Indeed, the relatively low-profile business represents one of the greatest growth stories in the history of the sector.
Based on $38mn of revenues in 2013 and just under $3bn in 2021, the firm has delivered a top-line CAGR of over 70%, with Ebitda hitting over $1.1bn last year, up 110-fold over the same period. Growth has slowed as it has scaled, but its 2017-21 revenue CAGR is still 36%. In the up-to-date financials Acrisure provided to this publication, it reported run-rate, pro forma revenues of $3.8bn and Ebitda of $1.3bn.
Although a degree of skepticism around the valuation is warranted as it has not done a full equity refinance, it has also showed surging growth in its enterprise value from a 2016 leveraged buyout at a $2.9bn valuation to a preference share recap last year at $17bn, and a top-up last month at $23bn.
This last valuation means that Acrisure is worth more on paper than Brown & Brown and Hub (although the latter could potentially refinance at a higher level if it was marked-to-market for recent growth).
Through this unprecedented growth, fuelled by approaching 800 M&A deals, the business has consistently maintained Ebitda margins of above 30%.
And thanks to a pivot from a typical private equity ownership model in 2016 to heavy use of preferred shares, the business has managed to keep more than 75% of the common equity in the hands of staff.
On paper right now – and it is an important qualification – that stake is worth somewhere around $9bn, netting out the debt and preference shares.
The story is also remarkable because the business has spread out over the four years from US P&C and employee benefits into a string of other areas, including reinsurance, international broking, MGAs and also into asset management, cybersecurity and AI.
As a result of the last of these, the business has dubbed itself a fintech that owns a top-10 retail broker, as it begins its positioning for a long-planned IPO.
Crucially, however, almost everything that makes Acrisure distinctive as a business elevates its risk profile. The business has the chance to deliver equity holders unprecedented wealth in sector terms, but to get there they are running the model with unparalleled aggression.
That attracts the negative notice of peers who think the business is reckless in its pace of M&A and financing structure, as well as artful in the way it presents itself to agency owners and investors.
Much in terms of the way the story is ultimately viewed will depend upon whether it can navigate the winding path to a successful IPO over the next 12 months or so – a move which would substantially de-risk the business through de-levering and allowing it throttle down on M&A.
To do that Acrisure must prove that it can comply with the Sarbanes-Oxley public company standards, something which will be complicated by its decentralized structure and hypersonic deal velocity.
Approached for comment, Acrisure CEO Greg Williams said: “We’re proud of the company Acrisure is today and yet, our best days are ahead.
“Our people and technology are best-in-class and we’re seeing a real return on investments in both.
“Further, our vertical expansion has allowed us to grow on multiple fronts and deliver the product and service solutions our clients expect and deserve. As we continue to expand around the world, we’re incredibly excited about the future.”
The bear case on Acrisure
Acrisure is the business in the broking sector that attracts the highest degree of scrutiny from peers, bankers and private equity firms focusing on the space.
The bear case around the company can be organized into five points.
First, the deal velocity of the company restricts the time that can be spent on due diligence, which elevates risk of poor selection of targets.
Acrisure’s total deal count since inception is likely ticking up towards the 800 mark, and it has significantly outpaced the second most prolific deal-maker Hub over the last decade. (It is impossible to track acquired Ebitda for the universe of firms, leaving volume as the only consistently available proxy for M&A growth.)
In a deal announcement earlier this month, Acrisure said that less than six months into the year it has either signed – or reached letter-of-intent stage – on 100 deals, a level of M&A that no company in the sector has ever achieved in a full calendar year.
There are some involved in US retail broking M&A that believe Acrisure is being selected against in deals. Most sources, however, said that Acrisure is buying “everything” – good businesses, average businesses and bad businesses.
They stressed that there was no clear pattern, and argued that this 4-deals-a-week M&A machine is focused on originating the largest possible amount of Ebitda for the group, and executing as many deals as possible at speed, rather than carefully selecting targets. Success in M&A owes a lot to the deals you don’t do as well as those you do.
Second, the business has the most aggressive financing structure of any of the levered brokers in the US, leaving it more exposed than peers to a growth slowdown.
Acrisure’s debt structure is fairly typical for a levered broker. Moody’s estimates it is levered at around 7x forward Ebitda, and carries the same B3 stable rating from Moody’s that is held by the likes of USI, Hub and Alliant. (Acrisure states its leverage as 5.9x Ebitda at March 31, baking in the benefit of growth that is not yet in the Moody’s numbers.)
The most recent Moody’s projections on its debt coverage show it around 1.5x to 2.5x, with significant headroom above the 1.2x level set by the ratings agency as a risk factor for downgrade.
However, untypically the broker’s capital structure includes a huge amount of preference shares, split across three tranches. In March 2021, the company raised a Series A of $3bn prefs, and a Series B of $454mn, from BDT Capital Partners. Both carry paid-in-kind dividends, the former at 7%, the latter at 8%, meaning that interest is not paid but rolls up into the principal.
The company added a further $725mn of prefs last month, which are assumed to have PIK structure as well. Adding the coupon in to the first two series would suggest that the company is now carrying somewhere like $4.4bn of prefs, equivalent to approaching 3x Ebitda.
Moody’s treats these preference shares – which can be converted to common equity under certain circumstances – as 100% equity, despite their debt-like properties.
Acrisure doesn’t look over-strained from a credit perspective, but the preference shares place pressure on the company to grow its equity value faster than the dividend level to ensure the common shareholder value is growing.
It also elevates the risk for the common equity holders. If things go wrong, there is scope for the staff common equity holders – a group which skews heavily to entrepreneurs who sold their businesses to Acrisure – to be heavily diluted, and to miss out on much of the pay day many of them have long been holding on for.
Third, the firm’s CFO and head of M&A, Matt Schweinzger, was effectively obliged to step down last year from those roles after a fund he set up invested $485mn into what federal prosecutors allege was a Ponzi scheme.
In addition to his work at Acrisure, Schweinzger ran an unrelated fund – JJMT Capital – which invested the money in an investment vehicle called 1inMM, which was run by Zachary Horwitz.
Horwitz was arrested last year by the FBI and accused of losing $225mn in a Ponzi scheme built on faked distribution deals with Hollywood film studios including Netflix and HBO.
When the story broke in April last year, Inside P&C noted that Schweinzger – who has remained an adviser to Acrisure – was considered a victim and a witness in the case and was facing no criminal charges.
However, Schweinzger did raise money into JJMT Capital from Acrisure staff, including principals who agreed to sell their agencies to Acrisure, and these staff are exposed to the Ponzi scheme losses.
The optics of the situation remain unhelpful for the company.
Fourth, Acrisure is perceived as showing a degree of tradecraft around the way it has told its story.
Competitors, advisers and private equity houses that work in the space have cast doubt on the valuations Acrisure has been able to publicize coming off the back of preference share deals, stressing that they are not apples-to-apples with competitors.
The enterprise valuations generated by preference share deals typically reflect the strike price of warrants. However, given that the economics for the pref investors are heavily driven by the dividend, not the warrants, they are often willing to accommodate higher valuations than would be supported by private equity investing in common equity, multiple banking and PE sources said.
This has allowed Acrisure to put marks on the business that include sector leading multiples for private businesses.
A degree of peer criticism also reflects the way the business describes itself. In the release announcing its $725mn prefs raise last month, Acrisure described itself as “a fast-growing Fintech leader that operates a top-10 global insurance broker”.
This framing has been supported in part by the firm’s acquisition of the Artificial Intelligence business Tulco in 2020 in a paper deal valuing it at $400mn.
Sources have suggested that Tulco is supposed to allow Acrisure to leverage AI to build a proprietary pipeline of leads for its producing brokers.
However, there is widespread mistrust around this capability – particularly given Acrisure is not a leading performer on organic growth – and at the very least it remains a “show me” story. (The firm was in slightly negative territory on organic growth in 2020 compared to 4.4% for a private broker index, although it told this publication its 2021 organic was “high single digits”, and it expects to achieve the same again in 2022.)
Acrisure would not be the first business to want to identify its AI credentials to bolster the sales story in its S-1, but this is not a framing of the business that its competitors recognize.
Fifth, the firm is amongst the least integrated of the broker/agency roll-ups, and this “Confederation of Acrisure” creates operational risk, and constraints around your exit options.
Rolling up 100+ firms a year, and minimally integrating them, opens the firm up to the charge that Acrisure is largely driving value through financial engineering. Simplistically, this position says that Acrisure’s value creation largely reflects high levels of financial leverage combined with multiple arbitrage on massive deal flow.
And no doubt, there is some truth in that picture to the degree it matters - just as there is for all the private levered brokers. But equity value does not have to be earned through organic growth and franchise building.
The more forceful critique of the integration-lite model is that it potentially restricts your options for financing a business, and also exposes you to new risks.
In order to IPO, Acrisure must find a way to be compliant with the Sarbanes-Oxley Act, which raised the bar for public companies in terms of things like audit, financial reporting and fraud prevention. Hypersonic deal velocity magnifies the challenges of abiding by what is an already stringent regulatory regime.
Moreover, the most recent true failure of a private brokerage firm was UK aggregator Towergate. The firm’s seizure by its creditors in 2016 followed stress that emerged because it lacked a grasp on the earnings power of the businesses it bought.
Given the defensive properties of these assets, one of the few developments which could trigger genuine solvency risk in any of the private brokers is a realization that earnings have been overstated.
This remains a tail risk for any of these businesses, but the greater the complexity and the lower the level of integration, the greater the degree of risk.
Adding risk to a resilient model
This is the bear case that competitors and other market watchers build around Acrisure.
But there is one other reason for the degree of negative noise. There is a kind of sector purism from people that have been brokers all their careers, or those that have been near the top of the private brokers since the early involvement of private equity. These sources see Acrisure as refusing to play by the unspoken rules governing these firms.
But there is a case to make that Acrisure’s modus operandi just reflects its early realization around a decade ago that the broking model is so resilient that it can be run with more risk than has generally been appreciated.
With a high percentage of revenues coming through non-discretionary purchases, strong cashflows, low capital expenditures and controllable margins, brokers are hard to break. In addition, the sector has a huge runway on consolidation and is perceived as highly attractive to debt markets.
Given all this, a firm with good execution may be able to secure huge upside from taking a more aggressive approach to its build.
During a period with substantial sector tailwinds that strategy has paid off, but it is heading now for a stress test as financing costs rise, organic growth comes under pressure, tuck-in deal activity slows, and multiples for exit fall in both public and private markets.
If any of the US retail brokers are going to find those challenges difficult to absorb, it is likely to be Acrisure.
Nevertheless, Acrisure doesn’t look financially stressed. It remains on stable outlook from Moody’s and has headroom on interest coverage, and pretty distant maturities on its debt.
And as suggested earlier this month, all of the private brokers have significant levers they can pull if they do start to get into trouble. (See: “Levered brokers: Squeezed returns, but fundamentally resilient”)
De-risking through an IPO
My strong sense is that having got its prefs deal done in May, Acrisure is on the run-in to an IPO in the next 12 months or so.
This would be a decisive moment in de-risking the group by reducing debt leverage, taking out the prefs and lowering the hurdle on future growth.
But successful execution will not be straightforward. Acrisure needs financial markets to be receptive, and right now the IPO markets are closed. Public brokers have also traded down 10% to 20% from April peaks, closing much of the positive arbitrage with private markets that had emerged.
In addition, the company will have to find a way to convince public markets investors that it has a good story on organic growth, given that this is seen as a non-negotiable attribute for a high valuation.
Acrisure also has a valuation floor on its IPO, which reflects the massive amount of money it needs to raise through the offering to retire the prefs and take at least 1x off the debt.
This would require the company to raise something like $5.5bn-$6bn through the IPO just to take the leverage out – and some will surely be needed to provide staff owners with liquidity. There is probably a limit of around 30% of the shares that could be offered, according to banking sources, which would therefore require a valuation of ~$24bn to raise $7bn.
The Sarbanes-Oxley hurdle may be the most challenging for the company and is understood to be a major management focus now.
It’s hard to know at what point the firm would look to go with the IPO, and pieces move in different directions as the PIK accumulates, and the debt leverage falls due to earnings growth.
But back of the envelope math suggests it would need to be valued at around 17x 2022 Ebitda to hit that valuation, which is testing but possible. Partly it would depend upon the broader market, and partly it would depend on how well the company could sell its story – which in some ways will be highly attractive, and in others may raise concerns.
Moreover, with growth and technology stocks routed since July last year, the investor reception for any company with a fintech story to sell is likely to be less receptive than in 2020.
All this assumes that the IPO can be done. And to ensure that, Acrisure must prove that it can comply with Sarbanes-Oxley even as it cranks up its M&A machine’s pace towards 200 deals a year.
Given the attractiveness of the broking sector, the firm’s remarkable track record on growth and the natural delevering with growth, this operational hurdle may be the most challenging for the company and is understood to be a major management focus now.
The $10bn shot
Acrisure has a shot at creating ~$10bn of equity value for staff in a 10-year period (although in shares of a public company, not cash). If it can do it, the company will arguably become the greatest entrepreneurial success story in the recent history of the sector.
But the firm remains such an outlier in its approach versus peers that at the very least, it warrants caution until the firm demonstrates it can pass the final test around execution by staging a successful IPO.
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