Changes in how companies raise money will create challenges and opportunities in the insurance business, particularly in professional liability. A recent article in the WSJ (see here) noted that companies are increasingly turning to private sources of capital rather than the public markets. This is a critical trend that will have implications for many years if it continues.
The article notes that overall public debt and equity issuances fell by 11% between 2009 and 2010, to $1.07 trillion, while private issues rose by 31%, to $1.16 trillion. This shift… will likely accelerate when the SEC implements reforms in the Jumpstart Our Business Startups Act. (see our prior post)
While the article points out the costs and regulatory challenges of being a public company, there are additional drivers to the trend towards private sources of capital, including:
- Size is not as important: In many market segments size is not necessarily an advantage.
- Technology: The cost of technology has come down, allowing smaller companies to compete on an equal footing.
- Specialization: As in insurance, specialization provides a competitive advantage.
- Capital Markets: The private market has become more active (& likely more efficient), providing an alternative to public markets (including for exits), and size does not seem to be a hurdle to private sources of capital.
The public D&O market will decline as the public company base declines, and the private company D&O market will continue to grow rapidly. But the private company D&O is also getting more challenging as the financial structures increase in complexity and numbers of private company shareholders grow.
Providing private company D&O to organizations with more complex capital structure is complex. As a wholesale broker, we provide D&O, along with expertise and markets, to all types organizations through retail insurance agents and brokers.