Liberty Mutual | Published 09/30/2022 | political risk insurance

It’s news to no one that our world is in a state of turbulence, from the political climate to the actual climate. One of the numerous effects of political change is that organizations operating in international emerging markets face potentially significant business risks, from elections and coups to wars and sudden nationalizations.

Global economies are still rebounding from the social unrest and supply-chain issues of the COVID-19 pandemic, a crisis that led investors to consider adding inequality measures (such as the Gini coefficient/index) to country-risk profiles that traditionally relied on political stability measures. More recently, the Russia-Ukraine war has been producing global ripple effects, including reduced agricultural output to regions like Turkey, the Middle East & North Africa, and Bangladesh; a worsening of the continued energy crisis; and sustained and elevated inflation.

In fact, in a recent annual survey of PE and VC practitioners conducted by S&P Global Market Intelligence, 26% of respondents highlighted political upheaval as one of the top five risk factors of most concern.

There is, however, a solution. Learn more about a well-established but underutilized tool that can help mitigate the risks private equity firms face investing in today’s shifting geopolitical environment: political risk insurance (PRI).

How political risk insurance can reduce the risk of geopolitical turbulence

First, let’s examine some of the specific risks a company funded by a PE firm faces in a volatile political climate. These risks include, but are not limited to:

Lost investment without compensation because the government seizes control of company assets. History is rife with examples of newly elected regimes forcibly taking ownership of privately controlled resources.
Forced abandonment of projects or equipment because the potential for politically motivated violence escalates to the degree that the business must leave quickly to ensure the safety of its team.
Management of breached contracts that occur when a supplier or vendor runs into the above or related problems.

“Foreign direct investment is crucial for developing countries,” says Amy Gross of Liberty Mutual’s Global Private Equity Practice. “For example, many countries where these emerging markets exist have a significant need for clean and sustainable energy sources. This need has driven a number of those initiatives—solar energy, wind projects, etc.—all requiring a capital investment of anywhere from $10 million to $2 billion. However, to attract that kind of capital, investors need to know that their political risk is mitigated.”

Based on the very real risks listed above, it’s no surprise that PE firms have been cautious about expanding their international portfolios. However, avoidance of overseas assets means firms are missing out on substantial business opportunities—investments that could be less risky if more firms leveraged political risk insurance.

Just as traditional insurance is leveraged by PE firms to reduce risk to businesses in a domestic portfolio, political risk insurance helps firms manage the unknown liabilities associated with investing in emerging markets across the globe. A risk management strategy that includes PRI gives private equity companies more dependable access to opportunities in the developing world and more confidence in valuation and pricing when it’s time to exit.