Briefing: M&A opportunities exist for those mid-market firms willing to align on culture

By Stuart Reid

No-one could have forseen – at least not when I started my career in insurance – the prevalence of mergers and acquisitions (M&A) activity in our industry. While the number of brokers in the UK remains at a healthy level, the size makeup of our market has substantially changed.

With a few notable exceptions, the UK broker market is now made up of the very large and the small, with the mid-market looking sparse. This leaves a fantastic opportunity for those that wish to take it.

Smaller brokers tend not to sell to the very large. Shareholding in these firms is usually vested in a small number of individuals – often the founders or those related to them – and cultural factors are strong.

This cultural piece is important but unsurprising, as it is the very reason the business was created in the first place.

Culture in these smaller firms is often so strong that, as a factor for those owners considering selling, it can trump the silly prices others are happy to offer.

This leaves the very large acquirers with a conundrum – with backers and owners keen to see growth, M&A has been a relatively easy way to satisfy the board. But, with only smaller businesses on offer, the difficulties are multiplied as those smaller deals do not tend to move the needle much.

Those mid-market and smaller firms have an opportunity here.

Not like the old days

Put simply, the UK acquisition market for the very large brokers is no longer what it was.

This can easily be seen if you take a look at the lack of deals done this year. However, this slowdown in deals may be offset by a shift into the MGA market, eye-watering spending in Europe and even movement into the more difficult and historically closed Lloyd’s and London market.

This diversification has an instant appeal, but moving out of the core business brings its own obvious dangers.

Why buy? Why not grow organically? Well, as an industry – and I do mean “as an industry” – we are very poor at selling.

Most brokers sell less than two policies per client on average, which is plainly ridiculous considering the range of products we have on offer.

Retention of a client is key and most companies do very well at this, but try measuring additional sales to an existing client and it does not make for good reading. We are so fortunate to be in an industry where clients renew annually, but sadly this seems to have made us lazy for new business.

Repopulation

Despite challenges to organic growth, the mid-market will be re-populated, be it via growth by merger or by firms selling to truly like-minded businesses.

This will happen because, to my mind, the mid-market offers the best value for all. Firms in this category are big enough to give the best service to their clients, to capture the attention of suppliers and to provide an environment and fully support employees at whatever level.

However, these firms are also small enough to move fast, to specialise where needed, to control and nuture a strong and inclusive culture and to enact a real difference in all things compared to those large competitors.

Financially, broking has had such success with M&A in the past due to the savvy backing of those that sought out the skilful entrepreneurs in a market that was cash-generative, annually renewable and threw off great profits.

With greater regulation, higher interest rates and the lack of attraction offered beyond simple price, the largest of these businesses – having in many cases lost those entrepreneurs – are now finding it increasingly difficult.

A hard market in a predominantly commission-based industry may delay the inevitable, even with the pressure that the new Consumer Duty will rightly bring to excessively high margins.

The very large will be left to diversify beyond their skill set and, finally, may end up buying each other.

As I said at the top of this piece, what a fantastic opportunity that leaves the rest of us.