Industry the Jan/Feb 2019 issue

The Bubble Continues to Get Bigger

And a burst is nowhere in sight.
By Phil Trem Posted on January 18, 2019

For those in the deal-making business, buying or selling, 2018 was likely a very fruitful year for you. The merger and acquisition marketplace ended 2018 with a flurry of transactions. The preliminary numbers, based on announced deals as of Jan. 2, 2019, have the year finishing with 552 announced transactions. This is just off the 2017 total of 557, but we are very likely to set a new record, as year-end deal announcements continue to flow in.

It truly has been an incredible year. Consider the following sampling of deal activity that occurred in 2018:

  • Sale of two of the largest bank-owned agencies: Key Insurance & Benefit Services (to USI Insurance Services) and Regions Insurance Group (to BB&T Insurance Holdings)
  • Sale of five firms in the top 35 (in terms of annual revenue): Jardine Lloyd Thompson Group (to Marsh & McLennan); Integro Group Holdings (to EPIC Insurance Brokers & Consultants); Hays Companies (to Brown & Brown); Crystal & Company (to Alliant); and Wortham (to Marsh)
  • Initial public offering of franchise-focused Goosehead Insurance
  • New private equity infusions into Hub International (by Altas Partners), Acrisure (by Blackstone), Propel Insurance (by FlexPoint Ford), Navacord (by Madison Dearborn Partners), and Renaissance Alliance Insurance Services (by Long Arc Capital).

Nearly 80% of the announced transactions within the space were completed by independent insurance brokerages, similar to 2017. The majority of these buyers were backed by private equity; this subsegment completed almost 60% of all transactions during the year. The three most active buyers during 2018 were Acrisure (59), BroadStreet Partners (37) and Alera Group (33), all private-equity backed in some form.

More than half of the total transactions during the year involved property and casualty agencies, while the remaining 45% were evenly split between employee benefits agencies and those that have both P&C and employee benefits (multi-line agencies).

We saw valuations increase across all deals MarshBerry was involved in on both the buy side and the sell side. We believe these multiples are above average given the visibility we have on other deal activity. The average base purchase price payment in our database increased by 8% in 2018, with a pro forma EBITDA (earnings before interest tax depreciation and amortization) multiple of 8.58. Maximum valuation potential (maximum earnout) averaged 10.85x EBITDA.

Platform transactions continue to grow in value as well. A platform is defined either as a seller that is a large brokerage or a buyer that is entering a new geography or niche. The selling firm will typically have an ongoing leadership role in the firm. The average base purchase price for a platform increased 7% in 2018 with a pro forma EBITDA multiple of 9.77. The maximum valuation potential (maximum earnout) averaged 12.43x EBITDA. It is important to note that these are averages. We are seeing pricing as high as 11x paid at closing for firms that would barely make the Top 100 listing. These valuations were historically reserved for the national brokerages. However, demand for high quality firms and the need to deploy capital continues to create favorable market conditions for selling brokerages.

Even though private-equity backed brokers continue to lead in the deal count, the three most active public firms—Marsh, Brown & Brown, and Gallagher—played a much more significant role in this year’s domestic activity than in last year’s. The three firms collectively increased their deal count by 47% in 2018. We will have to keep an eye on the volatility of the stock market to see if it has any impact on deal volumes in the short term.

We will have to keep an eye on the volatility of the stock market to see if it has any impact on deal volumes in the short term.

As turmoil continues in the stock market and the Federal Reserve raises interest rates, we continue to hear rumbles of concern in the distribution space. There is general concern over the sustainability of the pace, volume of deals, and valuations that exist. Investors, at this point, don’t appear to have the same concerns. With at least five major private capital infusions into the space in 2018, there are no sure signals that the market is going to slow down.

Additionally, on Jan. 1, 2019, Patriot Growth Partners, led by CEO Matt Gardner, concurrently acquired 17 firms to create the next national brokerage. Patriot is backed by Boston-based Summit Partners.

While the dust is still settling, one thing seems abundantly clear: supply and demand remain robust. Investors are flocking to the distribution space, and many independent firms are still owned and controlled by those from the baby boomer era. Most of the buyers are proclaiming they have very full deal pipelines, and the momentum of a robust 2017 and 2018 is anticipated to continue into and throughout 2019.

Securities offered through MarshBerry Capital, member FINRA and SIPC. Send M&A announcements to M&

Phil Trem President of Financial Advisory, MarshBerry Read More

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