Tailwinds Blowing for Private Equity M&A

Looking at the overall investment landscape in 2024 and into 2025, let’s discuss the trends affecting private equity investment appetites and facilitating momentum in the investment landscape.

Matthew Scally: I would say, quite simply by volume and value, private equity-leveraged buyouts were back in 2024. For some simple data points, the third quarter of 2024 saw the highest amount of leveraged buyout [by] volume since the first quarter of 2022, which is on the tail end of that boom. And private markets were 50% greater than public markets through the first three quarters of 2024. So, the data is not fully locked, but we expect 2024 to be a really solid year in terms of capital allocated and deals facilitated. And that is, of course, a component of multiple different industries and a few different factors.

One, we saw the rate environment stabilize a bit and view that on a go-forward basis there is going to be continued downward pressure on some of the interest rate costs and the cost of capital for investors. Private equity is, as most people well know, an illiquid investment which requires deployment of capital. So you can go back to funds raised in ’21 and ’22 and ’23 and there is still a need to deploy the remaining capital, i.e., dry powder. Yes, fundraising in 2022 and 2023 was a little compressed, but there are still a lot of dollars out there that need to be spent.

I also think in 2024 there was a bit of a narrowing of the bid-ask spread between buyers and sellers. And that I think helped facilitate some of the transaction momentum we saw throughout 2024, but specifically in the back half as well.

I will say as private equity… continues to mature, there has been and will continue to be more of a focus on value creation and identifying the thesis as opposed to solely investing behind tailwinds in a specific market. How are we going to accomplish our EBITDA targets? What are our focuses in terms of adjacencies we can go into? How is technology going to allow this business to be more and more efficient? All are points that we’re having deeper conversations with our private equity clients on.

Discuss insurance industry-specific trends and 2025 expectations.

Grier Tumas Dienstag: We saw similar trends in insurance that mirrored the overall private capital ecosystem. So, as Matt mentioned, that spike in deal activity in 2021, a precipitous drop into 2022 and also 2023, and then the return of insurance investing in 2024 looked similar to the overall environment. If we break down what types of deals those included, it included some of the major brokerage deals as well as a return for many large brokers continuing to acquire smaller brokers. We also saw continued activity in MGAs, claim services, and technology, not to mention some of the balance sheet and permanent capital investing that continues to occur.

Going forward, similar also to the overall outlook, we expect an increased deal activity in insurance in 2025. We’re already seeing that in the first quarter and know that there are both several assets that need to trade—they’re nearing the end of their hold periods [of] five, seven, eight years—and similarly several investors who have either successfully raised or still have money to spend from prior funds. So, we expect it to be a great year ahead for M&A.

What drives value in investors’ eyes and how are they evaluating potential insurance industry investments?

Scally: First and foremost, we did see some level of depression in the valuations across the insurance space. That again, to Grier’s point, mirrored what we saw more broadly in ’22 and ’23 across most industries with the broader leveraged buyout space. Within brokers specifically we’ve seen a bit of a bifurcation and investors particularly in the private space really valuing a more centralized technology-driven platform that has clear succession planning in place, clear thought processes and data related to the placement of the business, clear vision on where the growth is going to come from by geographies, by lines of business, as well as specifically by industries that they’re trying to partner with. There has historically always been a focus on producer and client retention, and that remains. And I think coming out of the acquisition boom from 2020 to 2022, there is a very specific focus on post-earnout organic growth that the brokers who have acquired agencies are able to achieve. And all of that ties together with a more centralized organic growth-driven brokerage getting valued at a materially higher multiple than the one that has remained more federated and might not have the same level of succession planning in place.

I would think that does create a bifurcation among potential targets because there does seem to be those aggregators that are very focused on integration and then the ones that just have a lot of disparate, small agencies.

Scally: I will say to many management teams’ credits, they have been focusing on these levers for the last few years. They have certainly not been blind to them, and a lot of our interactions with these leadership teams have been focused on those points—how to platform and how to integrate more effectively. What’s our producer and client retention strategy? Where do we need to lean forward on organic growth, i.e., new client lead generation sources as well as services that we can offer our end clients? So, kudos to them for taking those steps. But I do feel the industry has a while to go and there is still a gulf between folks who are doing this exceptionally well and others that are maybe in their early innings of executing on this plan.

One aspect of the insurance value chain that has seen significant investor interest is MGAs. What aspects of MGAs are drawing investor interest? Who's buying MGAs? And what external factors are affecting their growth?

Dienstag: MGA has been the major investment theme over the last three or four years and one that wasn’t top of mind for most of our clients five or six years ago. We consider some of the structural and cyclical changes that have driven significant growth in MGA formation, especially immediately coming out of the pandemic. One, the shift in the nature of risk—more complex risk is more difficult to place. Some of these changes include increased nat-cat [natural catastrophe] incidents and larger verdicts coming out of liability claims. These are structural changes that combine with more cyclical changes like the rate environment as one example. Also, thinking about the outflow of talent from carriers in particular given some of these return-to-work mandates coming out of the pandemic, there are a lot of tailwinds for the MGA space. We step back and say, “What do investors care about?” “Where are we seeing the most interest?” It’s often in aggregated MGAs. So, MGAs that are diversified from an exposure perspective, i.e., different lines of business, different geographies, different industry segment focuses, require different expertise across each of those areas. It requires different distribution networks. But it also helps to have a variety of capacity providers that may be providing capacity to two completely different programs within that aggregated MGA and be able to help with some of the downside risk if all of a sudden one of your programs [faces] a really challenged loss ratio environment in one year.

Then we step back and say, “OK, there are only a few of those aggregated MGAs in the market overall, some of them might be for sale, some of them not necessarily, and that creates a lot of investor interest in those that might come to market.” But it also creates another cohort of investors who say either “we don’t want to pay the multiples that those aggregated large MGAs might demand,” or “that’s not going to be part of our investment strategy and instead we’re going to go to specific individuals, to team lift outs, to star talent from either a carrier, another MGA, etc., and help support them and eventually grow into an MGA that might have similar diversification that we’ve seen in some of the successful deals of the past few years.”

Scally: The other piece I’d add on the MGA portion of this discussion is it is a highly competitive transaction market. It is not just private equity investors who are looking to deploy capital in this space. Brokerages and management teams as well as even other carriers…are looking to acquire, form, establish MGAs. And you have a material amount of talent that, as Grier mentioned, is pulling out of that and looking to combine or join those organizations. And we’ve seen a lot of success, though again still in the early days, of brokers effectively managing and partnering with MGAs either through wholly acquiring them, taking an equity stake, or just being more thoughtful in that partnership loop. So it’s an area that has a lot of attractive tailwinds, and investors across the ecosystem, not just private equity, have picked up on that.

Claims services is another area that has seen particular attention from investors recently. Break down the industry and investor trends.

Dienstag: Claims has been a huge focus area coming out of the challenging loss ratio environment that many of our carrier clients saw in the early years of this decade. We’ve seen a huge focus on accuracy, in particular in claims that span across lines of business. Looking at some of the prior programs that might have driven down adjusting expense and saying we need to make sure that that’s not at the expense, no pun intended, of worse accuracy. The No. 1 priority is going to be paying out the claims as they deserve to be paid out, and ideally doing so in a way that also manages the very litigious environment in which we live, ensures that claimants are paid what they deserve quickly and that, as part of that, there is a lot of opportunity for innovation. So, that means bringing some of the learnings from the auto world over to property, which we still see being generally many years behind the auto claims environment, despite a lot of innovation there. It means thinking through what it means to bring newer technologies like Gen AI, as an example, to create co-pilots for adjusters.

And these trends I talk about in the context of carriers because they’re so relevant to our investor clients as well. What I mean by that is there are a number of large-scale TPAs, both here in the United States as well as in Europe, that have very similar challenges and opportunities to carriers with large claims organizations looking to innovate, looking to bring the best solutions that they can at the best cost to their clients, whether they be self-insured or carriers themselves. Then similarly we have a lot more opportunity now as it relates to the use of our data, as it relates to analytics. And to ask, what does it mean to really have a set of scaled solutions, whether they be sitting within a TPA or whether that be the long list of innovative players playing more of a point solution type role in the claims ecosystem and really driving significant value in pursuit of that accuracy I mentioned.

Let’s discuss the changing external environment of risk and what that means for investors in the space.

Scally: I personally feel from the conversations that I have with my clients that there is a move towards specialization and complex risk, and investors are excited to put in capital behind that, whether it’s on the distribution side or whether it’s on the underwriting and balance sheet component of this. We have more and more conversations around where rates are going to go in relation to E&S markets, how brokers and admitted markets are going to try and better serve or provide capacity, and if that’s an opportunity or a risk. So I do see a flight to specialization happening and the private equity investors that are out there that spend a lot of time in financial services or specifically in insurance, are taking note of that and have been very active in and around that space.

Is there a tech component here? Are private equity investors looking at companies that are utilizing advanced technology as creating more value?

Scally: They certainly are, and there’s some specific examples of where that has been successful. Private equity investors are always going to gear themselves towards service and tech-oriented and tech-enabled businesses, especially given today’s tailwinds. Everything and anything related to AI or generative AI has garnered interest from investors and the insurance industry is no different than others. There are opportunities to drive efficiency gains, there are opportunities to realize accurate underwriting, there are opportunities to develop a better and stronger placement strategy if you’re a distributor, all associated with technology support. And many of the AMS [agency management system] providers, the outsourced providers to the insurance distribution and balance sheet landscape, are focused and being thoughtful around this. And there’s a reason why ITC [InsureTech Connect] is so well attended in Las Vegas. Everyone wants to understand what else is happening and what opportunities they may or may not be missing.

That said, I do think there is a broader proof point for some of these solutions to actually show a real strong ROI. And investors are always going to be very wary of pre-revenue or light revenue businesses before they write very large multiples associated with it. I also have a thesis, and others probably agree, some may disagree, that where these capabilities are housed is not set in stone. They’re not necessarily always going to be independent companies that are servicing, whether it’s the distribution ecosystem or the balance sheet. There is a lot of investment being made by distributors and by carriers on internally owning some of these capabilities, too. So the world is going to have to find a nice balance between what folks want to develop internally from management teams’ perspectives versus what they want to outsource.

When you think about the future, what is the potential for a broker evolution to come out of this current phase?

Dienstag: We have gone through a cycle over the past 10 or 15 years of significant fears around disruptions. We talked about ITC and the importance of technology. And there was a world a decade ago where there was consistent conversation around the disruptors that would come in and take the place of an independent agent and push the majority of the market direct. From personal to commercial lines, to be clear, there was discussion about carriers no longer playing an important role in the ecosystem given the rising role of brokers and the increased economic profit that they generate. I think what we’ve seen is that, while there have been significant changes and value has shifted among peers from carrier to carrier, broker to broker, the dynamics of the industry are rather stable at this period in time, and there’s nothing to suggest that we’re going to see a massive change in the next five years from the concept of balance sheet players.

Carriers, whether they be legacy carriers that operate as mutuals or as publicly traded companies, or whether they be permanent capital-backed players that are riding that trend with their private capital investors, we do see an important role for large, diversified capacity providers and carriers. There will be winners and losers among that group, but they will exist. Similarly, we see that brokers are playing an ever important, and in some ways increasingly important, role in the ecosystem in the way that they’re aggregating the business that they write, whether it be with their own owned MGAs taking more of that underwriting role, with their own wholesalers trying to push more of that business through their channel, assuming everything is still the same from a client and coverage perspective.

So I think what we would say is the macro forces of the industry are here to stay and the question becomes what separates the winners from the losers in each of those major categories and who will be the service providers and solutions playing into that industry, whether it be in the claims space, whether it be in underwriting technology, whether it be in data and analytics where there’s significant money to be made from an M&A perspective.

Scally: I always default to the quote that someone said, which is we always overestimate the amount and pace of change in the next two years but underestimate it in a decade-plus. And I think that’s really relevant for the insurance industry today. I have no doubt a decade from now there will be increased or even materially different sources of risk appetite and capacity than what exists today. You, of course, already see elements of that, whether it’s through ILS [insurance-linked securities], whether it’s through parametric insurance, the continued growth in the excess and surplus markets. Third-party capital is going to enter and continue to grow within this space.

And I will say distributors in particular should, and are going to need to, be very thoughtful of how they want to develop those relationships to ensure that the placement of risk for their clients is best suited. The structure of it, the exclusionary criteria, and frankly the overall cost of it. But over the next couple years, the world probably won’t move in that direction as fast as maybe some people believe.

It sounds like potentially there’s huge wins out there for the clients as they benefit from all of this happening behind the scenes—potentially better risk underwriting, more capacity as you’ve mentioned, to better serve policyholders.

Scally: I think the end of this is, distributors are going to continue to get more and more sophisticated. That should in theory flow back down to the insureds, meaning that they have better risk structure, better cost for that risk, and it’s placed in a market or part of an ecosystem that is able to absorb it effectively. And I think our insurance, whether it’s on the P&C or the EB side, is a critical part of how we do business right now. It’s how our economy functions. And there’s a lot of smart people making some pretty big bets in and around that area.