The most notable example came just after the UK government imposed the lockdown in late March, when this publication revealed that Willis Towers Watson had put its sale of wholesaler Miller on ice.
That was close to the moment of peak fear, with equity markets routed and debt markets seized up, before massive government action allowed a recovery of confidence.
At that point there was a well-supported school of thought that said the broker juggernaut of rapid organic growth and widening margins would come to a juddering halt, as they struggled with falling volumes, commission rebates and mounting delinquencies.
Aon’s move to reduce salaries was the most obvious marker of this moment of pressure, but the cashflow pressure was also evident from its peers drawing down credit revolvers and tapping the debt markets.
Since then evidence has emerged that volumes have held up better expected, while rate rises continued to accelerate, buoying growth. Last week, US broker Truist reported 2.1% organic growth in the second quarter, a figure which wholesale-only brokers on both sides of the Atlantic are likely to have bettered in some cases.
Alongside this, the brokers have successfully demonstrated they can control costs to deliver flat to increasing margins, with the ability to drop travel and expense spend a crucial lever, given it can amount to 6% of revenues in some firms.
Another barometer of the receding chaos was the news this publication broke last month that Willis was starting to warm up the Miller sale process again.
But what next for broker M&A in general? As the dust begins to settle, will we see a reduced level of interest in this previously red-hot market?
The short answer is no, for a number of reasons.
Broking and M&A advisory sources told this publication that the essential value proposition brokers offer to investors – both trade and external – has held up well during the crisis.
Private equity likes brokers because they are highly cash generative businesses that take leverage well and come with relatively light regulation for the financial services sector. Crucially, they have also established a track record of successful consolidation, which includes an arbitrage between the multiple earnings can be bought at and the multiples they can be sold at.
Strategics continue to be attracted to M&A because scale is increasingly a key determinant of success within broking, and because synergies offer a clear path to margin expansion.
These dynamics are largely unchanged in the pandemic and the resulting recession, but there have been some other inhibitors, most of them now eased.
For private equity investors, the all-but closure of the debt market in the early days of the crisis brought an immediate halt to deal-making.
One source described a deal in which contracts had been exchanged and only regulatory approval was wanting – only for the lender to pull out before the deal could close. Now, however, sources said the debt market has thrown up the shutters and is hungry to deploy capital.
Equally challenging during the early days of the pandemic in the UK was due diligence, and this too slowed down deals for both private equity and strategic buyers.
It was unclear at that stage how vendors’ businesses would hold up through the crisis, and modelling future performance was difficult. With a large range in possible outcomes between the best and worst case, it became more challenging for buyers and sellers to find common ground on valuations.
The past four months, however, have given investors more confidence in the resilience of these businesses.
Sources did note, though, that multiples have come off slightly as buyers weaponise the continuing uncertainty to screw down pricing. Due diligence is also understood to have become more rigorous.
A number of consolidator businesses are known to be hungry for deals, and that appetite has not waned. Ardonagh, for instance, completed a vast restructure of its financing last month, bringing in major new debt backers Ares and Caisse de dépôt et placement du Québec (CDPQ), with KKR also returning to the fold. The deal also reloaded Ardonagh’s M&A war chest with £300mn to spend.
Global Risk Partners’ (GRP) sale to Searchlight closed last month, with co-founder David Margrett signalling a renewed appetite for acquisitions and even citing the pandemic as a source of M&A opportunities for the firm.
Aston Lark, with its backing from Goldman Sachs, retains a healthy appetite for deals, as does PIB. MGA Nexus is also still keen to grow, although there are fewer consolidators in that space.
In short, there is still plenty of money out there seeking the regular returns and potential for M&A-fuelled growth that insurance fee businesses can provide.
The early Covid-19 slowdown looks to have been a blip rather than a wholesale change.
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