With current brokerage valuation multiples sometimes as high as 15 to 20 times EBITDA (earnings before interest, taxes, depreciation and amortization), buying a business is challenging for anyone without access to significant capital.
So, how do brokerages finance their deals?
“Aside from borrowing from banks, raising capital from insurers or private equity (PE) still continues to be the most common route,” says Alex Wong, a partner at advisory firm Smythe LLP.
And PE interest is showing no sign of slowing down, adds Andrew Mathias, senior vice president of investment banking with KPMG Corporate Finance.
“I’m having calls weekly, if not more, with large insurance-focused private equity, even in the U.K. and in the U.S.,” he tells Canadian Underwriter. “When they start picking up the phone and asking questions, that’s when you know they’re looking to deploy capital.
“There’s a whole bunch of private equity [providers] that have come [into the insurance space] in the past two years; there’s still a whole bunch more that want to come into this space,” Mathias says. “So, I think there’s still a huge runway for M&A to continue.”
An example of a Canadian brokerage that’s partnered with a PE firm is SIB Corp. (StoneRidge Insurance Brokers).
SIB Corp. CEO and president Ted Puccini says the brokerage partnered with CIVC Partners, “[which] has supported SIB in developing a defined M&A strategy. CIVC has also been instrumental with formalizing SIB’s capital/debt structure which has allowed SIB to reach its short- and long-term goals.
“Thus far, SIB’s successful track record of smart and profitable acquisitions coupled with our prudent cash/debt management practices has allowed our shareholders and lenders to provide deal capital as required with a high degree of trust and confidence.”
Related: Why 2024 could be another banner year for brokerage M&A
In Westland Insurance’s case, the brokerage has a strong partnership with Broadstreet Partners and Ontario Teachers’ Pension Plan (OTPP), says brokerage president and CEO Jamie Lyons.
On its website, OTPP says it has “one of the largest and most sophisticated pools of private equity capital in the world.”
Adds Lyons: “This partnership with OTPP provides us with access to substantial, long-term, Canadian capital, which is essential to our strategy as we build Westland thoughtfully for the future. The partnership with Broadstreet and OTPP is both long-term and scalable.”
Other deal financing options include preferred equity and a vendor take-back, the latter essentially being a promissory note that the seller will pay the money over time to the buyer, which accrues with interest.
That said, traditional debt is still a common way to raise capital, Mathias says.
“The smaller brokerages are definitely going to go to their bank,” he says. “Once you get to five, six million [dollars] of EBITDA, that’s where it probably makes sense to look at alternative structures, whether it’s private equity or private capital, private credit.”
Smaller brokerages may also decide to partner with other groups or join a branch network, for example, rather than sell to large consolidators, Mathias says. “I think you’re going to see more M&A happening between smaller players doing more unique M&A and more structural transactions than a traditional buyout. That’s going to happen.
“How do we come up with unique ways that we can still survive, but we’re not selling our business?” he asks. “That’s where you’re going to see a bunch of opportunity or a bunch of transactions.
“I don’t want to call it M&A, but transacting partnerships happening.”
Feature image by iStock.com/Just_Super
