The M&A Version of the Hippocratic Oath: Don’t Break What You Just Bought

You partnered with Sightway Capital in 2018 and KKR in 2021. Could ISC have expanded without PE backing, and what value did the KKR partnership bring?

Prior to ISC, I spent about 13 to 14 years in private equity where we invested in eight or nine insurance businesses. Those were mid-market investment firms, so the firms were a little different from KKR, but it gave me some good perspective.

Prior to ISC, I spent about 13 to Could we have gotten to the same place without PE backing? We could never have made our first two acquisitions without our original financial sponsor, which was Sightway Capital. And we did need the backing of private equity money to continue our business acquisition goals. The KKR partnership has been great.

KKR has done more than just provide money, though. They’ve helped us grow and institutionalize the business. We were the combination of several different acquisitions—we bought our first business in February 2019—so we had to bring it all together with financial reporting, budgets, organizing our individuals. KKR accelerated our maturity as a business. In the first two years, KKR’s in-house operational consulting team, Capstone, has helped guide us. There’s been a lot of emphasis on our development as an MGA and to think about ongoing acquisitions; we’ve made two acquisitions since the KKR buyout, and we’ve evaluated 30 or more. It’s impossible to say how our journey would look with someone else, but KKR has added value to the business—spending a ton of time on the operations side of the business in addition to providing assistance with financings, M&A and other growth initiatives.

Does the credit crunch harm your prospects’ financials or make them less attractive?

I don’t think it makes the underlying businesses unattractive. Generally, the MGAs we’re looking to acquire are underpinned by the general economic health, so the credit environment is not the main issue. We are really looking at healthy businesses. As the cost of borrowing goes up, though, we see an impact on valuation. Of course, our cost to borrow affects the terms of the transaction.

What are the primary reasons you eliminate prospects as you evaluate their fit for an acquisition?

Lack of growth opportunities, poor underwriting results, underlying carrier concentration. We recently passed on one that had only one reinsurer.

Once the purchase is done, how much more money is needed to provide the support the acquired business needs for ongoing success? How is that factored into the acquisition price?

Most businesses we buy are healthy, growing, and cashflow positive, so the capital required for them to achieve growth goals is usually minimal. We have a platform that involves our finance, technology, marketing and sales teams, so we plug the acquisition into our platform, which costs us soft dollars in terms of time—our sales team learning a new product, for example—but we don’t really have to invest much in the way of hard dollars. The acquired company may have things we can do to make the underwriting system more effective or some other efficiencies we can bring, but it’s more about leveraging their existing platform and augmenting what they’re already doing right. The first rule is don’t break the business, even if it takes longer to integrate. That’s the M&A version of the Hippocratic oath: don’t break what you just bought.

Does KKR have a say on the acquisitions, or is it a blank-check situation?

We recently refinanced our debt, our financial structure. That debt has the ability to grow, and we have the ability to obtain debt financing to facilitate growth for at least the next 18 to 24 months. If we need more equity—to the extent the acquisition makes sense—KKR is there. It’s not a blank check, but for things that are strategically important, there’s capital to support those endeavors. And, as I say, KKR has helped us mature, including in evaluating acquisitions.

Do the new SEC requirements on PE reporting affect ISC strategy or ability to deploy capital? Will there be any effects on ISC at all from the SEC’s new rules?

Anything KKR needs from us as a portfolio company, we provide, so I don’t expect this will create any particular negative impacts. We can bring in Big Four accounting and audit firepower if it’s needed. But I don’t anticipate anything dramatic.

Any final words?

We are in such a better place in 2023 than where we were when KKR bought us in 2021, and much of that is due to their goals for us and support.