One of the challenges of representing insurance brokers in the sale of their company is to find the right buyer for our client. The challenge is that a buyer may be the best fit for one client, but the worst fit for another client. We strive to match the best cultural fit with the best offer.
The buyers for insurance agencies have changed over the years. There used to be a somewhat limited list of large publicly traded brokers that did the vast majority of the insurance brokerage deals. Starting in the mid to late 1900s, the banks began to aggressively buy insurance agencies. The opportunities to cross sell to the bank’s commercial loan customers appeared to be very attractive.
Today’s phenomenon is the entrance of many private equity firms as the buyers of insurance agencies. As I prepared to write this blog on a Sunday morning, I became aware of another private equity backed agency. My first reaction was that they must not be very large. However, their website stated that their revenues exceeded $200 million. Since most of our clients are in the East, South or Mid-West, I assumed that they were active on the West Coast. They did seem to be based out west, but then I noticed that they had major offices in three states where we are very active.
The new private equity firm’s agency is now the 13th private equity owned agency on our master list of potential buyers. The interesting situation is that this ownership type now exceeds the number of publicly traded or independent agencies on that list. It is clear that there are thousands and thousands of independent agencies not on our list. They either have expressed little interest in acquiring agencies or they don’t have the resources to fund the transaction at Closing.
Let’s assume that there are a total of 25 names on our potential buyer’s list. We have closed several deals on Long Island in the past few years and we are working on several other transactions. I would not be surprised if all 25 buyers would show interest in our clients. It would be impossible to keep track of those discussions. As a result, we need to significantly narrow the list by matching our client with the proper buyer. We ask each potential buyer to explain their story. We want to hear not only a good story, but one that sounds unique. Without a story that differentiates each buyer, the decision most often comes down to who is willing to pay the highest price.
The First Event
The one thing we know about all private equity backed agencies is that there has to be an exit strategy for their investors. It appears as though one of three events will need to occur. The first event is that the company can go public. This has not occurred even though a few have seemed to have the size and profitability to take this step.
The Second Event
The second event is that another private equity firm can buy out the interest of another private equity owned agency. This happens frequently as the agency grows and gets too large to meet the future funding needs of the agency. There has been a very active market for these types of transactions. We don’t see an end to this process. Many private equity firms have entered the insurance brokerage due to the success of other firms and the returns that they achieved for their investors. What happens if these returns are not achieved? The private equity firms are very reliant on the debt markets. The availability of credit at very favorable terms has fueled much of the growth. What happens if these markets face a lack of liquidity? How does this effect their ability to grow and to continue to pay current multiples?
The Third Event
The third event is the sale of their interest to the existing publicly traded broker. There have been several of these transactions and I expect to see more over the next few years. We believe this will impact their ability to buy smaller agencies until the larger acquisitions are integrated. Our opinion is that we haven’t reached the point where too much is not a good thing. We love how the competitions has driven multiples higher in the last year. There is no better feeling than a happy client.
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