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AssuredPartners deal shows continued private equity zest for insurance brokers

A recent transaction for a controlling stake in AssuredPartners Inc., which will see it return to its original private equity backer, maintains the strong pace of insurance broker deals.

Strong and predictable cash flow, low capital expenses and high recurring revenue streams continue to attract private equity investment dollars to the insurance brokerage sector, said Phil Trem, executive vice president at MarshBerry.

In addition to traditional private equity funds, pension funds and family offices have also been keen on the insurance brokerage industry, Trem said in an interview. MarshBerry tracked some 580 brokerage deals in 2018, the highest count the company has recorded in a single year. Of those, 346 deals included private capital buyers, he said.

Combined with unannounced deals, MarshBerry estimates that the total number of insurance broker deals in 2018 could have been as high as 700. Demand remains strong while supply has not slackened, Trem said.

"We expect to see continued deals where independents are selling to the larger aggregators, as well as those private-capital backed firms finding new capital solutions to continue with their existing business models," he said.

GTCR LLC is a rare boomerang investor in AssuredPartners, having helped get the broker off the ground in 2011 before selling its equity stake to Apax Partners LLP in 2015.

The return play was a surprise to AssuredPartners, according to co-founder and CEO Jim Henderson, but it may end up being a pleasant one. The company's new and original backers will not have to familiarize themselves with the operation, and AssuredPartners can continue its pace of expansion toward its desired spot among the top 10 brokers, Henderson said in an interview.

"We want to continue to improve our organic growth. We've made very good strides to do that, and there's a commitment to do it," the CEO said. GTCR's backing will widen AssuredPartners' pipeline for larger acquisitions when they present themselves, Henderson said. A different fund advised by Apax Partners will maintain a minority stake in the broker.

"With these two very well-capitalized [private equity] firms in back of us, we feel like if and when we need the capital to grow by larger chunks, we will," Henderson said.

Media reports said the deal gave the broker an enterprise value of $5.1 billion; Henderson did not confirm or deny that valuation.

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Wells Fargo analyst Elyse Greenspan said private equity's ongoing appetite for brokers is consistent with her outlook for strong organic growth for the sector in 2019. Her cash EPS estimates for public brokers for 2019 indicate that the group continues to hold valuation upside, Greenspan wrote in a Feb. 21 research note to clients.

While valuations have been at an all-time high, the deal market is exposed to a couple of macroeconomic sensitivities, MarshBerry's Trem said. Higher interest rates would dampen the pace of private equity purchases, as would a slowing economy.

Private equity investors often value buyouts based on how they forecast what businesses are worth in the near term, so a souring economy could discourage some of that capital, Trem said.

"When expected [economic] growth starts to slow down ... we think that may cause a little bit of a pullback on valuation," the adviser said.