In an update exclusive to this publication, the Warburg Pincus-backed broker repudiated claims it had requested additional investments from senior members of staff late in 2021 and early this year.
The 2019 start-up said it expects to use up only around $50mn-$60mn of additional capital before becoming cash-flow positive later this year, leaving it with around $150mn of equity capital unused, as well as a $50mn debt facility that is not fully drawn.
Becoming cashflow positive is a key milestone for a start-up as it means that the period when it is dependent on outside financing is at an end, eliminating a key risk.
McGill and Partners said it had doubled its annual run-rate revenues to $123mn in 2021, its second full year of operation, and its projections on cash burn were based on this metric topping $200mn in 2022. Given the rapid growth and the revenue earning patterns, booked revenues in calendar year 2021 are likely to be significantly below the run-rate figure.
The company emphatically denied to Insurance Insider it faced any issues with available funding, staff retention or the business pipeline needed to support its ambitious 2021 revenue budget – and, in doing so, it set out far more detailed supporting figures than would typically be released by a private company.
Eponymous CEO Steve McGill said he was “extremely proud” of the company’s progress to date, while Warburg Pincus managing director James O’Gara called the business “one of the stars of our portfolio”. (Their full statements are published below.)
Market scepticism
The update comes amid swirling rumours in London that the intermediary had made not one but two requests to senior employee-owners to invest more in the business in the past six months.
Sources were divided on the motivation. Some said McGill and Partners had not meet key targets linked to the next release of funding from Warburg Pincus, which had consequently requested an investment to further align staff equity holders.
Other sources suggested that the move was more of an opportunity for staff equity holders to minimise the dilution of their holdings, which is a side effect of the equity drawdown mechanism from Warburg Pincus.
There were also implications that McGill and Partners, while successful in hiring high-calibre brokers in a variety of classes, had struggled as a pure start-up commencing with zero existing revenues to bring in enough new business as the amount of client turnover in the market fell substantially in the earlier phase of the pandemic.
Sources said some divisions of the firm had outperformed while others had failed to meet their targets. The marine and cargo team led by former JLT executive Gordon Longley was one unit repeatedly cited as having achieved more than its budget.
Complex P&C business and fac lead McGill and Partners’ portfolio, each accounting for 21% of its business as of late last year.
The aviation and aerospace team, led by ex-JLT executive Joe Trotti, was brought up several times by sources as being significantly under budget in 2021, while the energy unit was also said to be behind plan. The two segments account for 5% and 4% of the portfolio, respectively.
CEO McGill said in a separate November interview that the aviation team had experienced “challenges”, adding that 2022 “would look a lot brighter” for the unit, adding that the energy division was at that time “just beginning to pick up”.
Morale dip?
Sources said morale at McGill and Partners has suffered in recent weeks, citing an uptick in the number of outbound calls made by staff at the firm considering a move. Multiple sources at rivals said they were in discussion with McGill staff looking to move, while a number of recruiter sources also referenced work that was live to place staff from the firm elsewhere.
As with any broking firm, McGill and Partners’ value is primarily in its workforce. The company has set itself up as a “super-boutique” that provides “narrow and deep” expertise, made possible by hiring a senior cadre of brokers with specialist experience.
As such, an uptick in conversations around exits could prefigure a loss of value, if some of that carefully selected and costly talent heads for the door.
The business has also employed a single P&L model – unusual in broking – to encourage cross-departmental working and a unified approach. Sources suggested that this model, however, was the cause of some friction, where divisions that are performing well are becoming frustrated with those that are behind budget.
Broking start-ups: The inherent challenge
McGill and Partners faced a number of challenges inherent in broking start-ups from the get-go, as well as a host of cyclical market headwinds over the past two years.
At its launch in May 2019, we set out the advantages and disadvantages of former Aon group president Steve McGill’s bold new venture. (See McGill and Partners: “A disruptive idea and a huge war chest”)
On the one hand, the business began life with a strong executive team, abundant financial resources and in position to benefit from the talent disruption created by Marsh McLennan’s takeover of JLT, announced the previous year.
On the other hand, however, the company began as an entity with zero revenues, having chosen not to make a strategic acquisition, and faced the challenge of having to prise retail and wholesale accounts away from more established businesses.
Starting up a broking business from scratch also always creates the potential for substantial cash-burn as a firm must hire staff first, loading costs upfront, while waiting for revenue to come in as business is won over time.
Other challenges facing the business are not specific to McGill and Partners but affect all intermediaries to a degree.
The fierce war for talent in the broking market has driven remuneration costs sky-high. This publication’s recent coverage revealed that the phenomenon is partly driven by a widespread push for growth in broking combined with a shortage of suitably senior talent.
McGill and Partners has strongly cast itself as an employer of choice, boasting a host of employee benefits including limitless annual leave, generous parental and carer leave, and equity for all staff.
It is also understood to compete robustly on remuneration in its quest to secure top talent. One source suggested that pay at McGill and Partners could stretch to 40% more for the same positions at rival companies, something which reflects the perceived risk of move to a start-up.
Finally, the pandemic caused a phenomenon in broking in which clients were reluctant to change brokers amid widespread economic uncertainty, upping client retention and damaging new business inflow. For a new broker without an established book of clients, the implication is that this trend would be all the more punishing.
McGill’s response: Revenue surge, strong capital and a full talent pipeline
McGill and Partners strongly rejected the notion that the business had made any type of additional request for investment from staff in the last two quarters and confirmed no such exercise is planned.
It confirmed that it hit $123mn in gross revenue for 2021, up from $60mn in the prior year. It also said only around 33% of the $250mn capital committed by Warburg Pincus had so far been deployed.
McGill and Partners also pointed out that it has so far hired 396 members of staff with a “strong pipeline” of further recruitment activity, citing active discussion with 35 individuals to join the firm excluding plans in the US.
Addressing claims of declining staff morale and a possible outflow of talent, McGill and Partners said 14 staff had voluntarily left in 2021, of which four joined competitors and three went to insurers. The rest left for personal reasons, it said, with its overall colleague retention rate in 2021 in excess of 95%.
On the other side of the equation, the company said it hired 140 people during the year – a 55% increase in staff.
In terms of clients, McGill and Partners said it has brought on board more than 360 clients with companies in renewables, logistics, pharmaceuticals, healthcare, mining, manufacturing, aviation, energy and financial services.
The intermediary also noted that all its staff are equity owners and that 110 provided equity capital, as did its four founding executives and Warburg Pincus.
On capital, McGill and Partners said total equity capital currently exceeds $300mn, with “substantial additional capital” available from Warburg Pincus if needed.
It added that it draws down equity capital quarterly as and when it is needed, but said that over 2021, it expected to draw down $64mn and in the event drew down just $15mn, which it attributed to strong financial and operational performance.
The last time it raised equity capital from across its existing investor base was in March 2021, the company said.
Since that point, the company has brought 32 new staff on board as investors, who have in total subscribed $4mn of equity.
At present, McGill and Partners estimates that it will not need to draw down more than 50% of the available equity to fully support the business, based on delivering on its $200mn+ budget for 2022.
CEO McGill said: “We are extremely proud of the progress we have made as a firm in recruiting talent, winning clients and achieving $123mn of revenue in 2021.
“This is all the more remarkable considering this is only our second full year of operating as a business, and we have been working remotely during a global pandemic for most of this time.”
Warburg Pincus managing director James O’Gara said: “McGill and Partners had a fantastic result in 2021, further cementing its status as one of the stars of our portfolio.
“We’re excited about the opportunity ahead and look forward to continuing to support the team and business as they invest in further growth in 2022 and beyond.”
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