Ep. 547 Private Equity and Bonded Contractors: Building a Foundation through Communication

Rancho Mesa's Marketing and Media Communications Specialist Megan Lockhart sits down with Surety Group Leader Andy Roberts as he explains the important role communication plays when private equity acquires a bonded contractor.

Show Notes: ⁠⁠Subscribe to Rancho Mesa's Newsletter⁠⁠.

Director/Host: ⁠⁠Megan Lockhart

Guest: ⁠⁠Andy Roberts⁠⁠

Producer/Editor: Jadyn Brandt

Music: "Home" by JHS Pedals, “Breaking News Intro” by nem0production

© Copyright 2025. Rancho Mesa Insurance Services, Inc. All rights reserved.

Transcript

Megan Lockhart: You’re listening to Rancho Mesa’s StudioOne™ podcast, where each week we break down complex insurance and safety topics to help your business thrive.

I’m your host, Megan Lockhart, and I’m joined by Andy Roberts, Surety Group Leader with Rancho Mesa. And today, we’re going to talk about the important role communication plays when private equity acquires a bonded contractor. So Andy, welcome to the show.

Andy Roberts: Thank you for having me.

ML: We're happy to have you.

Now, you recently wrote an article addressing this topic. So what are some of the key differences between how surety companies underwrite standard construction bond programs versus those owned by private equity?

AR: So on the standard side, you know, we really look at like a standard net worth and the net worth of the company when we're establishing, you know, those limits and what they would qualify for a bond program. So, you know, we look at like the retention of the capital, you know, that they're keeping money in the company, you look at their cash balances, like what their net profits looking like at year end. But when you're looking at, you know, these private equity deals, the big issue you run into is that they carry a lot of debt on their balance sheet. And you, the interest payments on those debts often lead to them showing a negative, you know, net income on their financials, which on the standard side, that looks, that's not a good thing. You know, we don't like to see that you're losing money.

So, you know, it's important on this where we find surety companies that understand PI because you want to look at their cash balances, you know, making sure that their cash flow is good. They have a bank line and other working capital items outside of the standard stuff that we look for.

ML: Okay, that makes sense. So why is it so important for private equity firms to involve their surety agent and company early in the acquisitions or due diligence process. So if you're looking to or if they're looking to acquire a company that relies heavily on bonded work for their revenue source, it's going to be important that company can still get that kind of work after the acquisition. And so, you know, oftentimes when they're bringing on a company, you know, there's a big capital expenditure to make the acquisition, which has a negative impact on the balance sheet. And so if we're going back to the surety company and it has a, you know, a detrimental impact to the balance sheet, you know, that affects their program limits. And this could affect that company getting the bonds that they need. And therefore, you know, making the investment in that company, maybe not the best for the long term, you know, for the equity firm.

ML: Right. How do the financials of private equity owned companies, especially higher debt and potential net losses, impact their ability to secure bonds after an acquisition?

AR: Well, those you know as the debt goes up if you know depending on the interest on that too like that can you know hamper their limits and you know make their program smaller because the surety companies then are tightening up you know they're looking at all these other obligations that this money is kind of earmarked for and so it's really important that they're keeping an eye on their you know their cash flow their bank line these are all kind of key markers we look at like if they're heavy into their bank line for cash flow cash flow purposes, that's not usually a good sign and, you know, might be a sign that they're having some struggles. And that's going to cause the surety company to kind of suck back and not want to support as big of a program that they might need.

ML: Right. So in your article, you mentioned the role of the current management team post acquisition. So why does their continued involvement matter so much to surety companies during the transition?

AR: So this is a really, you know, important thing because some of these P.E. firms, you know, every P.E. deal is different. And depending on what market sector they're in, you know, the P.E company might be back east and they're buying a company that might fit the mold that they're doing for, like if they're electrical contractors or landscapers or something, but they might be in a territory that they're completely not familiar with. So keeping that management in place, you know, at least for a while, you know, keeps the operation continuity in place, the knowledge transfer, the relationship transfers, you know, keeps all that kind of stuff in place to help keep the business running, you know, hopefully it was profitable and running well prior to that and it keeps that trend going, you know, so that the private equity company, you know, has a good investment on their hands.

ML: Right. Well, Andy, thank you for this important information. If listeners have questions about their surety program, what’s the best way to get in touch with you?

AR: So you can reach me at (619) 937-0166 or at aroberts@ranchomesa.com.

ML: Great, well Andy, thanks for joining me in StudioOne™.

AR: Always a pleasure, thank you for having me.

ML: Thanks for tuning in to our latest episode produced by StudioOne™. If you enjoyed what you heard, please share this episode and subscribe. For more insights like this, visit us at RanchoMesa.com and subscribe to our weekly newsletter.