One deal after another, Equity Risk Partners builds its reputation catering to private equity firms
By Thomas A. McCoy
Mergers and acquisitions are a dynamic, transforming part of the U.S. business landscape. In the insurance business alone, who could have imagined 30 years ago the configuration of insurance company and broker ownership that exists today? One of the interesting turns that the M&A phenomenon has taken, in every industry, is the increasing number of takeover deals where the acquirer is a private equity firm.
In November 2000, Michael Marcon left Aon Risk Services’ Mergers and Acquisitions Group to launch his own insurance brokerage firm. The firm he was about to create would provide insurance services to private equity firm clients exclusively. Today, Michael is the CEO of that firm, Equity Risk Partners, based in San Francisco, which he describes as “the only full-service broker focused exclusively on private equity.”
From its start-up six years ago, with four employees, the firm has grown to 40 employees, with offices in San Francisco, New York, Chicago, and Houston. Annual revenues are $6.5 million.
Equity Risk Partners provides P-C, employee benefits, and risk management consulting for the private equity firms themselves as well as the firms they acquire. Even when the acquisition is only a minority interest, Equity Risk Partners still has a shot at becoming the broker of record for the targeted firm. If they do not obtain the on-going brokerage, Equity Risk Partners will charge the private equity firm a fee for its services.
“We interact regularly with about 65 private equity firms and more than 350 portfolio companies,” says Bob Zenoni, president and COO, who joined Equity Risk in 2002. “Our primary business target is mid-market private equity firms, those that acquire companies with revenues of $150 million to $500 million. We work with many firms doing larger deals as well.”
Rather than having a predictable stream of renewals at various times of the year, all business at Equity Risk Partners starts when the buyout deal closes. It can come any time, and Equity Risk Partners has to be ready.
“The interesting part of the business and the difficult part of the business is the same thing,” says Michael Marcon. “When the phone rings, we don’t know who’s calling, we don’t know what they’re buying, we don’t know where they’re buying it, we don’t know when they’re closing, we don’t know what industry it’s in. And we have to be able to solve all their problems.
“When you see in the Wall Street Journal that XYZ Corp. made a preemptive bid for the B division of ABC Corp., it wasn’t really ‘preemptive.’ They had already talked to their insurance advisor and they had talked to other advisors.”
Michael continues, “When our clients talk to the us, they say, ‘We’re going to pull this division out of ABC Corp. How much is it going to cost us to insure them stand-alone? What do we build into our model so we know how much to pay for this division?’ We are a component in that decision, but there are additional factors more important than ours.”
Having this advance information about deals in the making requires strict confidentiality on the part of the insurance broker. “We sign confidentiality statements for most deals,” Michael says. “But even if we aren’t asked to sign one, we maintain complete confidentiality because if we didn’t we’d be out of business. Our integrity and our credibility is everything.”
One of the unique aspects of working with private equity firms is that they get to dive into whatever type of business they happen to invest in. “One day our people are working on a manufacturer in Oklahoma, and the next day they’re working on a trucking company in Florida,” says Michael. “We require a lot of flexibility from our employees.”
Throughout Michael’s career, both at insurance companies and brokers, he has specialized in working on the risks of firms in the financial business. The four producers at Equity Risk Partners include two ex-investment bankers and two others who have worked with private equity clients exclusively for at least 10 years. Among them, they have worked on more than 500 completed transactions, including those from prior firms.
One of those producers is the other founding partner, Tony Marcon, Michael’s brother, who is senior managing director. “One of the differences between our firm and the M&A practices among the national brokers,” he says, “is that we partner with outside specialists when necessary to get coverage for our clients.
“For example, one of our private equity firms was buying two helicopter companies at the same time and merging them together. The helicopters were used by the forest service to put out forest fires. We partnered with an outside aviation specialist whose expertise was in helicopter coverage to get them the right coverage. The national brokers in our market would have used a general in-house aviation specialist.”
Michael states that Equity Risk also considers its own insurance companies partners in a way that its national broker competition does not. “In the soft market the national brokers started selling services that the companies used to provide for them. We don’t have time for that; our carriers are our partners. If they have resources built into their premium that the client is getting charged for anyway, we’ll use those resources.”
Equity Risk Partners is divided into business segments that match its clients’ key areas of risk, including employee benefits, executive/professional liability, and trade/political risk. It even has a segment providing personal lines to its private equity clients and portfolio company executives. So, on the surface, it looks like a lot of other diversified brokers. The functions of its producers, however, look a lot different.
“Our producers are much more like deal managers than producers,” says Michael. “They manage the resources that we bring to the private equity firms. And we have the most demanding and the most sophisticated clients that you could have. Our clients want us to be able to understand their business, the difference between a stock purchase and an asset purchase, a spin out and a recap. They want us to be able to talk to their lenders and explain why a risk is insurable or not insurable.
“It’s tough to recruit people for our business,” Michael points out, “because most of the major brokers tend to be very segmented. If you try to pull someone out of a major broker, they only do property, or casualty, or executive liability. We’re looking for people who can do everything. And if you go to smaller brokers, those people are used to doing everything, but they’re not used to working on large, sophisticated risks with multinational exposures.”
A high degree of client involvement is a “given” at Equity Risk Partners, for producers and support people alike. Another given is the need to work quickly and accurately under tight deadlines. President and COO Zenoni notes that when deals are in the pipeline, “We have to be able to respond, and that can mean long hours and odd hours. Mike likes to say we work on ‘private equity time’ not insurance time.”
Michael describes today’s private equity market as incredibly active, but he’s quick to point out that it hasn’t always been this way.
“In 2000 my wife and I used our life savings and took out a line of credit against our house to capitalize Equity Risk Partners. We opened our doors on January 1, 2001, which was the absolute worst time in the history of the private equity business. In our first year, the venture capital bubble was bursting along with the technology bubble, banks’ lending was drying up, and then we had 9/11.”
The bank credit crunch was damaging, Michael explains, because “there are two pieces to a private equity transaction—the equity from the private equity firm, and the debt from the banks. You can have all the equity in the world, but if you don’t have debt, it is harder to generate an appropriate return and you don’t have a deal.”
Zenoni says the weak private equity market continued through 2003. Still, he notes, “We survived and thrived during that period.” Today, he says, the rising tide of the private equity business is raising a lot of boats. “As the industry gets more publicity and exposure, it attracts more investment dollars, which fuels more transactions.” *