A competitive insurance market and slower M&A environment is creating unique opportunities and challenges for private equity firms in 2025.
With 2024 “in the books,” we reflect on the past and look forward to 2025.
2024 was an extraordinary year for NFP as we were acquired by Aon in late April. NFP will continue to be “independent but connected” with our parent company Aon. We will stay focused on our core middle market strategy, while leveraging Aon’s benchmarking, analytics, claims data and resources. Through developing relationships across our firms and sharing best practices, ideas and strategies, we continue to enhance our clients’ ability to manage risk across their portfolios.
2024 Market Review
We suspect our 2024 looked similar to the broader M&A market. Some of the themes from 2023 carried forward in 2024:
- Cost of debt slowed down the overall M&A market.
- Private equity (PE) firms focused on smaller add-on acquisitions.
- Two-thirds of the transactions we worked on were add-on acquisitions.
- Deals are taking far longer to get from the bidding process to close.
- Deals failing during the diligence phase:
- 2022 – 14.7%
- 2023 – 30.6%
- 2024 – 34.2%
- PE operators remained focus on improving EBIDTA as the exit market continued to be very slow.
- Deal professionals noted that the companies that came to market were unattractive, while quality assets commanded exorbitant multiples.
The Wall Street Journal reported that private equity funds raised in 2020 and 2021 have $500 billion of “dry powder” awaiting new investments. The clock is ticking on these firms to begin to deploy capital or they will need to ask their limited partners for extensions. We see 2025 being an active year for M&A transactions. So, what does all this mean from an insurance perspective?
Looking Ahead
Insurance Market Implications
Representations and Warranty (R&W) Insurance
The following chart illustrates “Rate on Line” as a percentage of the limit of liability. As you can see, rates topped out in Q1 of 2022 at 6.62% and bottomed out in Q1 of 2024 at 2.13%. The R&W market is highly competitive right now. All signs of a soft market are in plain sight: an abundance of capacity, very aggressive pricing, broadening of terms and lower deductibles. When the M&A market heats back up, underwriters will find more discipline and rates will likely firm up.
Due Diligence and Optimizing Value
Given the environment, many PE sponsors have focused on creating value by focusing on expense management. Insurance and employee benefits are often the second-largest expense for an employer behind payroll. Understanding the levers to “pull” is critical for optimizing insurance expenses:
- Utilizing portfolio programs for coverages like D&O and cyber.
- Using critical benchmarking data to understand trends for employee benefits plans.
- Finding alternative capital sources rather than posting collateral or using letters of credit to satisfy insurance company requirements.
- Leveraging the buying power of the portfolio by capturing data and tracking the annual premiums spend with various carriers.
A Partner You Can Trust
NFP’s Private Equity team is ready to help PE firms tackle the opportunities and challenges that 2025 will present. Contact NFPTFPrivateEquityGroup@nfp.com to discuss how we can help optimize your portfolio's risk management strategy for 2025.
Disclaimer
NFP Corp. and its subsidiaries do not provide legal or tax advice. Compliance, regulatory and related content is for general informational purposes and is not guaranteed to be accurate or complete. You should consult an attorney or tax professional regarding the application or potential implications of laws, regulations or policies to your specific circumstances.
