Michael Faulkner says there are no signs that the broker acquisition frenzy will start to cool
Is the broker acquisition bubble set to burst? Listening to senior figures in the market – insurers and brokers – one has to wonder how long the current situation can continue.
The broker M&A market is without a doubt pretty hot at the moment – red hot, some might say. But is it overheating? Is the sector poised to crash, or at the very least witness a major correction?
Last week Broker Network chief executive Grant Ellis attacked the unrealistically high prices paid for brokers. Some buyers, he said, were overpaying and fuelling the expectations of many purchasers who were asking for more than their businesses are worth.
Of course Ellis, an acquirer of brokers, would be expected to talk down prices. But he is not the only who is saying this. Senior insurance executives – and not from the insurers that are buying brokers – are also expressing concern over the relentless rise in multiples.
Groupama is rumoured to have paid £52m for its stake – thought to be 60% – in broker Lark. If correct, that would equate to a sale price of approximately five times its brokerage of £17m.
Similarly, AXA is thought to have paid over £150m for Smart & Cook, which would equate to a multiple of between four and five times brokerage.
While these prices are exceptional, prices have also rocketed for smaller brokers, with the typical multiple of brokerage rising from around 1.5 to as much as three times.
So what does this mean for the future? Can the market sustain these prices?
Simple economics would suggest that while buyers are able and willing to pay these high prices then the price boom will continue apace.
The question is whether something happens to change that appetite. There are already signs that the credit crunch is beginning to have an impact on the availability of acquisition funds.
As Insurance Times reported last week, brokers are starting to approach insurers for funds to continue their acquisitions as money from other sources such as banks is drying up. If credit, from whatever source, begins to become scarce or more expensive, then the appetite for acquisitions could begin to slow down.
Of course, insurers have far deeper pockets than most brokers, so it is unlikely that their appetite for purchases will be affected.
The question is how the broker consolidators themselves will be affected. Opinion is divided. Brokers such as Giles insist they have no problem raising money to satisfy their desire for purchases.
But many in the market think that a slowdown is inevitable. While a crash seems unlikely, the continued escalation of rates may, like house prices, begin to falter. Time for some reality.