Alternative Capital and Brokerage? Still Going Strong

In 2018, we found record-breaking M&A in insurance brokerages, which continued in 2019. What major themes did you see over the course of 2019?

I think there have really been three things thematically that persevered throughout 2019, which I think is largely a continuation of prior years. First of all, many of the largest established players continue to do tuck-in and platform acquisitions on a relatively frequent basis, and that pace has probably increased a little bit. Secondly, you’ve seen some meaningful M&A activity with some of the midsize platforms. One or two of those have gone to private-equity-type folks, and a couple of others have gone to some of the larger strategics who are beginning to kind of consolidate that second tier, mid-tier, of folks. Lastly, we’ve seen some new entrants show up in the market, too. That’s been here in the U.S. and in the U.K., and I think that’s the result of some M&A activity that took place early in the year. We will see that kind of continuation through the early part of this year.

For new entrants, are you talking about new P/E investors or new brokerages making acquisitions?

I was referring to new startup firms. I think you saw a bunch of very large deals close in early 2019, and on the back of that, in the U.S. specialty market and the U.K. wholesale market, you had a number of brokers and producers taking a long, hard look at what they wanted to do. As a result of that, I think you’ve seen some of those folks going out and forming new businesses. And in some ways, those folks are doing the old thing under a new flag. In some cases, I think they’re taking really interesting ideas about alternative capital and how to deploy those into the business as well.

We’ve been hearing a lot about individuals and teams moving in the market. Has that played a part in deal activity?

It absolutely has. When I talk to some of the large national brokers and those private-equity backed, I think they see—and it’s part of their pipeline—they’re probably seeing more teams and individuals than they’ve probably ever seen to hire into or to buy into their businesses. I think that trend might slow down as we get into 2020, but I think there was a decent amount of disruption in the market recently.

So really it’s talent driven.

Yes, that’s right. There are experts in particular parts of the economy who try to see where they can bring that value-add to other places.

Last year, we specifically talked about the growing trend of alternative capital providers looking to invest in this sector. Has that trend continued? Is there anything in particular to note about this buyer segment in 2019?

If you remember when we talked about alternative capital last year, one of my biggest takeaways for your readers was that every situation has to be considered carefully. Given the experience I’ve had and over the course of the last year since we spoke, I’d say that only continues to ring true even more. Yes, they continue to really care about the sector; they want to invest, they want to find opportunities, but each year and each situation is unique and the capital providers sometimes have a very unique ask, or request, or process, or perspective. It doesn’t always work for what some of the brokers or others are looking for. I found that speaking in generalities about them, while interesting and a little bit differentiated, you really need to kind of dig into that next level to see how they could be most appropriately helpful to folks in their businesses, because it’s not just a blanket statement in my mind.

What about the debt providers we talked about last year? Did they continue to be strong supporters of the industry?

Yes, indeed, in both the public markets and the private markets. In fact, over the course of the last 12 months, I would say that the private debt providers have become extremely aggressive in the industry. And, you know, if I can say on behalf of all the banks that I compete with across the space, we are now paying very careful attention to them and what they can do, because their interest and their understanding of the space is going to continue to grow. They provide some very attractive capital. I think the obvious test of the longevity of that capital and their desire will come through some economic cycle. You know, we’ve all been very fortunate to live in such a great environment for the last 10+ years here. Let’s see how that survives through some kind of cycle, which will happen one day.

Are there other ways alternative capital is looking to play in the insurance market?

There are. I think if people look at the underlying nature of insurance, it is very much an uncorrelated return profile to the rest of the economy. And many of these sophisticated capital providers, whether they be private equity or family or pension funds, are looking to gain economic exposure to that risk profile. It could be in the form of industry loss warranties, insurance-linked securities, cat bonds. It ultimately could be in the form of actually providing capital to support regular way insurance business. I think there are some really innovative and forward-thinking management teams and brokers out there that are exploring how they can bring that capital closer to their ultimate clients. In the process of bringing that capital closer, there’s much more economic value they can provide to their clients, to the capital providers, and therefore capture more of the value chain. I think, as we get the data and more of an analytical approach around things, and people really understand that, I think there’s a tremendous opportunity to unlock there.

Does the availability of technology in addition to data being more easily transferable help facilitate that in any way?

I think there’s a whole separate conversation for us to have around technology and what the insurtech folks are doing and what that does to understanding risk profile better. I’d say candidly, we’re still really in the early innings of pulling data. If any of your underwriters are reading this, they’d say, “Two years’ worth of data from someone’s iPhone doesn’t make a trend.” And how do I have enough of that at enough granularity to have some accuracy and back-testing to really make it work? I think that’s going to take a little time, but I do think there are elements of that which will change how insurance works, both from a customer experience and from an ultimate capital provider’s perspective.

Moving on a little bit here—several of the larger privately backed brokerages have been owned by their PE firms for the past three, four years. Last year we talked about this, and you said you didn’t expect many IPOs in this space. Is that still the case?

Man, I would love for lots more sale mandates or IPO business. As an investment banker, that’s my bread and butter. I think the continued movement of firms from private equity to private equity firm might be a little slower going forward. I think that fundamentally comes down to the fact that these are great assets to own and to be invested in for the long term. They are consistent cash flow, great return profile, lots of opportunity to consolidate in the space. I think many of the folks who own them say, “Look, if I’ve got a winner, I’m going to stay in a winner and just keep going with it. So how do I extend my whole period? How do I continue to stay invested in it?” I think that only perseveres. If someone sells Company A and they love the space and sector, they’re just going to try and find ways to go buy Company B and C. So why get out of Company A to begin with?

What about the next tier of brokerages outside of the private-equity backed firms—21 through 50 on the size list. What happens with them?

I think there’s a whole range of opportunity for them. I think some of them, where they have some real depth and capabilities and ambition—and a lot of these folks definitely do—could find ways to source some capital to fund growth. I think some of them might say, “Look, I’ve got a great platform. I might not have a great trajectory or a great succession plan. I’m happy to sell.” I think some will say, “I’m happy to be independent forever and just kind of do what I do.” So I think there’s a whole range of opportunities in front of them. And I think we go back to the start of this conversation: whether it’s with alternative or private debt, there are a number of folks who would love to help them facilitate growth profiles to the extent that they are ambitious and eager to do that.

Tuck-in M&A—the pace at the smaller platforms continues to be record-setting. What’s driving this?

I think there’s a bunch of things. I think, from a seller’s perspective there’s the demographic component: a lot of these folks are getting older. I think they fundamentally look at their business and ask, “Is there a succession plan for me to think about here?” And that can sometimes prove challenging. I think their door has been knocked on aggressively. I mean, if you go back five years, there were probably five people knocking on the door. Now there are 15, and you look at some of the valuations that get put out there in the market … [A]t some point, people just go, “Wow, it’s so good. I have to do something.” I think that’s really driven that volume of M&A, and I think we’ll continue to see that going forward.

It seems like even if you’re sort of just chugging along you’re still getting great value for your firm in this market.

I think that’s right. I think this activity continues well for the next six months, but I think it’s going to be interesting to see what this election cycle ends up doing for folks. I think many people will want to do transactions well ahead of primaries and all this other fun stuff, but let’s see how that goes. I think there will be a really active first six to eight months of the year. I think on the back of how the actual general election falls out, and whatever the administration’s Democrat or Republican approach to tax policy is going to be, you could see another wave of deals looking to get done ahead of any potential changes to tax law. So this could be a similar situation to 2012, where there was a really large spike in M&A activity because of the pending changes to taxes in 2013. We could end up in a situation like that, depending on how these elections turn out toward the end of the year.

What do you think is going to happen with deal activity in 2020?

I think the pace continues. You have 15-20 people on the buy side, you have attractive valuations still, and you have a market that’s very receptive from a financing and funding perspective. I think if there are teams for new platforms that folks want to get up there, there’s a relatively plentiful supply of capital to get them up and going. I think we’ll end up with a pretty active market in 2020 up to the general election. Let’s see how it evolves through the fall, and then maybe we’ll have a really busy December, once people actually know what’s going to happen in 2021.