Minority Equity Investments in Insurance Agencies
While insurance agency buyouts have gained incredible traction and private equity interest over the last several years, the market for non-control investments in agencies remains extremely limited for small-mid sized firms.
In 2019, 700 acquisitions were recorded with 43% being Private Equity backed whereas, in 2007, 200 deals closed with 7% being PE-backed. The increased demand is well-founded — agency operations are predictable, client retention is high (~90%), and operating margins continue to expand as innovative technology solutions are adopted (~30%). Also, as consolidation in the industry accelerates, valuation multiples are reaching record levels (12–14x EBITDA).
Interestingly, and despite the attractive economics, fast-growing agencies that efficiently manage leverage and need liquidity to capitalize on revenue growth opportunities cannot readily access capital.
Investment firms can capitalize on this to capture:
- A disproportionate share of a firm’s upside via discounted entry valuations
- Above-average organic revenue growth
- Arbitrage of the firm’s future sale proceeds
By contrast, in most buyout situations, revenue growth has plateaued, management is retiring, entry multiples are at peak levels, and the purchasers are highly leveraged (see below leverage ratios for PE-backed vs. Publicly traded brokers).
Ultimately — In today’s environment, more capital is required for agencies to grow and high-growth businesses are not willing to give up ownership control (and shouldn’t). There has never been greater interest from the investment community in our industry and there should be active players investing in (not purchasing) small-mid sized firms.