Political insurance for PE funds

A new insurance product has been launched to cover private equity fund investments in Africa and other emerging markets against political risk.

The political risk insurance has been developed by Overseas Private Investment Company (OPIC), the US government’s development finance institution.

It aims at shielding investors from the political uncertainty that characterises doing business in the emerging markets and damages arising from violence related to political activity.

East Africa has, in recent years, witnessed several incidents of politically instigated chaos leading to destruction of property.

Besides providing protection against such eventuality, the new product also targets offering cover from other unforeseen circumstances that may affect deals.

“For example, OPIC is developing insurance products for the renewable resources sector, specifically to protect investors against a government’s change in the feed-in tariff that the investor has relied upon to structure its project; and to cover investment in forestry projects, including Reducing Emissions from Deforestation and Forest Degradation (REDD) projects,” PIC said in a statement.

Industry players have often cited political risk as a drawback to the continent’s attempts to attract private equity investment, despite it being considered a high potential destination.

Acumen Fund East Africa director Biju Mohandas, in a past interview told The East- African that political stability was one area that Africa could learn from Asia to improve its attractiveness for investment.

A report by Renaissance Capital released last year, linked economic growth to political stability, and proposed an increase in trade and investment, instead of sanctions as a remedy to instability.

The insurance product is an attempt to boost investment by reducing risk. With the risks toned down, OPIC argues, fund managers who take up the insurance could accelerate their capital-raising cycles for investment funds.

This is by providing fund managers and their limited partners with long-term coverage against risk of loss to their investments as a result of expropriation, currency inconvertibility, and political violence. 

It added that by mitigating risks, this product would also boost investor appetite in pursuing opportunities in the emerging markets.
“Having pioneered the development of both political risk insurance and debt facilities for private equity investment, OPIC is in a unique position to launch new, flexible and cost-effective facilities that we expect will facilitate new investment in emerging markets,” said OPIC president and chief executive Elizabeth Littlefield.

The insurance facility will be provided depending on the fund’s needs, and can be arranged for either all individual investments for all of a fund’s investors, or the specific investment amounts of a select group of investors.

The product would be available through either its direct insurance or through an OPIC-sponsored private insurer reinsured by OPIC and backed by the US government.

Ms Littlefield said that given the volume, diversity, and spread of risk that exists in fund programmes, such facilities would be provided at more affordable rates by OPIC together with private market insurers than comparable stand-alone insurance products that are currently available.