Ed is theoretically worth more to a trade bidder with a substantial London market cost base than to a platformless PE house
As private equity (PE) owner Lightyear Capital weighs up the right timing to fire the starter gun on a sale process, wholesale broker Ed is clearly attracting PE interest.
Warburg Pincus, which looks to be keen to buy an insurance fee business, has made an approach for Ed and it is not alone in meeting management to begin a courtship.
PE interest in brokers and MGAs is currently intense, with multiples sky high as easy debt and the perceived opportunity for consolidation draws in buyout firms.
The strategy of leveraged buyouts followed by consolidation has worked well in the US, with brokers like Hub, USI and Alliant delivering handsome returns for their PE backers.
PE is looking to follow the same playbook here, and that means it needs a starter platform.
With a revenue base of £100mn ($133mn), Ed is not anything like the size it used to be, but it has scale compared to almost all of the other opportunities available to PE houses – and therefore will be seen as a good beachhead for a sponsor with hundreds of millions to put to work.
PE also likes a turnaround opportunity and – make no mistake – that is exactly what Ed still is as CEO Steve Hearn comes up to three years at the helm.
I understand that Ed has registered revenue growth in each of the last three quarters, but its profitability is still marginal and anyone who buys the business will still be buying into Ed’s potential and management team – not its reported figures.
The idiosyncratic rebrand and the huge investment in staff and systems is broadly viewed sceptically by the market despite Hearn’s insistence that re-investment of underlying earnings is masking the firm’s true profitability.
Some of this could be competitors throwing stones at someone who is doing things in a conspicuously different way. But not all of it can be accounted for in that way.
At a certain point, the reported numbers need to more clearly demonstrate that new value has been built in the business – and that point cannot be postponed indefinitely without the swelling of negative sentiment.
Bankers will no doubt heavily adjust and normalise the earnings as they strip out investment costs and project accelerating growth, but there is only so much that can be done with a low single-digit-million Ebitda number. Instead, much of the focus is sure to be on that £100mn revenue base.
And here Lightyear will find itself with a dilemma. Businesses with significant revenues but little margin will model better for strategic bidders that can price in substantial synergies than they will for private equity.
Ed is theoretically worth more to a company like Minova, Hyperion, Ardonagh, Besso or AmWins that already has a substantial London market cost base than it is to a platformless PE house.
Management is sure to resist that eventuality with vigour and has a substantial stake in the business, but, regardless of the exit price, this is going to have been a weak investment for Lightyear.
The New York PE firm bought into this company when its Ebitda was roughly $70mn and has watched its earnings to collapse.
PE firms care about their reputations given that they need to win the trust of the best entrepreneurs but, given the way the investment has developed since 2013, it will be very hard for Lightyear to leave money on the table on this one if it does garner strong interest from a trade player.