developed in consultation with the private equity fund manager. During due diligence process, a qualified BPO company should perform a detailed business valuation of the target company with a review of the value chain, operations and financial parameters. Getting a detailed financial model with revenue and operating drivers is a plus. In addition to looking at the company’s financials, a worthwhile BPO partner should assess the company’s market attractiveness by conducting a detailed competitive landscape analysis including checks on the company’s suppliers, customers and market trends and risks.

Experienced BPO companies can help private equity firms produce solid returns for their investors, adding value from the beginning to the end of the investment process

“A BPO company can partner with private equity firms, taking on the non-core operational tasks that are time consuming, repeatable and complex, freeing private equity firms up to focus on their core deliverables.”

– Vik Renjen

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Private Equity Focuses on Financials and a Trusted BPO Partner Does the Rest:

A Proven Mantra for Business Profitability

Once a private equity firm completes the investment transaction, a strong BPO partner can most likely save the insurance asset’s operating costs or increase its’ revenue stream. For example, Sutherland has been saving in excess of 30% in operational costs for the portfolio companies of private equity firms says Renjen. However, it’s important to note, that while saving is great, using a BPO’s services is more than a cost-cutting tool, it’s a means of delivering higher-quality services and capabilities as well as augmenting the Revenue stream. Private equity firms want to be sure to work with a company that offers its customers transformational value by deploying sophisticated computing, analytics and software automation in addition to expert human capital.

BPO Provides Operational EfficienciesOne of the most important things a BPO provider should do is improve operational efficiency and rationalize investments in multiple systems and redundant processes. BPO partners, engrained in the insurance industry, should have greater economies of scale and operational expertise than a standalone insurance company thus making their processing more economical. Receiving analytics support for benchmarking performance across marketing and operations and evaluating sentiment across the entire value-chain, including stakeholders, investors and customers is also of great value to private equity firms. It’s important that private equity firms are sure the BPO partner they are working with has the ability and a proven track record to provide these things.

What’s more, instead of PE companies unnecessarily employing full-time professionals to conduct research or do a cost analysis, the BPO partner should be able to take these tasks on. Knowledgeable professionals who have deep expertise in the sector and are used to conducting market and sector research as well as analysis should be at the helm so there’s no need to worry about quality control. In fact, a BPO partner will most likely have more breadth of experience due to a multi-faceted exposure in the space than someone in a standalone PE firm.

“Pooling resources is very effective and because we work with so many insurance companies we employ professionals to perform certain useful business functions that insurance companies need, but don’t necessarily need all the time, which makes it inefficient for insurance companies to staff these people full-time,” says Renjen.

Portfolio management and monitoring is another huge undertaking that private equity firms investing in insurance companies may need help with. “Having an additional set of eyes on your investments is a huge bonus. It’s extremely helpful when your Business Process Outsourcing (BPO) partner has very solid strategies to help your portfolio companies reach their goals during our ownership. Many can deliver on the processes, but very few companies like Sutherland Global Services have business transformational ideas to push a portfolio company to the next level. It’s important to partner with a BPO partner that brings domain, infrastructure and innovation,” says Andreas Schulte, Operating Executive, Marlin Equity Partners.

The ability to leverage professionals in various geographies and provide reporting and portfolio monitoring is also important.

It’s important that private equity firms are sure the BPO partner they are working with has the ability and a proven track record

“Pooling resources is very effective and because we work with so many insurance companies, we employ professionals to perform certain useful business functions that insurance companies need, but don’t necessarily need all the time,” says Renjen.

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Private Equity Focuses on Financials and a Trusted BPO Partner Does the Rest:

A Proven Mantra for Business Profitability

“It’s imperative that private equity firms are able to act swiftly if something has gone sideways at a portfolio company. We are much more likely to engage with a BPO partner that is astute at proactively picking up on the slightest operational issues and making sure they are righted before they even become problems,” Carlos Oliveras , CEO, Kane USA.

Leveraging different geographies that provide niche operational advantage is also of upmost importance. While any BPO provider can probably reduce costs by outsourcing certain functions, overseas outsourcing is not always the right answer. According to Harry Moser, founder of the Reshoring Initiative, about 25 percent of the jobs that were outsourced over the last 20 years will return to the U.S. or near shore to the U.S. because outsourcing didn’t make sense.

“We call it right sourcing. We do move some functions overseas if labor arbitrage can reduce costs, but that’s not always the case. We pick the best locations for our clients’ need and deploy based on that,” says Renjen. “There are no absolutes for any clients. All our solutions are designed around each clients’ specific needs. Sometimes it makes sense to be in the U.S. other times it does not.”

Once the private equity firm has executed on its strategy of increasing the valuation multiple of its insurance portfolio company, a good BPO partner is able to finally help private equity firms find the right exit opportunity. As opposed to just taking growth and the hold time into account, a BPO partner should be able to help private equity firms develop a suitable exit strategy based on market timings, the best divestment route including an IPO or sale to a strategic acquirer. What’s more, the more engrained the BPO partner is within the insurance industry the more likely it is to help find the right buyer because they will have insight as to whether any strategic acquirers are interested in the asset quicker than a private equity firm may find on its own or with an investment banker.

“We like to think of our relationship with private equity firms as a partnership between us, the private equity firms and the insurance companies. We focus on the non-core—but extremely important—work that needs to get done so private equity firms can focus on generating alpha and insurance companies can focus on their customers. We are the operational guys and we can deliver real measurable enterprise value from the very beginning until the very end, basically soup to nuts. This makes it a truly and tested Win –Win proposition for the PE Firm, their Insurance Asset as well as the BPO partner” says Renjen

CONTACT: To reach out to Vik Renjen, call 585-662-7402 or email: Vikram.Renjen@SutherlandGlobal.com

VISIT OUR WEBSITE AT: www.americanbanker.comwww.sutherlandglobal.com

Six categories of Private Equity related activities that can be leveraged using the services of a knowledge based BPO partner.

These are the foundation for successfully initiating, managing and sustaining PE investments:1. Identify Fund Opportunities2. Investment: Identification

and Evaluation3. Optimizing Portfolio Company

Performance to Increase Fund Alpha

4. Portfolio Monitoring and Management

5. Manage Investor Relations6. Exit Strategy Support

– Excerpted from an interview with Vik Renjen, originally published in Forbes, March 20, 2015