What happens when an institutional investor or a high net worth individual finds out that the lofty return they came to expect on a buyout fund is cut in half thanks to a few corporate collapses? Is there a lawyer in the house? Do we have insurance for this kind of stuff?

CNA, the nation’s seventh largest commercial insurance writer and the 13th largest property and casualty company, announced on Monday the launch of two new coverage plans designed specifically for the private equity and venture capital industries to weather any legal headaches their business may prompt.

We couldn’t help but notice the timing of such an announcement, especially as it pertains to the private equity industry. Of course, the credit crunch won’t seriously damage all leveraged buyout shops, but it sure will be painful for a lot of them.

Enter CNA.The company’s two new coverage areas are designed to help LBO firms and other fund investors to defend against a legal onslaught, the company said.     
    
“CNA Specialty announces directors and officers (D&O) as well as errors and omissions (E&O) coverage designed specifically to meet the liability insurance needs of private equity and venture capital firms. This coverage is targeted to private equity partners and venture capitalists who face many exposures as investment advisors, typically for high net worth or institutional investor clients.”

So far, institutional investors for the most part haven’t rebelled against the private equity industry because the returns remain strong. Top quartile funds were in the 30 plus percent range prior to the credit crunch that arrived this summer. Returns were expected to come down off those highs, but add in the credit craziness and there’s sure to be a portfolio company or two that gets levered into the ground.

Hedge fund returns in the meantime have been on the skids.

Judging by where things stand with the LBO market now, some buyout shops may want to give this company a ring.

(Photo. Reuters file)