Private Equity Strategies for a Shifting Market

Construction Private Equity Construct a resilient future using a strong risk Leadership and operational excellence will remain management approach as a blueprint for success. essential as dealmaking rebounds. Risk & Insurance | Employee Benefits | Retirement & Private Wealth Risk & Insurance | Employee Benefits | Retirement & Private Wealth

What to Expect in 2025 What to Expect in 2025 Deal flow should expand in 2025 due to lower interest rates and moderating valuations, and there will be continued strength in the secondaries market. The focus on operational performance and earnings quality will likely persist, and the cost of Representation and Warranties (R&W) and Directors and OfÏcers (D&O) coverages are expected to remain near historical lows. Forward- thinking portfolio managers will embrace risk management and insurance planning as an opportunity to add value. $1.2 $2.6 trillion trillion The amount of dry powder The amount of dry powder held by U.S. private equity held by private equity firms firms at the end of the first worldwide at the end of first 1 2 half of 2024, the most ever. half 2024, the most ever. 1. Ropes & Gray, “U.S. Private Equity Market Recap,” August 2024. 2. S&P Global, “Private equity dry powder growth accelerated in H1 2024,” July 12, 2024.

Profitability Lower interest rates and more realistic valuations point to a rebound in 2025. Private equity deal volume began to recover in 2024, reaching $255 billion in the first half, compared with $217 3 billion in the first half of 2023. While that’s a lot less than in the first half of 2022 ($524 billion), the first two quarters of 2024 marked what appears to be a slow and steady improvement in dealmaking. Buyers are willing to pay more for quality portfolio companies (portcos) and, to a lesser extent, sellers are reducing their expectations. Such narrowing of the valuation gap may lead to further improvement in dealmaking. Adapting uncertainty and winning in the marketplace starts with contacting a broker with deep industry However, until the market loosens, liquidity will remain expertise who can help a PE firm develop a competitive an enormous issue for many PE firms. Those in need of advantage in generating returns. liquidity continue to access the secondaries market, with an estimated $71 billion in activity in the first half of 2024 4 3. EY, “Private Equity Pulse,” July 25, 2024. and a predicted $150 billion for 2024 as a whole. The secondaries market should continue to thrive in 2025. 4. Lazard, “Lazard Interim Secondary Market Report 2024,” September 5, 2024. As it remains difÏcult to implement exit strategies at 5. Moonfare, “Private equity asset allocation,” September 2, 2024. acceptable valuations, PE firms are awash in undeployed capital, with $2.6 trillion of dry powder held by firms globally. Meanwhile, institutional investors — whose portfolios are 22% invested in private equity5 — may be considering a pullback to rebalance their portfolios, further hampering liquidity. As they hold back new investments to rebalance their portfolios, a growing liquidity issue may continue to hinder the formation of new funds in the coming year. PE firms must find innovative ways to build portco value and position them for success. Those firms with effective insurance and risk management plans will be in a strong position to profit in 2025, no matter which direction the market heads. 3

Vitality PE firms of all sizes will have opportunities to recruit and retain top talent. As they battle for talent to lead their portfolio companies, there’s always competition for top talent at PE firms themselves. And whether they’re recruiting analysts 6 from elite universities or poaching directors from rival firms, attracting and retaining the best and brightest will continue to be a challenge, particularly for smaller and less established funds. Adding to that challenge, more than half of PE firms lack succession plans, and most of the rest report they don’t have adequate talent in the pipeline to promote, largely because they haven’t developed talent internally. But there are opportunities for them: Such firms can get similar results through a strong benefits partner that can PE executives realize the importance of hiring and deliver the same type of services as a highly compensated developing talent within their firm. They say quality of CHRO. Tools such as Workforce Persona Analysis help leadership and succession are the most important factors in deliver personalized benefits that engage employees at all determining their success, three times more important than levels of the organization. portfolio rationalization and twice as important as artificial 7 No longer can a PE firm hire a B-level team and intelligence. get A-level results. 6. Peak Frameworks, “Best Private Equity Placement,” accessed September 12, 2024. Instead of sitting back, they’re seeing an opportunity to 7. Alix Partners, Leadership and the Future of Value Creation: The recruit top talent from the full spectrum of financial services, New PE Imperative, March 2024. often from organizations outside of PE or even finance. And large, well-heeled PE firms are hiring former CFOs, CMOs and CTOs from other companies, and increasingly, they’re hiring former Chief Human Resource OfÏcers (CHROs). PE firms hope that ex-CHROs not only can elevate recruiting and retention, but also implement learning and development programs, as well as create sophisticated, personalized benefits plans. They’re also leveraging that expertise within their portfolio companies. Smaller PE shops usually cannot afford to hire high- level CHROs from top companies, as such positions can command mid-six-figure salaries plus bonuses. 4

Resiliency Insurance and risk management will no longer mean checking a box. With deal volume remaining sluggish over the past several years, more carriers are bidding on fewer deals, driving down the cost of R&W coverage even further than the historic lows that it’s been at for the past two years.8 In fact, some deals have resulted in coverage costing less than 2% of deal value. D&O coverage is also approaching all-time lows. As the cost of coverage has dropped, the amount of time to consummate deals has extended. Because PE managers cannot afford to miss earnings projections because of a deal gone bad, the time spent on More portfolio companies will use analytics to assess due diligence has increased as much as 50%. Deals tend to the quality and suitability of coverages, especially for be bigger, more complicated and more prone to mistakes. cybersecurity, business continuity, weather-related risks and catastrophes. All of the above risks have increased Proper due diligence involves both property-casualty across all businesses. insurance and employee benefits issues. Among many elements of diligence, buyers must analyze target PE firms are also facing increased regulatory and company contractual obligations, international exposures, legislative scrutiny: The U.S. Department of Justice, the large claims, the overall adequacy of the benefits program SEC and the European Union have issued new directives and benefits compliance issues before the deal is finalized. and mandated disclosures in the past year that will directly 10 Firms must double or indirectly affect PE operations. Dealmakers and portfolio company managers have often their attention in meeting regulations and managing such considered proper insurance and risk management as a risk throughout 2025. “check the box” exercise needed to complete a deal, with risk management strategies limited to finding the cheapest insurance. 8. Woodruff Sawyer, “Reps & Warranties Insurance: Our 2024 Guide,” August 20, 2024. Exit timelines have extended, however, with some 9. HUB’s Outlook Executive Survey polled 900 C-Suite and VP-level investment pools lasting years after their target executives on the issues facing them on profitability, employee dissolution. As a result, risk management and insurance vitality and organizational resilience. programs have become far more important for PE 10. BCG, “The Regulatory Climate Is Getting Hotter for Private Equity,” July 17, 2024. firms’ portcos. Yet fully one-third of financial institutions responding to HUB International's Outlook Executive 9 Survey reported they do not have a formal enterprise risk management assessment process. This could lead to suboptimal risk management, inadequate insurance and — ultimately — inferior results. 55

Leadership Management at portcos will remain essential to sustain returns. In a slow market with extended exit cycles, PE firms are holding on to assets much longer than in previous years. Not only does that affect insurance and risk management needs at portcos but means that leadership and top management to run portfolio companies could be the difference between top-quartile performance and disappointing results. In this spirit, the race to recruit top executives to manage 11 That’s also portfolio companies is only increasing. exemplified by the increased concern from PE managers: More than half say that executive retention risk for their nationwide are implementing auto/home and personal 12 insurance solutions (48% of respondents), enhancing portfolio companies has increased in the last year. retirement plans (43%) and improving compensation (41%) The search for leadership at the approximately 23,000 as ways to improve their employees’ financial wellbeing. companies that private equity owns has become so intense that some are hiring first-time CEOs to lead their 13 11. Business Insider, “Move over dealmakers, portfolio-company portcos. Some are embracing a “CEO-first” approach to investing, in which PE firms recruit rising stars from operators are the rising stars of private equity,” August 14, 2024. management at successful companies, then partner with 12. Alix Partners, Leadership and the Future of Value Creation: The New PE Imperative, March 2024. those hires to identify and acquire a company to lead. 13. Hunt Scanlon Media, “The Rise of First-Time CEOs in Private Equity Portfolio Companies,” June 21, 2024. Overall, a broader view of talent development and employee retention means PE firms will need to invest more robustly in programs to recruit, train and retain rising talent at their portcos. In addition, the human resources capabilities of their portfolios may need to be supplemented or replaced with outsourced solutions that are better equipped in these areas. PE management can also look to improved compensation and inventive benefits strategies to keep lower-level employees engaged at their portfolio companies. For instance, according to the HUB survey, companies 66

Navigating Your Next Steps Navigating Your Next Steps HUB construction insurance, risk management and employee benefits HUB private equity specialists will work with you to develop a tailored specialists will work with you to develop a tailored strategy that will protect strategy that will protect the bottom line, support your workforce and build the bottom line, support your workforce and build resiliency for 2025. Here resiliency for 2025. Here are some initial considerations: are some initial considerations: Making risk management a pillar of your organization’s culture Erratic deal volume has made private equity firms more mindful Develop a can help identify exposures and develop response plans in case of their bottom line. Taking a higher deductible on any number Don't shy away of any type of incident, whether that is a weather-related event, 1 comprehensive of coverages can reduce premiums and improve experience 1 from risk. a threat of physical safety or a cyberattack. Make sure your risk plan. rating. Ask your HUB broker about captive solutions, self- broker understands how to approach risk and can identify gaps insurance and risk retention groups. in insurance that could disrupt your daily operations. To compete for a shrinking pool of skilled labor, personalized benefits Create a based on HUB Workforce Persona Analysis and data analytics can A (good) loss Understand the root cause of large losses and explain to carriers your personalized help your company differentiate itself from the competition. Creating 2 plan for preventing future losses. Develop a strategy with HUB to trend is your a quality employee experience (QEX) will boost engagement, improve 2 benefits determine the best time and frequency to review alternative markets. friend. recruitment and retention and promote worker wellbeing strategy. PE firms and their portfolio companies are struggling to Remain Safety is already the focal point of your operation, but with attract and retain top talent. But hiring and retaining a strong focused on an influx of new and less-experienced workers, injury risks 3 It's all about base of employees requires supporting employees’ health, 3 workplace increase. Work with a risk professional to review your safety your people. safety and wellbeing. Give them the ability to personalize their safety. program at least annually and address any issues. benefits without increasing costs. HUB’s QEX approach will give you a competitive advantage. Stay in contact with your broker and let them know about With multiple businesses to manage, you’ll have multiple risk Be transparent changes to the business to eliminate surprises at renewal. Be transparent issues. Let your broker know what changes you’ve made with your Review exposures and insurance needs at least 90 days prior 4 with your so there are no surprises at renewal. Review exposures and 4 broker. to policy renewal to allow your broker to find the optimal broker. insurance needs at least 90 days prior to policy renewal, so your coverages for your organization. broker can identify the best options. 7 7

Private Equity Rate Guide — U.S. HUB International’s rate guidance comprises an analysis of proprietary national survey data and interviews with HUB commercial insurance brokers and risk services consultants who specialize in the Financial Institutions industry. On average, we are experiencing rate cuts to moderate increases as insurance market conditions generally improve. Below are projections of rate increases that we anticipate in 2025. It’s important to discuss your business’ exposure with your insurance broker and understand what to expect well in advance of your next renewal. Coverage 2025 Private Equity Insights Rate Guide Capacity between carriers for private D&O placements remains D&O Private -10% to +5% strong. Underwriters are aggressively cutting premiums, giving automatic renewals and awarding two-year policies to maintain business. D&O insurance for public companies remains highly competitive. D&O Public -10% to +5% There is plenty of capacity and underwriters remain aggressive. Terms and conditions remain favorable for insureds. Premiums for cyber liability insurance are expected to continue to fall. Breaches and outages of significant service providers (i.e., Cyber -10% to Flat breaches at Change Healthcare and Crowdstrike) haven’t led to rate hikes yet but may point to harder market conditions in the first half of 2025. Claims on larger private equity firms are likely to drive higher rates and reduce capacity in the near term. General Partner -10% to +10% Underwriting considerations include the number of funds and Liability assets under management; investment strategy; management pedigree; portfolio company board exposure; and investor base or investment structure. Representation and Additional capacity has stabilized rates; however, expect rates and Warranty Flat to +5% retentions to rise should the volume of M&A transactions increase in Q4 of 2024 and into 2025. Professional Liability: E&O for As profitability has attracted competition in the market, expect Asset Managers, -5% to +5% additional capacity for Professional Liability coverage. Hedge Funds, Broker Dealers NOTE: Rate is typically defined as the amount of money necessary to cover losses and expenses while providing an insurance company with a profit for a unit of exposure. Exposure refers to a business’ or individual’s susceptibility to various daily risks. Carriers evaluate the level of risk an insured faces in calculating insurance premiums. 8

HUB Financial Institutions When you partner with us, you’re at the center of a vast network of experts who will help you reach your goals. For more information on how to manage your insurance costs, reduce your risk and take care of your employees, talk to a HUB financial institutions insurance specialist. $776M in commercial insurance premium brokered by HUB 27,000 insurance policies managed 8,600 financial institutions clients Stay up to date Subscribe to receive risk and insurance insights and event invitations throughout 2025. Subscribe hubinternational.com