Fresh from a string of broker investments, private equity is turning its gaze to Lloyd’s. Tom Flack reports.
A new power has risen in the UK insurance sector. While other lenders, beset by turmoil in the credit markets, tighten their purse strings, private equity’s appetite shows few signs of abating.
Following a string of audacious moves that has seen the most mysterious players in the financial world take advantage of uncertainty in the distribution landscape, private equity has turned its gaze on a new target, Lloyd’s.
Earlier this month 3i bought a £50m stake in the Hyperion group, which includes Lloyd’s broker Howden.
It looks as though the move could be the first of many.
“Eighteen months ago we decided to find additional minority shareholders,” says David Howden, chief executive of Hyperion. “We weren’t looking to sell. 3i has given us equity, which means we can back people.”
A year ago, the majority of analysts concluded that, while private equity had a clear interest in the sector, it was unlikely to grow significantly. That is starting to change.
“The European private equity cycle is moving back to financial services,” says Andy Baldwin, head of insurance at Ernst & Young. “We’re seeing heightened focus on financial services as an asset class to invest in. There is a rise in interest in general insurance in particular.”
Sources suggest that a number of private equity houses will enter the market in the next year, while existing ones will ramp up their presence.
“Investors are looking to diversify their portfolios,” says Peter Courtney, head of insurance at Accenture UK. “Investments in insurance are also a great counter to the instability in other financial markets.”
Long before the word ‘sub-prime’ entered the lexicon, private equity made its mark when it backed the blockbuster merger of Saga and the AA last June. Later, in the autumn, numerous private equity houses ran the rule over various broker targets,
After 3i made its play in January, Charterhouse reminded the market that the larger houses were still eager to invest in brokers, with the purchase of stakes in Giles, previously held by Aviva and Gresham, and granted the broker its own war chest of half a billion pounds.
But private equity is notoriously scrupulous with its investment. And because the banks are now less willing to lend, private equity houses’ bargaining position has improved. This was proven emphatically when talks between Towergate and investor Candover stalled over the consolidator’s bid to sell a stake worth up to £800m.
“The Lloyds market allows you to expand without the burden of a fixed cost establishment.
Andy Baldwin, Ernst & Young
“A number of private equity transactions have been put on hold because of the credit crunch,” Baldwin says. “The ability to raise capital is directly related to the rate of return when capital and liquidity is scarce.”
Could underwriting businesses provide an attractive alternative for private equity houses with money to invest? Andrew Hubbard, senior partner at Mazars, says: “How bold are you prepared to be? If you invest at the bottom of the market, and can get a good price, you get the full benefit of the upswing.”
Bruce Carnegie-Brown, managing partner at 3i’s quoted equity business, said recently that he was also looking at insurers, as he did not want to invest in further broking businesses that would then compete against one another.
Lloyd’s is even more attractive – there have been 15 private equity-related transactions in the market in the past 12 months.
Of course, private investors – the Names – have always been associated with Lloyd’s, but after the losses of the 1990s new money was allowed in with the creation of specific corporate Lloyd’s vehicles. Now private equity houses have seen the potential.
According to Baldwin: “The Lloyd’s market offers strong opportunities for growth. It provides a capital-efficient way of writing certain lines of business, it allows you to expand without the burden of a fixed cost establishment, and you have the power of the Lloyd’s brand which can drive international growth.”
A third area for heightened private equity activity in the insurance sector is third party insurance services, such as legal work and outsourcing.
Courtney says: “Private equity looks to pull one of two levers – cost reduction or revenue increase. In the UK insurance sector, it’s looking to do both.”
But what of fears that private equity is looking for nothing more than a short-term return on its investment? Analysts argue that the emphasis on the private equity cycle – that is, to buy into a business and exit within three to five years – is missing the point.
Hubbard says: “In many cases, private equity takes a long term view. But we’re not talking about 40-50 years. Eight, maybe 10, is the upper level.”
Howden adds: “A few investors come in and say, ‘what’s your exit strategy?’ Yes, at some stage you have to create wealth, but with 3i we have created a five-year plan. We are aligned with its network. If we want another £100m, it has said we can have it.”
So private equity’s interest in the sector is neither particularly complex nor nefarious, but is certainly here to stay – and will help drive the sector forward. But be warned. To quote Baldwin: “One thing they don’t suffer from is altruism.”
Who owns what
Charterhouse 37.5 per cent stake in Acromas, the company created from the merger of Saga and the AA, in June and an 80 per cent stake in Giles.
3i 27.9 per cent stake in Jelf, 50m pounds stake in Hyperion.
Caledonia 35 per cent stake in Oval, stake in Novae worth over 20m pounds
Candover Pulled out of talks to take a 25 per cent stake in Towergate last month.