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With so much private equity capital ready to invest in the insurance brokerage market, a number of other large insurance brokers will follow down the same private equity ownership path as Hub International Ltd. and USI Holdings Corp., an industry consultant predicts.
That could ultimately benefit insurance buyers as companies owned by private equity firms are not distracted by financial pressures from Wall Street and also have access to capital from their sponsors to help build their firms, other consultants say.
But private equity ownership has its downsides as well, the consultants say. Owners tend to hold on to their investments for a short time before either selling the firm or taking the company public again in an initial public offering. Such ownership change could impact buyers, they note.
"Excluding USI and Hub, an additional 10 of the top 100 brokers, at least, will be private equity-owned by the end of this calendar year," said John Wepler, president of Marsh Berry & Co. in Concord, Ohio, who said he is basing his predictions on the volume of discussions his firm has had with private equity firms and various brokerages.
"There is more than $15 billion of private equity trying to find a home in the insurance brokerage business over the next 12 months," Mr. Wepler said.
While a bulk of those transactions will take place with privately held brokerages within the $30 million to $80 million revenue range, Mr. Wepler said he thinks "we'll see another public broker go private within the next six months, without a doubt."
Private equity firms are seeking to make a big return on their investments by timing the insurance cycle--buying brokerages during a soft market and then selling their interest when the market hardens and the brokerages' price-earnings multiples rise, Mr. Wepler said.
This trend toward private equity ownership could ultimately benefit insurance buyers, consultants say.
"In general, a buyer benefits with private owners more so than with public owners," said John L. Ward, chief executive officer of Cincinnati-based Cincinnatus Partners L.L.C.
Getting caught up in the pressures of being a public company "can work to the detriment of buyers of insurance when the focus is more on earnings releases than on customer relationships," he said.
But on the flip side, "private equity firms come into deals with a view toward their exit," he said. So clients of a private-equity owned brokerages need to consider what the ultimate exit of the private equity owner will be and how that might impact them down the road. Overall, "I think on balance, it's neutral to slightly positive for buyers," Mr. Ward said.
Timothy J. Cunningham, a principal with OPTIS Partners L.L.C. in Chicago, agrees.
"It's likely a nonissue on balance, or a modest positive at best" for buyers, he said. "There could be a benefit as the brokers enhance, build out or strengthen their service capabilities to attract and retain business on a long-term basis without the quarter-to-quarter earnings pressure."
"The admonition, though, for brokers like Hub, USI and potentially other like deals in the future, especially those built on acquisitions, is they need to be out in front with the client to reassure them nothing is changing or else the client may begin to feel a bit uneasy," Mr. Cunningham said.