The private equity house faces challenges if it is to build a consolidator
It is no surprise that Gresham is circling the insurance industry at present. For a canny investor now is potentially a great time to buy-in to the sector. While the rest of the economy slumps, the insurance industry is approaching the leading edge of a hard market, which will provide some counter-cyclical comfort to investors.
Gresham’s interest is primarily in the commercial broking arena, although insurance service providers are also of interest. These companies will generally fit within its expertise of mid-market deals with a value up to £100m.
Commercial broking is also an area in which the firm has past experience having acquired a stake in Giles Insurance Brokers in 2006, an interest which it sold two years later to Charterhouse, another private equity firm with a keen interest in insurance. (Charterhouse currently owns a share of the Saga/AA business with two other private equity houses).
Gresham’s is interested in building an insurance broker with scale to compete with the likes of Bluefin, formerly Venture Preference, Oval, Giles, and of course Towergate. This will be quite a challenge and will require a great deal of money.
Some senior broking executives say that in order to have the necessary leverage in the market a broker need to control £1bn in annual premiums. At present, only Towergate has surpassed that target, although Bluefin is closing in with £750m in annual premiums.
Giles is looking to reaching £1bn and had £500m available to achieve that, although it has so far taken only £300m.
Gresham must also grapple with insurers' tough stance on commissions, which will limit the potential gains from a consolidation strategy.
Who might Gresham invest in? Gresham’s website lists the following investment criteria: first class, proven management; cash generative; high growth prospects and established and defensible market positions.
There are certainly a number of high quality independent brokers within the UK’s top 100 brokers that have the potential to be attractive investments - brokers that already have a strong presence and reputation in their respective regions. Whether the owners of these brokers are willing to sell a stake in their respective businesses remains to be seen. But with many thinking about their retirement options, there should be opportunities to back management buy-outs.