Just how large a foothold does private equity have in the merger and acquisition market for insurance brokerage agencies? In two words: a lot.
Private equity-backed acquirers are in fact the dominant presence in the M&A space. According to a 2015 report by MarshBerry, a financial consulting and M&A advisory firm, PE-backed insurance brokers accounted for nearly 4 in 10 (39.8 percent) of the publicly announced deals last year, topping for the second year running the M&A market’s other active players. Among them: non-private-equity-backed independent and public brokerage agencies, banks and thrifts.
“Year-to-date activity through November 2015 has produced the most transactions in the history of the insurance distribution space,” says Phil Trem, a senior vice president at MarshBerry. “The activity is being driven by private equity-backed firms that really didn’t make a mark on the distribution space until 2007 or 2008.”
Trem notes other private equity-backed firms that didn’t announce deals in 2015 — Acrisure, NFP Corp., and BroadStreet Partners — likely would add another 75 transactions to the count. The increase would bring the number of pacts in 2015 to 425.
“We expect more of the same in 2016, as the need to deploy capital is driving significant demand and will likely keep valuations at high watermark levels,” says Trem.
There is indeed plenty of capital to deploy. MarshBerry pegs the amount of “dry powder” — private equity money that could be used to fund M&A deals — at $139.3 billion, much of the total originating in vintage funds dating to 2007. The capital is connected to firms that either historically invested in insurance or promoted their interest in the space.
Trem says that private equity firms are “anxious” to invest in insurance brokerages for multiple reasons.
“The industry has a great recurring revenue model with a low capital expenditure needed for operations,” he says. “The industry is also highly fragmented, which allows for growth both organically and through acquisitions.”
As a result of the private equity firms’ keen interest in the insurance space, he adds, the average transaction price for brokerages continues to climb. New MarshBerry data pegs the average guaranteed (base) purchase price for a brokerage agency in 2014 at 7.14 times earnings before interest, tax, depreciation and amortization (EBITDA).
Accounting for “earn-outs,” or additional, realistic payments the seller paid based on the future performance of the business sold, the average deal is 7.85 times EBITDA. This compares to 7.38 and 7.41 times EBITDA in 2013 and 2012, respectively. “Demand is outpacing supply which is creating a sellers’ market,” says Trem. “Valuations on ‘high quality’ agencies are at an all-time high.”
These best-in-class organizations, he adds, exhibit characteristics that agency buyers are on the hunt for. Among them:
A young, vibrant leadership;
a strong track record of producing new business;
a focus in niches that enable scalable growth;
compensation structures in line with the market; and
a base of operations in an attractive area, with significant population density.
With each new acquisition, the number of such top-flight brokerages declines, boosting purchase prices of those still in the market further. But MarshBerry does not believe that valuations will continue to rise indefinitely.
“While we anticipate the volume of deals will continue, it is likely that valuations will begin to plateau in the near future,” says Trem.
See the charts beginning on the next page for additional highlights from the 2015 MarshBerry report (click on the images to enlarge).
In 2015, private equity-backed insurance brokers accounted for the largest share (39.8 percent) of the 349 publicly announced M&A deals. That’s up marginally from the 39.3 percent (126 deals) the companies nabbed in 2014. But the 2915 figure is a very substantial increase in share from the 15 percent recorded as recently as 2010.
As the chart below shows, the volume of publicly announced M&A transactions has, notwithstanding three years (2009, 2010 and 2013), been rising steadily. The 349 total recorded in 2015 is up an eye-popping 70.2 percent from the 205 pacts posted in 2005.
Total Announced U.S. Transactions
All transactions shown in this slide are announced deals as of November 30 (year-to-date or YTD) of a given year. The transactions were inked by publicly held acquirers, banks and private equity groups, plus private company acquirers. All targets are U.S. only. The data displays a point-in-time snapshot and has not been updated to reflect subsequent changes in prior years, if any. MarshBerry estimates that only 15 to 30 percent of all transactions are made public.
Since 2007, private equity-backed firms have amassed more than $139 billion in “dry powder” — much of the capital to deploy on mergers and acquisitions. As the chart below shows, the largest infusions of PE-backed funds happened in 2013 and 2014: The amounts entering the space over these two years came to $98.7 billion, or a whopping 70.9 percent of the aggregate, 9-year total.
As the chart also shows, U.S.-headquartered firms are not alone in pumping cash into the M&A market. Non-U.S.-based firms collectively accounted for more than half (54.3 percent) of the total, or $75.7 billion in dry powder since 2007. The years 2013 and 2014 again nabbed the lion’s share, totaling 17.9 billion and $36.9 billion in capital, respectively.
Source: MarshBerry-PitchBook (data through December 8, 2015).
Brokerage owners have enjoyed a seller’s market in recent years. As the chart below shows, business valuations have been rising steadily since 2013. Maximum purchase prices are now more than 9 times EBITDA (see note), up from 8.33 in 2014 and 8.41 in 2013. The totals reflect not only increases in base purchase prices, but also realistic earn-outs and maximum earn-outs.
Multiples calculated based on deals closed in 2014.
EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization, a measure commonly used to analyze and compare profitability among companies and industries because it eliminates the effects of financing and accounting decisions.
Base purchase price: The amount of proceeds paid at closing, including escrow amounts for indemnification items, (i.e., paid at close), plus “live out” (i.e., amounts that (1) the buyer may initially hold back, but which are paid as long as the seller’s performance does not materially decline; or (2) are paid at closing, but are subject to a potential adjustment.)
Realistic earnout: The likely earnout (additional compensation) to be achieved in the future based on, among other factors, actual seller performance and realistic discussions by buyer and seller of earnout metrics.
Maximum earnout: An additional earn out above the realistic level that, if achieved, would generate the maximum possible earn out payment.
Source: MarshBerry proprietary database. Data is compiled from transactions in which MarshBerry was directly involved, those from which MarshBerry has detailed information, plus transactions in the public record.