“PE Firms Upend Insurance Market for Legacy Liabilities”

Law360, September 8, 2023, Ganesh Shetty

Stephen Hoke was interviewed for the recent Law360 article “PE Firms Upend Insurance Market for Legacy Liabilities.” It is the first deep-dive into the rapidly growing trend of companies “selling” their legacy liability risk, such as asbestos and environmental, to special purpose private equity firms.  Read the article here.  If you are unable to access the article, Hoke’s article quotes are provided below. If you wish to learn more about the article or have any questions, please contact Steve Hoke at shoke@hokellc.com or (312) 575-8576. You can also view his bio here 

Overview of the Private Equity Legacy Liability Space: “Stephen Hoke, whose firm Hoke LLC specializes in advising companies on how to handle their legacy liabilities, told Law360 … private equity companies have a good track record of properly resolving claims.” “‘Reputation is huge,’ Hoke said.  ‘It’s a very small world at this level.’” 

Private Equities’ Business Model: “‘As long as claims are getting paid, plaintiffs’ attorneys do not care where the money is coming from, and if the private equity firm performs well, the settlement funds available to their clients will last that much longer. Private equity does try to get the claims payments down, don’t get me wrong, but they know how to do it, they know what’s too far and they know what is feasible.’” 

Why Sellers Don’t Require Restrictions on Buyer’s Investments: “‘The seller doesn’t want that, because that would require some level of due diligence and involvement in monitoring the progress of the deal over time. And, there’s a psychological aspect — the seller wants to get rid of the legacy liabilities. That’s the whole point.’”  

Recent Deals That Require the Buyer to Contribute Funds to Capitalize the Company:  “Hoke and Chaplin also noted that in recent deals, the seller of legacy liabilities has required the private equity company to put in some of its own funds into the entity that the private equity company acquires. The ensures the private equity company has some ‘skin in the game,’ reducing the moral hazard inherent in giving a third party substantial sums without guardrails on how they can be used.”  

Historical Performance: “Of the dozens of corporate legacy liability acquisitions to date, of which many may involve nonpublic buyers and sellers, there’s only been one major deal that’s failed, Hoke said.” NICO’s acquisition of talc supplier Whittaker Clark & Daniels Inc. in 2007, which recently filed for bankruptcy.  

Hoke on Regulation of the Private Equity Legacy Liability Space: “‘The state departments of insurance are very heavily focused on consumers. They’re not anywhere near as focused on commercial insurance as long as consumers’ claims get paid,’ Hoke said. ‘So, until some of these deals start failing spectacularly such that people don’t get paid, I don’t think this is going to change, and I don’t think the level of regulation is likely to increase.’”