Industry chatter around lack of UK-based M&A targets is ‘nonsense’ – Phil Bayles

Following 2021’s rampant uptick in broker consolidation, many market commentators feel the UK is running dry on potential M&A targets, with firms such as PIB Group instead focusing its M&A ambitions on Europe.

However, Ardonagh Advisory’s chief commercial officer, Phil Bayles, believes this view is “nonsense” because UK general insurance broking is a “very entrepreneurial market” where “people are always coming up with new ideas or new ways to serve clients”.

Broker consolidation gained pace amid the Covid-19 pandemic in 2020 and 2021. The UK insurance distribution M&A annual review - 2021 report, published by Imas in February 2022, cited that 145 UK distribution M&A transactions were announced in 2021 – these deals equated to a value of around £6bn.

The financial consultancy noted that 2021 was “a record year for M&A by value” and that the year contained “more deals by number than in any other year”.

Amid this backdrop, increasing numbers of UK-based brokers have switched to looking beyond Britain’s borders for M&A pipeline potential, believing that national acquisition opportunities were thin on the ground.

For example, in April 2022, PIB Group’s chief executive Brendan McManus told Insurance Times: “It’s not reasonable to think that we can continue to consolidate businesses in the UK and give our investors the huge growth that we’re already doing because we’re just running out of opportunities in the UK.

“In 10 years’ time, I’m sure people will start businesses again - but at the moment, there are fewer and fewer targets.”

Bayles does not share this perspective, however.

‘Natural’ part of an entrepreneurial market

Believing that the UK currently has around 2,000 insurance brokers in operation, Bayles explained: “Insurance broking is very entrepreneurial, therefore there [are] a lot of people who will start off on their own and create their own businesses.

“There [are] always new ones coming in, the same way that there are ones that are being swallowed up.

“I don’t think [broker consolidation is] a negative thing. It’s a natural part of an entrepreneurial business.

“If an entrepreneur [has] built a business up over 15 to 30 years, at some point they need to realise the value of that investment because that’s their pension pot, that’s their retirement plan. That’s only natural.

“[Broker consolidation is] a feature of an entrepreneurial market. That’s an incentive for more entrepreneurs to get into the insurance industry because they know that you can exit from the industry when you choose, at a rewarding level.

“I don’t see consolidation ending in four or five big players. There’s always going to be a number of big players, but also hundreds [or] thousands of small and medium-sized businesses that are an active part of the market.”

Bayles believes the optics around broker consolidation, depicting large firms gobbling up small businesses at pace, has come about because of the “very strong” valuations insurance brokers are attracting – this is driven by the fact that brokers tend to showcase “cash generation” and “high retention rates”.

In turn, these valuations mean that only “larger businesses have the financial firepower to acquire [brokers] rather than smaller businesses”.

Financial implications

Furthermore, macroeconomic conditions are also influencing consolidation within the broking market.

Bayles noted that the increase in the cost of money globally has created a “different market” for M&A activity – this is because firms are charged more for the money they are investing in acquisitions, making return on investment benchmarks “tougher” to achieve.

He continued: “If you think about the dynamics that drive consolidation, one of those is the availability of relatively cheap capital. We’re obviously going through a state of flux at the moment, globally, around interest rates going up [and] inflation [being] high.”

Bayles additionally hinted that economic and tax changes can accelerate consolidation thought processes and appetite.