Many in the market have looked at this askance, not only because of the massive disparity in size, but because Howden lacked many of the other things that define that group: treaty reinsurance broking at scale, US retail, large account broking, non-broking professional services units.
Howden signalled a desire to emphatically address this by acquiring TigerRisk for $1.6bn last year. It followed up the closing with a series of team raids including Guy Carpenter European CEO Massimo Reina and ~30 colleagues that herald efforts to build a global reinsurance broking footprint, and a full suite of specialties.
But it intends to make a much bigger strategic step during the next two to three years, as it seeks to live up to its avowal that it can rival the Big Three.
Sources have said that Howden intends to get into the $40bn-$60bn-revenue US retail market via a transformational acquisition-cum-merger.
And it is understood that Howden’s ambitions for that US retail deal will be huge, with a likely enterprise value for the acquisition of $10bn-$20bn, something which would put the bottom end of the top-10 US retailers in scope.
The move reflects both Howden’s arrival at the “JLT Dilemma”, where large clients need an in-house US retail capability, and the lure of the $2tn total addressable market.
Howden has quietly dropped prior messaging around not getting into US retail broking, which had been designed to protect its lucrative third-party US wholesale business, which is originated from US retailers.
If a deal is consummated, it will provide ammunition to Howden’s wholesale competitors in London accusing it of competing with its customers. However, sources have said it is a calculated risk that makes sense, given the relatively small percentage of group revenues represented by third-party US wholesale broking, and the dearth of scaled wholesalers in London that lack conflicts.
The risk of revenue breakage may be further managed through additional large M&A transactions before a US retail deal, with Howden believed to be interested in a Continental European mega deal, and/or an Australian transaction. Such deals would further dilute the percentage contribution of US wholesale to group revenues.
This transformation – alongside the reinsurance build-out – would create a platform for Howden to attack the large account/multi-national oligopoly of Marsh, Aon and WTW, it is understood, where sources believe market share is comfortably +80%.
The strategy is incredibly ambitious. Last year, I referred to evidence that the group is empire-building. Well, it probably makes more sense now to say that Howden is plotting to take over the world.
In its almost 30 years of life to date, Howden has built an impressive track record of execution, but it is important not to over-weight this in judging the chance of success.
The group underwent a step change in the speed of movement, and the size of bets it is making in around 2021.
In so doing, it elevated its risk profile. As noted last year, it has taken on a) complexity/integration risk, b) risk to its culture, c) and the risk of a failed mega deal.
But there are four further risks not touched on in our prior coverage that mean a plan as bold as Howden’s has a small landing zone.
These include financing risk, given that the business is currently deploying a lot of cashflow into team lifts, and securing the resources for new M&A and deferred consideration on existing deals via equity and debt raises.
A US retail pivot would also add the risk of dis-synergies from channel conflict (and the potential for associated talent flight).
Further, Howden faces UK-into-US execution risk – with British businesses rarely successful in full-throttle, onshore US growth.
Perhaps, most importantly, the group has illiquidity risk. Howden has created hundreds of paper millionaires through equity incentive schemes and generated major unrealized gains for its institutional backers General Atlantic (GA), CDPQ and Hg. (When GA bought in, the enterprise value of the business was just under £400mn.)
As a growth business, it is not paying dividends, and new equity and debt drawn into the group are being directed towards acquisitions and team lifts.
Sources have said that Plan A is for the business to remain perma-private, and if the growth plans are landed in a few years, it could conceivably be the largest privately owned brokerage in the world.
But at some point, staff shareholders will want to crystallize their wealth creation, and institutional owners will want to realize their gains. Trying to refinance the group privately at the kind of scale that is envisaged could be highly challenging. Hub's efforts to partially refinance at a mere $23bn valuation were not smooth.
The only way to square the circle may be to take the business public. But this will create challenges of its own, as the business would need to de-lever, and likely transition into more of a steady-state firm with a greater focus on building an integrated operating model.
Howden has proved an adept manager of risk to date, and there is a case to be made that all these risks are individually manageable. But they multiply up, and with so many in play, there is an increased chance that something, somewhere goes wrong.
This deep dive will be divided into two halves, with the first covering growth strategy and the second the risks to execution.
Here are the key points for Part 1, with the detail below.
Howden made a gear-shift on growth in 2020, spending close to $5bn on four major M&A deals, including reinsurance broker TigerRisk, and ramped up the frequency and severity of team lifts
The business is poised over the next two to three years to go elephant hunting in the $40bn-$60bn revenue US retail broking market, seeking a $10bn-$20bn EV deal
It is working to build out a global reinsurance broking footprint, including building its small Asia-Pacific operation and adding new lines of business
It is also eyeing major Continental European and Australian M&A, alongside further international tuck-in M&A and growing Dual to $5bn of GWP
The gear shift
In the past two years, Howden’s growth has inflected upwards, pushing the group towards what we would call its “JLT Dilemma”.
In the financial year running to 30 September 2020, Howden reported £777mn of revenues and adjusted Ebitda of £223mn, placing it towards the bottom of the top-20 brokers globally.
Run the clock forward two years, and the business was 2.4x as large on the top line, and 2.5x on earnings, reaching £1.84bn of revenues and £565mn of adjusted Ebitda, with its growth outpacing any other brokerage of scale with the possible exception of Acrisure.
This reflected four mega deals with a combined consideration of approaching $5bn, as well as organic growth of 19% in its 2021 and 2022 financial years. Having waited six years since its £400mn acquisition of London wholesaler RK Harrison, it raced through A-Plan, Align, Aston Lark and TigerRisk in 21 months. (Then there was the $4bn+ deal that got away, with Howden raising the money to buy both Willis Re and a number of Willis’ Continental European assets.)
The organic growth was also supported by an acceleration of team lifts and a willingness to contemplate hiring at much greater scale.
There were a number of developments that came together to support this gearshift.
The first was significant talent dislocation resulting from Marsh McLennan’s $5.6bn acquisition of JLT and Aon’s terminated acquisition of WTW.
Second was a broadening out of Howden’s investor base, with PE house General Atlantic – which had backed the business since 2013 – joined by Canadian pension fund CDPQ in 2017 and private equity house Hg in 2020.
The third was the willingness of debt markets to allow Howden an add-back for some costs relating to team rips, essentially allowing it to raise the finance to support the team lifts based on favourably adjusted earnings numbers.
This all came against an incredibly supportive backdrop for the private brokers, with extremely cheap leverage and seemingly endless multiple expansion on platform valuations.
This combination of factors can support their case for a pivot to a more aggressive growth strategy in 2021, but for a business in such a hurry now, it feels like it was slow to move in target areas.
Going big in UK retail in 2020/21 having left the field open to competitors for years meant Howden had to buy at higher multiples. The same thing is true in the US with MGA Align, bought at 20x or above.
All of the sector developments referenced above supported the rapid build-out of an international distribution business. Over time Howden came to comprise a cornerstone position in the UK retail market; an international specialty network spanning Europe, Latin America and Asia Pacific; a London market wholesale proposition; an MGA, Dual, that included a US arm; and a reinsurance broker.
Squint and this was JLT reassembled, particularly when you note that Howden hired hundreds of JLT alumni following its sale to Marsh McLennan.
But all of these moves are pushing Howden towards its own “JLT Dilemma”. The JLT Moment refers to CEO Dominic Burke's realisation that a presence in the US retail market was a strategic imperative to serve clients, particularly in the large account space.
His answer to that challenge, which was inhibiting growth, was to launch a start-up in the US led by Aon veteran Mike Rice.
Long-term, Howden will not escape the same strategic imperative, and – partly owing to JLT’s struggles in the US – will choose the road not taken: an acquisition at scale. (As an aside, JLT almost walked this path, getting very close to a deal with a major US retailer that did not quite come to fruition.)
Of course, the promise of the US is also just a total addressable market that dwarfs anything anywhere in the world, with just over $2tn of premiums versus roughly $4tn globally. Even if your clients do not need you to be in the US retail market, your investors probably do.
Howden will find a US retail broking space full of potential partners. There has been an explosion of private equity involvement in the sector over the last 15 years, with 30+ platforms now operating.
With a scaled international business, a large MGA arm in the US and the fourth biggest reinsurance broker in the US, it will have a lot to offer strategically to a business looking for a combination.
Given the number of operations, there is a huge spread by scale, business mix and quality.
Sources expect Howden to look for a major platform, potentially similar in size to its existing business at the time of the deal. They further expect it to look for a quality franchise, and potentially one with more specialty capabilities.
Picking the right partner will be the most important choice in the group’s history and represent a defining moment
If Howden were to wait a couple of years for a deal, and you scaled it up by around 20% annually, it could have an enterprise value of ballpark $20bn pre-deal.
There is no good dataset for private US retail broker earnings, but at that sort of scale, Howden could look for a deal with firms near the bottom of the top 10, and certainly in the top 20 – think $600mn-$1.2bn of Ebitda in round numbers.
Businesses like NFP, Risk Strategies, or Alera are plausible names. USI is also possible. Alliant would make sense, although it may be too big by that point.
Sources believe the other limiting factor will be a red line around the group CEO role for David Howden, something which would necessitate the CEO of the other group stepping down or moving into a secondary role.
Picking the right partner will be the most important choice in the group’s history and represent a defining moment.
Superficially, it might seem that this could be a strategic exit for PE otherwise struggling to monetise their investment. But in all likelihood there would be relatively little cash in a deal like this, with the PE that backs the US retailer likely to have to believe in value creation via the combination over time.
If a deal at the top end of this scale can be executed in the next two to three years, Howden would likely become the largest ever privately owned broker, with huge geographical diversification, and a presence right through the value chain.
Others won’t stand still, of course. Growth will continue to be an arms race in broking, and it is possible that we will get a different mega-merger within the private broking ranks. But Howden’s stated aim is to be a top-five broker in its chosen markets, and it seems a fair assumption that once US retail is added to this it will be aiming to be a top-five broking group outright.
Sources have said that even at this scale and beyond, the intent would be to follow the private ownership model, albeit with more widely syndicated private ownership that may involve additional sponsors, and potentially sovereign wealth.
Many roads to growth
Alongside this, Howden has other ambitions for simultaneous growth, including major growth of existing platforms and the addition of new ones.
Rather than pausing to consolidate following the TigerRisk acquisition, the group is out right now trying to build out its Asia Pacific team to complement Massimo Reina’s European team, which would give it the key pieces of a true global reinsurance footprint. That European team is also still under construction, with efforts to hire in Germany also taking place, according to sources.
Alongside this, it is looking to build out in other lines of business, having lifted out Aon’s London cyber team last month.
TigerRisk delivered $213mn of revenues in the year to 30 September. Howden’s reinsurance arm had revenues of £60mn, and Bowood and Capital Markets a further £50mn. Total pro forma reinsurance broking revenues totalled ~$360mn.
Beyond reinsurance, Howden has made clear via public statements that it believes there are more platform deals to be done. After inking the TigerRisk deal last year, David Howden told Insurance Insider that there were more mega-deals to be done in Europe.
Sources said that bondholders have been told that France is a key target market, and French broker Gras Savoye is known to have been a major part of the attraction of the Willis Towers Watson European assets Howden was targeting. Germany also has a marketplace with potential scaled targets like Funk or GGW, with the latter backed by Howden investor Hg. Howden has done far more to build in Continental Europe than peers, but its European broking business still represents only ~16% of group revenues.
It is further understood that Howden showed an interest in Envest, the independent Australian broking platform Ardonagh acquired in November last year for A$482mn ($323mn) – pointing to its M&A ambitions in Australia.
Sources have previously pointed to the quoted Australian brokers – Steadfast, AUB and PSC – as potential targets. These are big businesses, though, with the smallest PSC having a market cap of A$1.6bn and the largest, Steadfast, A$6.1bn.
Some existing Howden businesses are also perceived as having major runway on growth, with Dual having a stated target of building GWP to $5bn, roughly double today’s volumes. Although huge for an MGA, with £321mn of 2022 revenues, it represents only 17% of group revenues. The business is, however, a profit machine and delivers adjusted Ebitda margins of ~40%.
Tuck-in M&A deals in smaller markets will no doubt continue as well with over 30 deals inked in the 2022 financial year.
Ambition brings risk
The scale of Howden’s ambition is huge, with the pace of movement dizzying, and the number of fronts the group is targeting at once striking.
This is the plan to take over the world.
With ambition of this sort, however, comes risk. In the second of a two-part series on Howden due to run tomorrow, the risks the group is running to get there will be examined in depth.
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