Adam Barron, a partner at Englefield Capital, focused on the work done by his private equity partner in the Cox deal and the many opportunities and possibilities it offered.
"At Englefield, we're fortunate to see a lot of deal flows in insurance and lots of opportunity to invest. There's no real formula that can assure you of successful investment, but there are steps you can take to try to minimise the chances of failure."
But he stated that frequent failures do exist. "The battlefield of insurance investing is littered with the imprudent and the unlucky and every combination thereof, and only by being really rigorous and disciplined can you hope to be on the right side of this sort of investing."
So the first piece to get right is the management team. "It is fiendishly difficult to sit opposite people and try to work out whether they are the 10% of people that are going to be successful, perhaps less than 10% of people that will be successful in running an insurance company, at selling it at the sort of rates of return that constitute a private equity investment. But that's the job we're on for," said Barron.
He emphasised that it was important to focus on the facts, ask: what have they actually done? What has their performance been like? What has their track record been? And try to unpick from that the cyclical elements and all the other vagaries that might not apply in the future. How good have they actually demonstrated themselves to be? And that's all about getting away from people who are plausible talkers and getting towards the people who are effective doers.
"There are a lot of people who have been very successful, but that doesn't necessarily translate into success in the venture that they're proposing to you. So check whether what they've done historically is in exactly the same sector as what they're proposing to do."
Engineering the capital structure
Duke Street Capital's Colin Curvey gave an insight into the workings of private equity companies when he revealed he saw a great deal of opportunity in the insurance firm Cox after backing Neil Utley's buy-out.
"In Cox, we see ample opportunity for transformation. I don't want to give away too many secrets, but some of the things that we think will happen under our ownership are simplification.
"It was a very complex business, we now are returning it to being a focused personalised insurer and distributor, obviously with a particular focus on the motor sector," said Duke Street's associate director.
He said he believed that the heart and soul of Cox is in the underwriting. "And the differentiator lies in the knowledge of the underwriters. However, as we all know in the insurance industry, systems and processes are absolutely key, so we hope to increase the efficiency and eventually the effectiveness of the business by giving those a bit of an upgrade."
One way Duke Capital can add value as private equity owners is to focus on capital structure and this is why they are sometimes called financial engineers.
"There are many ways to capitalise a book of underwriting and, under our ownership over time, we will constantly evaluate what the most appropriate way to do that is and one that will make them better at underwriting and, frankly, enhance the value for the shareholders," said Curvey.
However, he admitted that there was still much to do on the horizon. "We're very excited about what we're going to do with the distribution arm of the business. Prior to our ownership it was already participating in the consolidation of personal lines distribution, and we've backed Neil to continue to do that, frankly.
"And so, hopefully, when the time comes to exit this business, because private equity owners don't own forever, we will have significantly improved the business in terms of its focus, its profitability, the size and the quality of the earnings as well. And that's a way to sum up what I mean by transformation."