Private Equity Firms Face Increased Litigation, Says Marsh Report

June 28, 2007

According to a survey by Marsh’s UK office, “almost half of private equity firms believe they will face an increased level of lawsuits over the next two years.” 47 percent of those surveyed predicted an increase, while 43 percent said it would remain the same. Only 6 percent thought there would be less legal action.

The survey also found that private equity firms expect regulators to be “the single biggest influencer of potential allegations with 83 percent citing them as a likely litigant.” By contrast Marsh noted that “regulators today account for just 2 percent of legal actions,” according to actual Marsh claims data.

The broker’s claims data also reveals that minority shareholders of private equity-backed businesses are bringing the most allegations, representing 46 percent of claimants in US and 21 percent in Europe. The most common allegation in both the US and Europe was in relation to a breach of fiduciary duty.

Karen Beldy Torborg, Global Leader of Marsh’s Private Equity and M&A Practice, noted that this isn’t surprising given the complexity in separating what can be perceived as the dual capacities of a private equity professional. “They can be seen as both a private equity investor and an outside director of the companies they invest in,” she explained. “It’s a unique situation, which brings with it an array of risks that must be fully understood and managed.”

Additional findings in the survey found that media attention was considered by half of respondents (51 percent) as a likely catalyst for increased litigation against private equity. Trade union involvement and government intervention were also considered to be significant influencers of increased litigation by a significant portion (42 percent) of respondents.

Beldy Torborg added: “The complexity of private equity transactions and the phenomenal growth of the industry have sharpened private equity’s focus around risk.”

Marsh’s report surveyed over 150 leading private equity firms across Europe, the Americas and the Asia Pacific.

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