Why private equity firms can't resist a broker

Towergate’s confirmation that Advent has invested £200m in the company is further evidence that private equity investors are taking a growing interest in the insurance industry – and brokers and service providers in particular.

While private equity firms are also interested in the underwriting side of the business – as Achilles’ purchase of Lloyd’s insurer Brit shows – taking stakes in brokers and service providers can provide a way into the market without investors having to get to grips with underwriting risk. That’s a daunting prospect for all but the largest private equity houses.

One reason insurers are an attractive prospect is simply that private equity investors are becoming more active and confident as they pick themselves up from 2008’s financial crisis.

Revenue streams

Brokers in particular are highly cash-generative and have predictable revenue streams – two big plus points for private equity investors. The business is also relatively easy to understand for less insurance-savvy investors.

Furthermore, while not completely unscathed by the financial crisis, brokers have been more resilient than other industries. They have certainly struggled to grow organically because of a reduction in insurance demand and soft pricing, but they have not faced the insolvencies seen in areas such as consumer goods. People may be more careful about what they spend, but they are still buying insurance.

There are also plenty of opportunities for private equity investors in the broker market. While consolidation has continued apace, there are still large numbers of small and mid-sized firms. As well as presenting more M&A opportunities, which gives private equity a chance to step in, dealing with smaller firms also offers investors an opportunity both to take a stake in a growing firm and to offer advice and expertise.

Clear exit route

The abundance of smaller firms looking to grow presents private equity investors with another key feature for their strategies – a clear exit route to allow them to capitalise on their investment. An investor could fund the smaller broker’s growth strategy and then get its payback when this activity catches the eye of a larger suitor.

Simply being in the industry is not enough to guarantee private equity interest, however. A good story and a good management team are both essential ingredients. An unambitious, stagnant company is unlikely to pique their interest.

In many ways, Towergate is the perfect attraction for private equity. It has a well-respected management team that knows where it is going, a strong desire to grow, and plans to float on the stock market, which will provide a ready-made exit strategy.

While the industry may one day fall out of favour with private equity investors, there is plenty to keep them interested for the time being.