Since the Fed started its aggressive campaign of increasing rates to tame inflation, the amount of dealmaking by private equity firms in the insurance brokerage space has slowed and valuations have dropped.
The drop in activity mirrored what was happening with private equity investors overall in the past two years when they pulled back their horns. However, now that the interest rate hikes have ceased and with possible Fed rate reductions later in 2024, private equity firms are agitating — and they are flush with cash looking for a home.
According to a S&P Global Market Intelligence report, private equity firms had $2.59 trillion in equity “dry powder” — essentially unspent funds — as of Dec. 1, 2023. That’s up 8% from $2.39 trillion a year earlier.
That is especially good news for owners of growing insurance agencies since they are largely viewed by private equity firms as a solid investment thanks to their reliable returns, growth prospects and stability — even during economic swings.
According to a report by McKinsey & Company, insurance accounted for 60% of all private equity transactions in the financial services sector between 2020 and 2022. During that period, 75% of insurance private equity transactions were for insurance distributors. However, when interest rates started rising in 2022, dealmaking dropped off precipitously.
The McKinsey report noted that the number of private-equity-backed brokerage acquisitions fell 24% from a high of 1,304 in 2021 to 987 in 2022. During the first half of 2023, there were 359 transactions, putting the year on track for a 27% drop.
There is reason to believe that action will pick up. In addition to private equity firms having an abundance of dry power, larger players that focus on insurance brokerage acquisitions received significant received cash injections in the last year.
Some notable transactions include:
- Goldman Sachs Asset Management announced in August 2023 that it would invest more than $1 billion in debt and equity in World Insurance Associates LLC, an acquisitive brokerage with a growing presence nationally.
- USI Insurance Services said in September 2023 that one of its existing shareholders, KKR, would make a new equity investment of more than $1 billion to become its largest stakeholder.
- Private equity firm Lightyear Capital LLC announced in November 2023 that it would make a strategic investment in Inszone Insurance Services, an insurance platform that has been growing quickly through acquisitions. With its investment, Lightyear joined forces with Inszone’s main investor, BHMS, which also announced that it would invest additional capital into the company.
Getting ready
The above firms have their magazines loaded with cash and they will start feeling pressure to spend those funds, particularly if there is some downward movement in interest rates.
While it’s impossible to predict when private equity will jump back in, brokers looking to be acquired can improve their lot by focusing on basics like:
- Client retention,
- Finding new markets,
- Growing their agency, and
- Managing their book’s loss ratio.
Insurance brokerage leaders should prioritize strategies for thriving in any business environment.
Agencies with a strong growth record and solid operations will be the belles of the ball when the market turns and private equity investors loosen their purse strings.
Those with a growth mindset tend to stand out from the crowd. Proven growth is still the biggest differentiator in the eyes of buyers, who are looking to partner with firms that can help them achieve their own growth and expansion goals.
