Broker CEO Forum 2023: ‘Differentiated’ broking M&A market puts greater emphasis on pre-deal prep

M&A in the UK’s broking sector is now showcasing “a more differentiated quality” compared to prior years, where pre-deal preparation around return on investment and the success of previous purchases “is much more important”, according to market-leading acquisition consultants speaking at Insurance Times’ Broker CEO Forum event last month (November 2023).

Addressing broker leaders on 16 November 2023 at Winchester’s Lainston House, the consultant panellists agreed that M&A in the UK broking market remained “very strong,” with the sector “a very attractive place to be”.

However, one panellist observed that there was now “a more differentiated quality” surrounding broking M&A deals, where “preparation is much more important than it ever was”.

He explained: “Businesses have come to market thinking the market is hot, so we can just put some numbers out there and get what we want. That’s definitely changed.

“There’s [now] a lot of questions around the numbers. So, to anyone looking to sell a business, that investment, preparation [and] time, that is super important.”

Another speaker concurred with this sentiment. He added: “People are spending a lot of time on prep before they [sell].

“If you are in a buy and build platform, there’s a lot more focus on have you extracted value from what you’ve bought? How have your acquisitions performed? There’s a lot more scrutiny over that.”

In terms of what this acquisition preparation looks like, the panellists listed “making sure that your numbers are all buttoned down, really focusing on underwriting quality, retention rates, cancellations, the [regulation] side and the IT side”.

“It just needs to be super clean,” one panellist continued. “You need to de-risk as much as [you] can – the perception of risk and actual risk – for the buyer side. That’s [what] people are really focusing on.”

Broader M&A trends

Although UK-based broking M&A is still considered to be an attractive business proposition – especially for US firms looking to use an “essential” UK “foothold” to break into continental Europe – M&A across the Channel is becoming increasingly important too.

This is because M&A targets in the UK are diminishing, one panellist noted, so Europe becomes the next obvious focal point.

Equally, the panellists confirmed that commercial and specialty broking businesses are more likely to be snapped up by buyers, with a smaller pool of investors interested in personal lines. In part, this is because personal lines products cover such a wide array of specialisms.

The gap between broking and MGA M&A activity in the UK has also shrunk, the consultants added.

Private equity appetite

Private equity-backed M&A remains prevalent in the broker market, continued the session’s panellists.

This is because insurance broking is still viewed as a “safe haven” for private equity (PE) funding compared to other asset classes and sectors, due to the fact that individuals and companies will always need to purchase insurance policies, regardless of broader “turmoil” that may impact economies and industries.

One speaker explained: “More private equity [firms] want to do deals because they don’t want to go into consumer lending, specialty banks.

“[They are] nervous about some insurance [businesses] because of the regulatory curveballs and the risks [around] that sector, but they need to provide cash and insurance broking, employee benefits, wealth management – those are still very strong.

“Money is available – it’s just a bit more expensive than it was. If you are a private equity buyer, you factor that into your modelling.”

Broker delegates agreed with this perspective – one attendee commented that PE backing is often viewed as a short term commitment, however this is now typically not the case. In fact, PE deals have moved from being three to four year agreements to instead be five to seven year arrangements.

An acquisitive broker added that it is important to present a strategy and organisational vision that PE firms can “buy in to” as well.