Private Equity Investment Appetites Maturing

Leader's Edge talks with Matthew Scally and Grier Tumas Dienstag from McKinsey.

Both authors of “Investing in insurance: The value imperative,” they discuss recent private investment trends in business overall and then in the insurance sector. MGA and TPA private equity investment stood out in 2024, for example. They also cover what to watch this year.

Read the Transcript 

Disclaimer: Podcast transcriptions are computer generated, please excuse errors. For the most accurate version of the conversation, please refer to audio.  

Matthew Scally: Coming out of the acquisition boom from 2020 to 2022, there is a very specific focus on post earn out organic growth that the brokers who have acquired agencies are able to achieve. 

Sandy Laycox: Welcome to the Leader’s Edge podcast. I’m Sandy Laycox, Editor in Chief of Leader’s Edge. In this episode I talk with Matthew Scally and Grier Dienstag from McKinsey. Matthew and Grier were among the authors of a recent piece “Investing in the Value Imperative,” which looks at recent investment trends in the industry. We sat down to discuss their findings. Our conversation begins with the overall investment landscape in 2024 and into 2025. We discussed 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 leverage 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. 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 views 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 these folks. Private equity, as most people well know, is an illiquid investment which requires deployment of capital. You can go back to funds raised in 21 and 22 and 23 and there is still a need to deploy the dry powder. Yes, fundraising in 2022 and 2023 was a little compressed, but there is 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. 

That 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 or leverage buyouts or whatever to mature. There has been and will continue to be more and more of a focus on value creation and identifying 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? What is our deployment strategy? How is technology going to allow this business to be more and more efficient? These are all points that we’re having deeper conversations with our private equity clients. 

Sandy Laycox: We dig further into investment in the insurance industry specifically as Grier shares industry specific trends and 2025 expectations. 

Grier Dienstag: We saw similar trends in insurance that mirrored the overall private capital ecosystem. 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 to 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. Go forward, we expect increased deal activity in insurance in 2025. We’re already seeing that in the first quarter and know that there are both a number of assets that need to trade. 

They’re nearing the end of their hold periods 5, 7, 8 years in and similarly several investors who have either successfully raised or still have money to spend from prior funds. We expect it to be a great year ahead for M&A. 

Sandy Laycox: We then get into a discussion of what really drives value in investors’ eyes and how they are evaluating potential insurance industry investments. 

Matthew 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. 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. 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. That ties together with a more centralized organic growth driven brokerage getting valued at a materially higher multiple than one that has remained more federated and might not have the same level of succession planning. 

Sandy Laycox: That really does create a real bifurcation among potential targets because there does seem to be those aggregators who are very focused on integration and then the ones who just kind of have a lot of disparate small agencies. 

Matthew Scally: To many management teams’ credit, they have been focusing on these levers for the last few years. They have certainly not been blind to them. 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—that is new client lead generation sources as well as services that we can offer our end clients. Kudos to them for making that step. But the industry has a while to go and to your point, Sandy, 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. 

Sandy Laycox: One aspect of the insurance value chain that has seen significant investor interest was MGAs. Grier and Matthew share what aspects of MGAs are drawing investor interest, who’s buying MGAs and external factors affecting their growth. 

Grier 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. If we think about some of the structural and cyclical changes that have driven the significant growth in MGA formation—especially immediately coming out of the pandemic as well as premium shifting over to MGAs—we think about a few things. One, the shift in the nature of risk: more complex risk, more difficult to place. Changes like increased NatCaT incidents and larger verdicts coming out of liability claims. Those structural changes combined with more cyclical changes like the rate environment. 

Also the outflow of talent from carriers in particular, given some of these return to work mandates, created tailwinds for the MGA space. If we step back and say what do investors care about? Where are we seeing the most interest? It’s often in aggregated MGAs—diversified from an exposure perspective, different lines of business, different geographies, different industry segment focuses. That requires 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 downside risk if one program faces a really challenged loss ratio in a given year. 

There are only a few of those aggregated MGAs in the market overall. Some of them might be for sale, some not. That creates a lot of investor interest in those that might come to market. Another cohort of investors might say either we don’t want to pay the multiples those large MGAs demand or that’s not our strategy, and instead they back specific individuals or lift out star talent to help them grow into a similarly diversified MGA. 

Matthew Scally: The other piece I’d add on the MGA portion is it’s a highly competitive transaction market. It’s not just private equity investors looking to deploy capital in this space. Brokerages and management teams as well as even other carriers are looking to acquire, form, or establish MGAs. There’s a material amount of talent, as Grier mentioned, pulling out of carriers and looking to combine or join those organizations. We’ve seen a lot of success—though still in early days—of brokers effectively managing and partnering with MGAs through full acquisition, equity stakes, or more thoughtful partnerships. It’s an area with attractive tailwinds, and investors across the ecosystem have picked up on that. 

Sandy Laycox: Claims services is another area that has seen particular attention from investors recently. Grier breaks down that industry and investor trends. 

Grier Dienstag: Claims has been a huge focus area coming out of the challenged 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 across lines of business. Some of the prior programs that aimed to reduce adjusting expenses are now being re-evaluated to ensure accuracy isn’t sacrificed. The number one priority is paying out claims as they deserve to be paid—and doing it quickly, especially in today’s litigious environment. 

This creates opportunity for innovation. Bringing lessons from auto over to property, using newer technologies like Gen AI to create co-pilots for adjusters. These trends are relevant to our investor clients, especially those looking at large scale TPAs. They face similar opportunities to innovate and manage costs effectively for their clients. 

There’s a lot of opportunity in using data and analytics—whether housed within a TPA or through innovative point solutions that contribute to claims accuracy and cost efficiency. 

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. 

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

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

Sandy Laycox: That was Matthew Scally and Grier Dienstag from McKinsey. I hope you enjoyed our conversation. For more Leader’s Edge podcasts, go to leadersedge.com or subscribe to us on your preferred podcast platform.