Hiring whole teams out of rival brokers has risen to record levels over the last couple of years in US retail – with reinsurance broking also seeing some action – as a second-order impact of the abortive Aon-Willis deal and Marsh McLennan’s takeover of JLT.
In Alliant and Lockton you have two top-15 US brokers with long track records of financial success that have made team lifts the central plank of their growth strategies.
And while they are the most relentless exponents of the mass walkout with a subsequent blitz to immediately move business, the practice is quite widespread. Even #1 broker Marsh McLennan has recently taken advantage of the talent dislocation from Aon-Willis to stage some dramatic team lifts.
There are companies that swear off the approach – and some that even stipulate in contracts that staff cannot employ it at all. But if companies that take 3-5 staff simultaneously and insist staff respect contractual restrictions are included, then the list of brokers that are pulling this growth lever grows substantially.
The majority of the broking sources spoken to this publication criticized the practice, but there was a tendency to make exceptions for moves they had themselves made owing to mitigating factors like the adverse industry impact of consolidation on staff.
The playbook
There are various different flavors of team lift. All include the resignation of multiple staff working in the same area or office in close succession, with deals to move to a single rival already negotiated at the time of quitting.
At the larger end, tens of staff can walk out on the same day, with the largest ever single move when Tim Turner and around 200 staff resigned from CRC to move to start-up RSG back in 2010.
The divergence in approach reflects how this point is reached and the behaviour thereafter.
In some cases, discussions are conducted entirely one-to-one using the “fire-break” of a recruitment firm. In others conspiracies are committed that include the use of burner phones and laptops. But with tens of staff sometimes leaving at once, it stretches credulity to think that major raids are ever conducted without any discussions being held directly between staff who have worked together for years – even if no documentary evidence emerges.
Some of the hiring companies are very zealous in insisting that staff respect their contractual obligations, including non-solicit and non-compete provisions. While others either look the other way, or – it is widely assumed – encourage staff to adopt sharp practice in seeking to lure away clients immediately. The latter approach sometimes includes the theft of confidential data, including client lists.
Some broking firms will look to engage ahead of litigation or in the early stages of any litigation spawned with a view to buying the book of business. The more aggressive firms are likely budgeting for legal and settlement costs when they build models to assess the attractiveness of the team lift, sources said.
The benefits: Higher returns
Broking management teams have to weigh a complex range of factors in determining the relative weight that they will give to team lifts, M&A and an organic growth strategy tied to individual hires and developing internal talent and capabilities.
While M&A gives the acquirer rapid control over the acquired company’s book, and therefore quick cashflow with relatively low risk around the revenues, the cost of deals has increased over the years as valuations soared.
Hiring in individual senior staff to fill gaps, or bringing in and developing young talent, both offer the opportunity to deliver organic growth. These approaches can deliver high returns, particularly with early-career talent, and are central to value creation for public market brokers. But there is a higher risk that individuals underperform versus whole businesses or teams.
Industry sources have said it is hard to argue when it comes to the financial success of the team lift approach, and that executed well it can deliver the highest returns, particularly judged on a cash basis.
The returns reflect the revenues relative to the effective outlay of a) the costs of professional services (recruiters, lawyers); b) the cost of settling any litigation; c) staff costs before the team hits break-even; and d) however much of the economics is shared with the team to bring them aboard.
One senior broking source estimated the latter as 20-30% of the value created, although multiple sources stressed a huge range of outcomes depending on the remuneration model (equity, multi-year guaranteed bonuses, enhanced commission splits etc).
Compared to M&A multiples, settlements are cheap. Typically the litigation is settled via private mediation. Sources told Inside P&C the potential settlements to end legal proceedings after a mass walk-out range are typically between 2x and 3x Ebitda – although they can be somewhat more in cases where wrongdoing has been egregious - compared with 10x-16x multiples in M&A deals.
On top of this companies have to fund teams while they are loss-making before revenues come on-stream. IMA Financial CEO Rob Cohen told Inside P&C that it takes on average less than three years for new producers to be “validated by the industry”, with a range of executives also stressing a similar lead time on hitting break-even.
The costs: Time and culture
While the teens or 20s internal rates of return that can be delivered through M&A can be significantly exceeded when a team lift is executed well, there are significant trade-offs to secure this.
The revenue risk around a team lift is elevated. “Now the major difference between taking a team and M&A is the certainty with which you’re going to get the revenue,” one senior broking source said.
Inevitably some teams will over-promise when touting their services and subsequently under-deliver.
Moreover, sources said that financing is less favorable for team lifts, as lenders will not provide leverage against future promised cashflows from team rips. The situation has improved somewhat in recent years with lenders now allowing brokers to adjust their Ebitda upwards by stripping out associated costs when they refinance.
Nevertheless, this means team lifts are more cash consumptive than M&A, which can make team lifts relatively less attractive to PE-backed brokers, with the model working better for stable companies with under-leveraged balance sheets. And, of course, the returns are slower to come through.
Now the major difference between taking a team and M&A is the certainty with which you’re going to get the revenue.
The risk of litigation also creates uncertainty, including the wildcard of whether a temporary restraining order is granted. And if cases do proceed they can garner a lot of press coverage, damaging a firm’s reputation and creating a distraction for the management team.
Furthermore, the integration of a new poached team can create friction with existing staff, particularly if very different compensation structures are used.
Multiple broking executives also stressed the broader risk to the culture of a hiring firm built through repeated use of team lifts.
Some of these sources suggested that bringing staff onboard with the promise of significant financial gain, particularly if sharp practice was encouraged, threatened the kind of culture they were looking to nurture in their businesses.
One senior broking source pushed back on this characterization, stressing that there was typically an untold story of broken promises or company failure at the firm the team was looking to depart.
This idea has surfaced in the litigation between Aon and Marsh in Florida around the move of Michael Parrish and a team of 40 from the former to the latter. Marsh has argued in hearings and in a counterclaim that the failed Aon-Willis deal generated enough uncertainty for executives in Florida to consider moving from Aon to secure their jobs.
Nevertheless, sources acknowledged that heavy use of team lifts tended to foster a producer-focused or team/franchise model within broking firms. This in turn could restrict the exit options for a company, with large corporates with institutional cultures unlikely to be able to integrate such assets successfully.
And despite Marsh McLennan’s recent forays, it is also difficult for team lifts to really move the needle for multi-billion revenue firms, which tends to shift the growth strategy towards organic growth in particular, or larger M&A, as a firm matures – a move which may even now be evident with Alliant.
Antitrust, ESG and boomers
The team lift model has proved its financial effectiveness repeatedly, but there are forces which could see its use recede somewhat over time.
Major broker deals have been a big spur to this activity, and are now in the rear-view mirror with a negative antitrust environment inhibiting new transactions.
Moreover, the increasingly stringent standards around corporate behaviour resulting from the ESG Awakening are starting to seep from the public markets into the larger end of the private equity world – something which could ultimately start to inhibit the behaviour of companies wary of headlines about corporate raiding.
And finally, the producer-centric culture which sustains these kind of moves may come under pressure as Baby Boomers retire and the key demographic shifts towards millennials – a group more focused on purpose, collaboration and team culture.
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