Insurance companies are still popular with private equity investors. But it’s not aways win-win
Private equity is still very much in love with the insurance industry. The buzz surrounding the sale of the UK business of Groupama has intensified this week, and several private equity names have been mentioned in connection with the firm, including JC Flowers and Charterhouse.
Groupama is not the only one in the industry attracting private equity interest. US broking Group AmWINS, which bought Lloyd’s broker THB earlier this year, received a $1.3bn (£817m) injection by selling a large stake in itself to New Mountain Capital. The company plans to use the proceeds for further growth.
Private companies that are doing well in the industry always catch the eye of the ever-vigilant equity firms. For example, private brokers with a good growth record and prospects can often find a string of representatives from such investors queuing for a meeting with the chief executive to discuss possible terms.
Whenever a Lloyd’s insurer puts itself up for sale, private equity is never far away. And when reinsurance companies want to capitalise on temporary hardening in catastrophe rates, private equity firms are happy to back them – typically by investing in so-called ‘sidecar’ special-purpose reinsurers.
Private equity interest can be a win-win. It can provide the beneficiary with fresh funds to grow or go it alone. The deals provide the investor with a rare opportunity to invest in a growing, cash-generative company. Such opportunities are few and far between in financial services, so insurance is shining like a beacon. The industry is particularly attractive because, while it has not escaped unscathed from the financial crisis, it is doing much better than banks.
Private equity has a downside, of course. In some cases, they are keen to greatly increase the level of debt on target companies’ books, which can, if overdone, make them a slave to large interest payments.
However, according to one chief executive considering private equity investment, the answer to this is simple: choose your partner wisely.