Gallagher flags up the risk of private equity-backed consolidators in its annual report

Arthur J Gallagher is paying heed to growing pressure from private equity-backed consolidators, the broking giant’s global annual results report for 2017 reveals.

Acquisitions have been a critical part of the broker’s growth strategy. In 2017, the Gallagher group completed 39 acquisitions, which represents $172m of acquired annualised revenue. Three of these acquisitions were UK-based.

Its most recent UK acquisition was that of consulting firm Gatehouse Consulting last December.

In a section on risk factors, the Gallagher report reads: “Our acquisition program has been an important part of our historical growth, particularly in our brokerage segment, and we believe that similar acquisition activity will be important to maintaining comparable growth in the future.”

Private equity risks 

However, an increasing interest in insurance broker acquisitions has led the broking powerhouse to identify private equity consolidation as a potential risk to its business model.

In the UK, consolidators such as Peter Cullum-backed GRP and Brendan McManus-led PIB are circling the market alongside the usual suspects. This narrows down the number of targets available for M&A.

In April PIB bought Wilby, its fourteenth business in 21 months. Meanwhile GRP snapped up its 29th broking firm with the purchase of Burnley-based Thomas Sagar.

The Gallagher report continues: “Failure to successfully identify and complete acquisitions likely would result in us achieving slower growth. Continuing consolidation in our industry and growing interest in acquiring insurance brokers on the part of private equity firms and private equity-backed consolidators could make it more difficult for us to identify appropriate targets and could make them more expensive.

In addition, with more competition to buy businesses, having adequate capital to fund purchases could also become an issue.

The report adds: “Even if we are able to identify appropriate acquisition targets, we may not have sufficient capital to fund acquisitions, be able to execute transactions on favourable terms or integrate targets in a manner that allows us to realize the benefits we have historically experienced from acquisitions.”

Other risks identified by Gallagher in its 2017 annual report include:

  • Economic instability
  • Premium volatility
  • Less predictable contingent and supplemental revenues from underwriting expenses
  • Competitive pressures
  • Failure to capitalise on technology
  • Business Disruption
  • Reputational damage
  • Talent retention
  • Foreign exchange rate pressures
  • Cyber attacks
  • Compliance with various regulatory bodies, data protection laws and anti-corruption laws
  • Investments, debt and common stock risks

 

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