Implications of an Active M&A Market

Video Transcription

Hello ladies and gentlemen, my name is George Bucur. I’m a director within MarshBerry’s financial advisory practice.

Specializing in serving specialty distributors, such as MGA’s (managing general agent), MGU’s (managing general underwriter), wholesale brokers, and program managers, we are bringing you this periodic video blog to talk through dynamics of the specialty distribution sector. Today, we are revisiting the transaction activity specifically of larger firms within the specialty sector. You may be asking, George, we just talked about this in September, didn’t we? And the answer is yes. But there has been so much activity that we are revisiting the topic.

Specifically looking at the acquisition side, we saw Wellington acquired by Truist, Truist being the owner of CRC Crump and AmRisc, as well as others. We saw also Risk Placement Services acquire Atlas General, a large California based workers comp firm. We also saw various transactions from Worldwide. They sold to Amwins in an almost all equity transaction. Very interesting since Genstar just got into Worldwide in July of 2019.

What’s also interesting is we talked about Ryan Specialty Group acquiring All Risks last year. Ryan Specialty Group has recently come out and said they’re contemplating an IPO (initial public offering). If Ryan Specialty Group were to go public, that means that three of the four largest firms of specialty distributors would be public. But getting back to point, on the recapitalization side we’ve also seen a lot of activity. And just to be clear, recapitalization event is when one private equity firm sells to another liquidity source, most times another private equity firm. Specifically, Galway, the former conglomerate of JenCap and EPIC Partners, get recapitalized with Harvest Partners. We further saw Doxa take on private equity from Century Equity Partners. And finally, through our interview a few weeks ago, you may know that ISC (Integrated Specialty Coverages) recently took on capital with KKR (Kohlberg, Kravis, Roberts & Co.).

Now, what are these implications of all these transactions? One, we see the larger firms having to acquire larger competitors in the marketplace because, frankly, the smaller firms aren’t moving the needle enough to make a difference. You saw that both with Ryan Specialty Group and Amwins in their respective acquisitions of All Risks and Worldwide.

Also, we see continued high interest for smaller bolt-on and roll-up acquisitions. Further, with the influx of capital that is coming from these recapitalization events, we are expecting a continued high interest of acquirers of specialty distribution firms. And that’s reflected in the activity within the first quarter. There were 37 transactions. If you’re to annualize that, that’d be nearly 150 transactions in 2021 compared to 123 in 2020 and 97 in 2019.

All this being said, the pressure that is happening with this consolidation is mounting. If you look at the firms, the top four firms in 2006, they may have about 20% of overall premium volume of specialty distribution per MarshBerry’s estimates. Estimating those firms’ volume now with these acquisitions that we just talked through puts them at around three quarters of the premium volume that flows through specialty distributors. Immense wealth and generation of value is coming from that concentration of the premium, but at the same time, it’s putting a lot of pressure on smaller brokers in the marketplace.

Now, there may be other reasons why this transaction activity is occurring, Specifically the threat from the Biden Administration of almost doubling capital gains taxes. That is the reason why both individual sellers, as well as private equity firms, are contemplating transactions. But also, there’s the thought or concern of interest rates going up. And as interest rates go up, buyers will not be able to be as aggressive in pricing as they will in a lower interest rate environment, given the amount of debt that private equity puts on the various transactions. All this being said, the interest remains with specialty distributors, and it is strong.

If you have questions as to how the overall M&A environment may be impacting your firms or valuations, please do not hesitate to reach out. We look forward to seeing you next time.