Last week, Warburg Pincus and Temasek pre-empted the pending Specialist Risk Group sale process with a knock-out ~18x Ebitda bid valuing the firm at £1.1bn.
Kudos to CEO Warren Downey and sellers HGGC, who extracted a full price on an accelerated timeline. Those watching investor appetite, like PIB, are likely to be encouraged as momentum continues off the back of Permira’s acquisition of German business GGW.
The deal is also noteworthy because it shows one of the more prolific insurance distribution investors in Warburg (McGill, Foundation, K2) throwing its weight behind a thesis that has growing currency.
The broking thesis holds that London is the Gateway to the World and comprises four different elements.
First, there is increased conviction in senior broking and private equity echelons that a playbook for consolidation outside of the US and the UK can be run successfully, either in a single region like Europe, or via a full international strategy that spans Europe, Latin America, Mena and Asia Pac.
This reflects the much higher available merger arbitrage relative to the US and UK, with tuck-ins in the US at roughly 11x-13x and international deals at 7x-9x. It also owes something to the perception that there are more available takeover opportunities with consolidation activity still in an earlier inning.
Second, there are ways to work the premium flows harder via consolidating wholesale flows and rationalisation of placement, as well as some value creation via operational synergies.
Third, and perhaps more importantly, it is widely believed that if brokers can build an international business of scale and diversity – particularly if it has a specialty complexion – then they will increase their optionality around future exits.
Such businesses will likely be seen as “other halves” for US strategics at scale looking to go global, with the size mismatch in favour of the US creating scope for cash sales. The smaller markets they are operating in also means more of these businesses are in the £200mn Ebitda and below bucket, making them more attractive to private equity as well.
Fourth, London-headquartered firms with their established entrepreneurial leadership and international outlook are perceived as the obvious beachheads for this kind of strategy.
Trailblazers
JLT and Howden are the original models of international specialty expansion, with the former’s international footprint one of the attractions for eventual acquirer Marsh McLennan.
Having built much greater scale with ~£900mn of 2023 international revenues ex-UK, Howden is looking to operate the playbook in reverse by finding a US retail business to acquire.
Ardonagh has also rolled out the playbook at breakneck speed, with its Australian build via platform acquisitions Resilium, Envest and now PSC, along with a string of tuck-in deals a paradigm example. From a standing start, it has assembled an ex-UK business with ~£500mn of revenues in less than five years, with its M&A now coming 90% outside of the UK.
A string of other names have been more quietly building out international footprints including BMS, PIB, and Miller. SRG will now join the roster of would-be acquirers in Europe and Asia Pacific. The scale of its ambitions in this area are perhaps best demonstrated by abortive efforts in 2022 to buy Scandinavian business Sacra – a business that ultimately sold for north of EUR500mn.
Brown & Brown has also been moving into non-US markets, while AJ Gallagher has long since held a major presence beyond the domestic US market where it is such a cornerstone.
Banking sources told this publication that they are receiving a significant number of enquiries from US broking platforms starting to look at Europe, with some mounting fact-finding expeditions.
The increasingly crowded playing field is important.
Muted competition for assets to date has created dynamics reminiscent of the period 10 years ago in the UK, and 15 years ago in the US where consolidation could be pursued with relative ease on attractive terms.
That more companies are starting to fish in those waters suggests that the clock is ticking. Later entrants will not find the same degree of opportunity as those that moved early.
A second reason for a degree of caution is the challenge that Anglo Saxon businesses often have in securing real success in non-English speaking marketplaces.
Cultural differences can be greater than expected, and an English accent may play better in some places than an American accent. How materially is not clear.
Marsh, Aon, and WTW were able to build out global footprints through deal-making in the 1990s and 2000s, but it took them many years of heavy lifting to build truly integrated platforms from the pieces they acquired.
Of course, the key levers of value creation here for most acquirers will not be operational synergies. But ultimately, the hard work of knitting these international empires together will have to be undertaken under one owner or another.
SRG may still be early enough to the party to find that the playbook is a winner.
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