Great businesses have greater value – Mistry defends broker consolidation

When Insurance Times spoke to Partners& duo Phil Barton and Stuart Reid, they warned of the excesses of consolidation amidst the inflated prices being paid for broking businesses in recent years.

This has drawn ire from some in the industry, with Brokerbility executive chairman Ashwin Mistry saying both had already benefited from selling businesses for high valuations over the course of their careers.

“We are not all in the same boat,” he said. “They have both benefited significantly from the excesses of consolidation models, so to make those magnanimous statements now falls on deaf ears a bit.

“A good business has value, and a great business has greater value.” 

And Mike Bruce, GRP’s new group chief executive, told Insurance Times in a separate interview that he was even dubious as to whether multiples had increased markedly in recent years. 

“There’s always a lot of misinformation and bravado around multiples, but I don’t believe the multiples have changed materially in the last couple of years,” he said.

Regardless of this, Bruce said that strong brokers would always generate high multiples, and that there was nothing wrong with that.

”A good quality business will generate a strong multiple for the vendor and good luck to them if they’ve worked hard to build a quality business that a number of people are interested in,” he said. “Why shouldn’t they enjoy the fruits of their many years of hard work?”

Barton, however, argued that the high multiples being paid for broking businesses had bred a culture of short-termism amidst the consolidators that had seen brokers fighting for short-term profits ahead of customer loyalty and long-term sustainability.

But Mistry says that good businesses will always look to invest in their future, and that the valuation of those businesses should represent that.

“[At Brokerbility] we have become more flexible as a result of our investment in technology, and therefore more resilient and relevant,” he said. “So I have all the ingredients of a modern day business that has responded positively to consumer behaviour changes. So therefore I would say that my business is worth a little bit more than an organisation that hadn’t had the foresight to invest, put the money in talent and think about succession, technology and client sectors. 

“In the space of consolidation, there is cheap capital out there, and brokers will still attract interest, because broking is the only sector I know of where we know that a customer will spend money with us on a particular date. How powerful is that?”

Regional Lessons

Mistry says that his own business, Brokerbility, had learnt the lessons of the first wave of consolidation and recognised that while size matters in broking, it is also the space you occupy that is a determining factor of future success, citing the regional market as a particularly profitable sector.

“What good businesses realised from the first round of consolidation is that size matters, and as a small regional broker, we had to put our hands up and beg, steal and borrow from anyone that would listen,” he says. “We learnt that whilst land grab is an essential and important play, the profitability from the regions space is far, far greater than the extortionate levels of commission demands from the consolidators.

“And over a period of years now, that regional fraternity has produced good returns for insurers for less demands.”

And Compliance expert Branko Bjelobaba says that he sees this type of strategic thinking across the broking industry, and that for the ones that get it right, this is represented in the value given to their business.

“Insurance is never short term and brokers always have to look ahead and workout what their business strategy is,” Bjelobaba says. “The bigger boys know the type of broker that fits their business. 

“The valuation on an insurance broking business is the value of the clients, the value of the assets in the business, and the value of the management team to take the business forward. But clients are very fickle and could leave if they lose their contact at the business and the loyalty is gone, leading them to leave at renewal.”

And Bjelobaba says that, at the end of the day, consolidation will always be a part of broking.

“People want to sell and people want to buy,” he said. “Everyone needs insurance, and brokers generally facilitate a better deal for customers all round.” 

Read more… Barton/Reid warn of ‘excessive consolidation at inflated prices’

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