‘FTX due diligence’ no longer enough for PE, VC firms – BRP

The private equity (PE) and venture capital (VC) industries face more challenges than ever, as rising interest rates raise the cost of capital and bank failures raise concerns about risk and liabilities of portfolio companies.

In this environment, basic due diligence is no longer sufficient to ensure that these companies are protected from risks during transactions. The Silicon Valley Bank crash, coupled with controversial startup failures in recent years, has put PE and VC firms under pressure to tighten their due diligence methods, experts say. in Insurance Business.

“A lot of companies are coming in due diligence and looking at where they can put their money,” said Pam Mason (pictured right), senior partner and senior vice president of venture capital at BRP Group.

“You can no longer do ‘FTX due diligence,'” agreed Travis Holt (pictured left), senior partner and senior vice president of private equity at BRP Group, referring to the cryptocurrency trading platform that crashed in late 2022 .

“There are a ton of large, sophisticated investors pouring hundreds of millions of dollars into FTX with virtually no due diligence,” Holt continued. “These types of events show that you can’t just ‘check the box’ and get it over with.

“In trying economic times, if you’re looking to pay a price for a business that may be a little outside your comfort zone because the cost of capital has gone up a lot, you’re not going to have any surprises.” .”

‘A real need’ for risk management and insurance solutions

To better serve private equity and venture capital firms amid these challenges, BRP Group has launched two new practices aimed at supporting clients with risk management and insurance.

BRP is an independent insurance distribution company representing 1.2 million clients in the US and internationally.

Through dedicated practices, BRP aims to offer insurance expertise, transaction support, due diligence services, and cyber risk assessments to private equity firms, venture capital groups, and strategic acquirers.

Holt leads the private equity team while Mason leads the venture capital team. Both have extensive experience in the PE and VC spaces.

“There is a real need, from a venture capital perspective, for insurance professionals to provide guidance and help companies provide a better return on investment,” said Mason. “That’s what they’re looking for from an insurance and risk management perspective, and I think we fill that void.”

The practices are also the result of the confluence of market timing and BRP Group talent, according to Holt.

“Pam and I have been doing this work for almost 25 years. We’ve seen peaks and valleys in deal flow, but we’ve been strong in deal flow and we’ve seen a lot of activity, so we’re excited about where it’s going,” Holt said. “We are very selective about having the right talent and we make sure to have real experts on the team.”

In addition to Holt and Mason, the leadership teams of the private equity and venture capital practices include John Warren, senior partner and senior vice president of private equity, and Lidore DeRose, senior partner and senior vice president of transaction risk.

Private equity, venture capital requires different perspectives

Asked why there are separate practices for private equity and venture capital, Mason explained that each team offers two different perspectives.

“One of the reasons we’ve structured it this way is that while private equity and venture capital have important similarities in asset management, they’re very different in terms of client needs. They’re really two different focus,” he said.

Private equity usually takes a majority or 100% fully owned stake in a portfolio company, while venture capital takes a minority stake. Private equity investors are also more inclined towards established companies, while venture capital investors favor young startups.

“The kinds of work we do for due diligence on an acquisition for a private equity firm is very different compared to venture capital,” Mason said.

Holt added: “There’s a big difference in how a private equity firm looks at an investment compared to a venture firm. At the venture stage, they’re interested in rapid growth, sales, development of product, and talent acquisition. They are trying to grow, grow, grow, with the intention of raising more capital in 12 or 18 months.

“On the private equity side, there is a significant stream of cash flow [into a firm] and they are looking for us to protect cash flows.”

Ultimately, BRP’s PE and VC practices seek to offer a holistic approach to transactions, the senior partners said.

“We see a huge need in the market to take a holistic view of the transaction,” said Holt. “Services are very segmented, where you have a transaction risk team, a due diligence insurance team, and an insurance placement team that handles insurance post-closure servicing and placement, and that teams always don’t get along.”

“We will treat the client with multi-billion dollar assets under management the same way we would treat a small, special purpose vehicle looking for insurance,” Mason said. “That’s very consistent with what we do.”

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