Lessons of UK Broker M&A Independence Day Conference 2019 Olly Laughton-Scott, Partner, IMAS Corporate Finance Vienna, 28 June 2019 IMAS Corpora rate Finance Unrivalled M&A expertise in financial services
IMAS Corporate Finance UK market overview Recent M&A activity and drivers of change Valuations in UK broking M&A The Top 50 UK brokers Impact of consolidation on the Top 50 UK brokers Lessons and implications / the next five years? 2
IMAS overview IMAS at a glance • Independent corporate advisory firm that has been owned by its partners since 1992 • We specialise in providing conflict-free advice on corporate transactions across the financial services sector • Our clients include entrepreneurs, corporates and private equity firms, for whom we prepare 1992 bespoke advice and develop corporate finance FOUNDED IN solutions that achieve their goals • Our highly experienced team have backgrounds at leading global financial services groups, extensive >100 YEARS OF transaction experience and a track record of COMBINED success EXPERIENCE • We partner with our clients, managing discreet transaction processes focused on achieving the ~200 TRANSACTIONS best outcomes and maximising value COMPLETED IMAS S Corpo porat rate Fina nanc nce Unrivalled expertise in financial services 3
IMAS - insurance partners Olly Laughton-Scott John Nisbet Founding Partner Partner, Insurance • Founded IMAS in 1992 • Joined IMAS in 2018 • Built IMAS database • ex N M Rothschild & Sons • Insurance specialist: > 100 deals • Chartered Accountant • Over 30 years’ experience • 15 years’ experience in insurance M&A Tel.: +44 (0) 20 7444 4392 Tel.: +44 (0) 20 7444 4398 ols@imas.uk.com jn@imas.uk.com IMAS S Corpo porat rate Fina nanc nce Unrivalled expertise in financial services 4
IMAS transactions A specialist insurance adviser Selected advisory assignments • Extensive experience advising on corporate transactions of every type across the UK insurance sector sale to sale to sale to • Completed ~200 transactions in the last two decades, mainly advising private sellers but also acting for large corporates and private equity clients sale to sale to sale to • Particular focus on insurance distribution – more than 100 completed deals covering personal lines, commercial, Lloyd's, MGAs MBO backed by sale to Acquisition by • Deep sector knowledge and data driven approach underpinned by proprietary database, IMAS-Insight IMAS S Corpo porat rate Fina nanc nce Unrivalled expertise in financial services 5
IMAS- Insight What makes us different • Unique internally developed database analyses the entire UK Financial Services landscape • Real time data from FCA and Companies House - over 30,000 companies classified by activity, size and ownership • Factual data overlaid with >50,000 cross-referenced qualitative inputs; built up over 25 years – no other adviser has this capability • Provides our clients with comprehensive sector view – every buyer (or possible target) is captured • Data ultimately just a tool – backed up by our sector knowledge and industry relationships www.imas-insight.com IMAS S Corpo porat rate Fina nanc nce Unrivalled expertise in financial services 6
IMAS Corporate Finance UK market overview Recent M&A activity and drivers of change Valuations in UK broking M&A The Top 50 UK brokers Impact of consolidation on the Top 50 UK brokers Lessons and implications / the next five years? 7
UK insurance broking – market structure (today) … Ownership of UK general insurance distribution (>£5m value) Value band UK Quoted Privately O'seas Private Mutual Other Total (est.) held Owned Equity £100m+ 4 8 12 9 0 6 39 £25m-£100m 0 40 8 21 1 1 71 £5m-£25m 0 247 27 9 1 4 288 Total 4 295 47 39 2 11 398 • Table above is the ‘tip of the iceberg’ – more than 2,000 firms worth less than £5m • Privately held businesses the predominant ownership model • Of the privately owned businesses above, 73% have principal shareholder aged 50 or over • Fragmented market has proven fertile hunting ground for PE / PE-backed consolidators Source: IMAS- Insight IMAS S Corpo porat rate Fina nanc nce Unrivalled expertise in financial services 8
… and how it has changed Number of authorised UK insurance distribution entities 8000 • Regulation has made it harder to start a business 7000 • Restrictive covenants more effective so moving staff more difficult 6000 5000 c.3,000 regulated firms – down from >7,000 in 2005 4000 3000 Change in 2000 basis of UK regulation 1000 0 JAN02 MAY02 SEP02 JAN03 MAY03 SEP03 JAN04 MAY04 SEP04 JAN05 MAY05 SEP05 JAN06 MAY06 SEP06 JAN07 MAY07 SEP07 JAN08 MAY08 SEP08 JAN09 MAY09 SEP09 JAN10 MAY10 SEP10 JAN11 MAY11 SEP11 JAN12 MAY12 SEP12 JAN13 MAY13 SEP13 JAN14 MAY14 SEP14 JAN15 MAY15 SEP15 JAN16 MAY16 SEP16 JAN17 MAY17 SEP17 JAN18 MAY18 SEP18 JAN19 Source: IMAS- Insight IMAS S Corpo porat rate Fina nanc nce Unrivalled expertise in financial services 9
Not all subsectors are consolidating – rise of the MGAs Number of (all) authorised UK insurance distribution entities and MGAs – past 10 years 5,000 250 Change over past 10 years: More than 200 MGAs in the UK (right • No. of Brokers: >25% 4,500 hand scale) excluding Lloyd’s brokers • No. of MGAs: 50% 4,000 200 3,500 3,000 150 2,500 • Insurers struggle to take advantage of opportunities created by rapidly developing technologies 2,000 100 • Nimbler MGAs are better structured to do so 1,500 • Over longer term insurers will reduce activities and focus 1,000 50 increasingly on allocation of regulated capital as industry moves from being product-centric to client-centric 500 0 0 MAY09 FEB10 NOV10 AUG11 MAY12 FEB13 NOV13 AUG14 MAY15 FEB16 NOV16 AUG17 MAY18 FEB19 Authorised MGAs Source: IMAS- Insight IMAS S Corpo porat rate Fina nanc nce Unrivalled expertise in financial services 10
IMAS Corporate Finance UK market overview Recent M&A activity and drivers of change Valuations in UK broking M&A The Top 50 UK brokers Impact of consolidation on the Top 50 UK brokers Lessons and implications / the next five years? 11
Recent M&A in UK broking UK insurance distribution M&A activity since 2014 – number of deals worth >£5m Have the consolidators largely swept up the mid- 2018 a record sized (£5m to £25m value) businesses? year for M&A by number of deals Source: IMAS- Insight IMAS S Corpo porat rate Fina nanc nce Unrivalled expertise in financial services 12
Deal volumes in last three years driven by voracious appetite of private equity UK insurance distribution M&A activity 2013-2015 and 2016-2018 – buyers 100 2013 – 2015 80 60 31 27 40 9 9 20 0 UK Quoted Privately Held Overseas PE and PE-backed 90 100 2016 – 2018 For Overseas 80 read: US 60 42 40 10 4 20 0 UK Quoted Privately Held Overseas PE and PE-backed £5m-£25m £25m-£100m £100m+ Source: IMAS- Insight IMAS S Corpo porat rate Fina nanc nce Unrivalled expertise in financial services 13
Dominant buyers change over time – new consolidators active since 2016 Principal buyers of UK insurance distribution since 2003 – annual spend on M&A (£m) 700 5,000 (Scale adjusted due to relative size of JLT acquisition) Particular buyers tend to 600 dominate at any one time 500 400 300 200 100 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 YTD -100 -200 Towergate / Ardonagh Gallagher Hyperion Marsh PIB GRP Aston Lark Source: IMAS- Insight IMAS S Corpo porat rate Fina nanc nce Unrivalled expertise in financial services 14
Understanding the Private Equity backed consolidators • ‘Buy low sell high’ • Premium payable for the larger businesses that PE backed vehicles set up to create • Take on and reduce or eliminate entrepreneur risk attendant in most small/mid-sized brokers • Acquisitions their ‘day job’ – quick decision making and lock in entrepreneurs • Create value by institutionalising multiple smaller businesses • Confidence around ability to exit • Large international acquirers (Marsh, Aon) willing and able to pay a premium • Roll up of smaller firms involves a level of work they are not set up to undertake • Secondary buyouts (cf. Aston Lark) – as prevalent in the US • IPO? – unclear when / if public markets will become relevant again • Supportive debt markets (funds) and synergies / operational improvements boost returns IMAS S Corpo porat rate Fina nanc nce Unrivalled expertise in financial services 15
IMAS Corporate Finance UK market overview Recent M&A activity and drivers of change Valuations in UK broking M&A The Top 50 UK brokers Impact of consolidation on the Top 50 UK brokers Lessons and implications / the next five years? 16
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