In recent posts, we outlined the background of and reasons for the dramatic upsurge of private equity investment in the insurance brokerage industry, how the combination of private equity and low interest rates have dramatically raised valuations, and how private equity sponsored agencies increasingly dominate the insurance agency business. These topics should cause every agency owner to wonder whether they should jump on the private equity bandwagon. Here, we provide some food for thought on this topic.
Why PE is So Interested in Insurance Brokerages
Private equity investors have sought out the insurance brokerage industry for some very simple reasons, including:
Insurance brokerage is a relatively straightforward business with predictable, renewable cash flows calculated on a simple-to-understand margin basis.
The industry is dramatically fragmented and there are many opportunities for the acquisition of healthy smaller businesses with no clear succession plans.
The predictability of the cash flows enables the acquiring entity to use debt in the capital structure, which dramatically increases the returns.
The market pays a huge premium for larger agencies; the larger the agency, the higher the multiple the market uses to value it.
Acquiring agencies under the rubric of one broker leads to added growth and operating efficiencies for all the agencies involved.
The ownership interests of the private equity firm, management of the acquiring agency, and the acquisition targets can be aligned so everyone benefits as the business grows and prospers – in short, everyone is a partner and everyone wins!
Repositioning the Agency for Growth and Additional Value Creation
The main reason for an agency owner to jump on the private equity bandwagon is to reposition the agency for additional growth and value creation. It is not only to “sell.” Simply stated, being part of a private equity vehicle can reposition the agency to grow far faster than would be the case staying independent. This is true whether your firm is the acquisition vehicle or part of a larger acquisition vehicle.
In our last blog, we cited two examples of companies of various sizes that have raised private equity capital. These are just two examples of the 29 agencies that have attracted private equity capital. Acrisure, a large agency, has grown from under $40 million in 2013 when it first sold a majority interest in private equity capital to over $1.6 billion today. The small agency, who first raised private equity approximately 2 years ago, has grown from under $6 million in revenue to approximately $45 million. While the owners sold off a significant portion of their equity in obtaining the private equity investment, the value of the residual equity has grown to multiples of the valuation of the company prior to the investment. The owners ultimately increased the growth trajectory and dramatically increased the value of the firm by partnering with a private equity firm.
If you’re the owner of an agency that is unable to attract private equity capital due to the agency’s size or other attributes, stay tuned for our next blog post, which will focus on how you can still take advantage of the private equity boom. We will outline how these transactions are designed to “keep you in the game” and create value faster than you can on your own, all while providing you with substantial upfront cash and the opportunity to focus on what you love to do. By providing you with equity in the acquisition vehicle, you in turn become a partner in the larger business and participate in the value creation that will take place through the success of the overall enterprise.
To discuss the opportunities that private equity might present for you, reach out to Sica | Fletcher today. Also, remember to watch this space next month for our follow-up segment,
“How Can a Small Agency Take Advantage of Private Equity Transactions?”
Among the brokerage community, Sica | Fletcher is well known as the leading strategic
advisory firm in the U.S. that specializes in the insurance brokerage space and related industries that compliment it. In 2018, we lead the country with 79 transactions completed for insurance agents and brokers, and in 2017, we led the country with 62 closed transactions. We are also the leading advisor to the private equity firms that are most interested in investing in insurance brokerages and in the private equity sponsored agencies that have been created in recent years.
The firm was founded in 2014 by Michael Fletcher and Al Sica, two of the industry's leading insurance M&A advisors who have closed over $6 billion in insurance agency and brokerage transactions since 2014.