Amrit David supports management teams, private equity firms and alternative capital providers across a variety of transactions in the insurance brokerage space.
We recently sat down with him to discuss today’s market dynamics and how some macroeconomic conditions are impacting brokerage M&A, whether private equity will continue to play a role in deals going forward, how investors are evaluating insurtechs, and what to watch for in the MGA space.
This conversation has been edited for length and clarity.
There is a fair amount of uncertainty in the macro backdrop. We’re coming out of a global pandemic, and that resulted in a couple of different things. There was an incredible increase in the money supply with checks written to people, government spending. Politics drove a lot of it and [there are] justifications for a lot of it, but you had just a tremendous increase in the money supply. You had a somewhat material withdrawal of labor, with folks either choosing not to work or deciding it wasn’t worth it, so you have this reduction in the labor force. Then I think there’s a third trend going on, a bit of a longer-term trend, which is the onshoring of production, which for many years we had moved to places like China, India, Southeast Asia… But onshoring of labor and production is a lot more expensive than offshoring it. In my view, you put increased money supply, you put a reduced labor force, and you put onshoring of production all together, and it’s no surprise that you face real inflationary pressures in the economy.
The Federal Reserve has a mandate to maintain price stability. I don’t blame them for what they’re doing. They actually need to be doing what they’re doing, given the mandate. It is a consequence of the dynamics we went through over the last couple of years. Let’s just hope it’s all managed in a way so that we have the proverbial “soft landing” as opposed to the hard landing. But we are going to be in this environment, I think, for at least a few more months and into ’23.
In my view, it’s going to be a little mixed. I think for the larger platforms or larger businesses that are maybe sponsor-owned, you have quite sophisticated capital partners for these firms. They’re aware of the backdrop, and they’re monitoring their companies and the situation quite closely. I think they’re being more and more conscious of what they own, but they’re also being much more conscious of where they deploy capital and their portfolio companies deploy capital… They’re going to be cautious, and we’ve seen that more and more in large processes…where the typical XYZ private equity players are just more cautious.
On the smaller tuck-in side, I think a more cautious environment is starting to emerge. Q1 was slow for M&A this year, [but] it has picked back up and it looks like we’re going to run through the tape again. But people have been using cash on balance sheet, debt and other facilities they have to fund M&A. As those run their course and people have to come back to the market to raise capital to do more of those tuck-ins, that higher cost is going to be much more apparent. I think that really plays into the market to some extent in ’23.
You and I have been debating this question over the last couple of years. Every year, I say it has progressed a little bit. This year, I think it has progressed a little bit more. Historically, the hurdle was high to get all the stakeholders around the table to align on the economic and social issues for the merits of a transaction, because I could go buy something big, and it was a big integration bet to get that right, or keep doing what I’m doing and that’s worked out really well so far so why take that risk?
I think what’s interesting to debate is does this macroeconomic and interest rate environment at least open the door for people to have more of a conversation. Do they say, “Hey, look, my Plan A might still be my Plan A, but should I at least understand what Plan C could look like? And should I have a conversation or not? Should I see if there are social things that matter, and should I explore if, in this different macro backdrop and this different interest rate environment, the economics of Plan C or Plan D might actually be compelling?” So I do think there’s more conversation. I cannot predict anything happens, because Plans A and B still look very attractive for many people. But I think many senior management teams are much more open and receptive.
It’s obviously been a much busier segment in recent years. I think a little bit stems from, you’ve had a lot of capital, private equity or otherwise, that has invested in retail brokerage. I think they see great thematics and trends within that part of the ecosystem. They say, “What are the other ways I can get exposure to that?” I think this is largely a function of that, where they say, “I know this stuff. I’m good at it. I’ve had some history in it. What else can I do?” I think that has really had a lot of folks think pretty interestingly about broadening their set of capabilities and where else they can go. So I do think we continue to see more of that.
Then there’s a whole little merry-go-round of carriers acquiring MGAs, or even sometimes there are teams within carriers that want to leave and then want to set up their own companies. They’re getting capital from people to set up their own businesses, and then they start to consolidate. So it’s honestly working both ways.
The insurtechs over the last couple of years have had a really rough go of it. I think the market is looking at them very differently. When I talked to you a couple of years ago, we talked about growth, we talked about customer acquisition, we talked about changing the way people interact and deal with their insurance companies. I think the meaningful decline in valuations for some of the public folks has really recalibrated that conversation for many. The real focus now isn’t growth at all costs, because you and I as industry veterans of insurance know that growth at all costs is easy—just lose as much money as you want. That’s the best way to do it. But there’s a real focus now on unit economics, LTVs, customer acquisition costs, building a business that has scalable loss ratios and expense bases that you can grow into, and managing your exposure to reinsurance. We haven’t talked about it yet, but everything I’m hearing is Jan. 1 is going to look brutal. When you put that in the context of what challenges these businesses are facing, investors are very focused on trying to navigate that broader thematic because capital-light is great when reinsurance is cheap but capital-light is going to be difficult for some of these players going forward.
But I think there are a couple of really interesting places to play in it. I like cyber. I like some small commercial stuff. I think there’s real opportunities and people building long-term differentiated platforms that provide value. I also see a lot—less in my world, maybe this is more technology focused—but on the plumbing within insurance companies and the APIs that connect; there’s a lot to be done from an efficiency perspective there.