Aston Lark, PIB and GRP: Where next for the consolidator troika?
Over the past decade, the high degree of fragmentation within the UK retail broking market has attracted private equity investors intent on consolidating intermediaries to create additional value.
The consolidation play has been highly successful given the similarities between a number of UK broking businesses, and three key players have emerged: Global Risk Partners (GRP), backed by Searchlight; PIB, backed by Apax; and Aston Lark, backed by Goldman Sachs.
As this publication has explored before, while there is still a fairly significant swathe of suitable small businesses available to buy, the supply of these opportunities is gradually drying up.
According to research from IMAS earlier this year, the number of target businesses with a value of >£5mn ($6.9mn) that are in segments targeted by current consolidators dropped from 427 to 296 last year – and will likely fall to 151 by 2025.
As the UK broker consolidator play enters its latter stages, then, the natural next phase will be the “roll-up of the roll-ups".
The theory behind this is that private equity backers looking for quicker expansion and therefore a higher return on their investments could well see more mileage in the takeover of a rival consolidation vehicle, rather than a long series of further time-consuming smaller deals.
However, as we explain below, there are a number of factors that would complicate a deal of that nature, with the needs of capital backers, the ambition of management teams, and the potential lack of multiple arbitrage all clouding any possible transactions.
All three broker consolidators – Aston Lark, GRP and PIB – have recently acquired new backers as they move through to their next phase of growth.
These three are not, of course, the only intermediary platforms playing the consolidation game. Ardonagh Group is another serious contender on a much bigger scale, having booked adjusted Ebitda of £308mn in the last full year, while HGGC-backed Specialist Risk Group (SRG) is also set on a strategy of intense acquisitions.
For the purposes of this analysis, however, we have separated out Ardonagh, which differs significantly from GRP, PIB and Aston Lark in its larger emphasis on London specialty business. We have also excluded SRG, which is at a far less advanced stage in its consolidation journey, and is targeting smaller, highly niche London specialty businesses, adopting the mantra “difficult done well”.
PIB transferred to Apax Partners’ ownership in January, with founding investor Carlyle reinvesting for a minority stake.
GRP agreed a deal with Searchlight in February 2020, as founding investor Penta Capital exited, while Aston Lark entered an agreement with Goldman Sachs in May 2019, with Bowmark Capital also reinvesting to retain a minority stake.
The first factor to consider in assessing possible deals between the three is the timing of the investments of their respective backers.
On the face of it, the timing of each private equity firm’s investment in their broker platforms suggests that it would be unlikely for any to seek either full or partial liquidity. The speed of Aston Lark’s expansion, however – with 10 acquisitions in 2020 and a further 15 announced this year so far – suggests that a relatively early deal is not unthinkable.
PIB’s January deal with Apax Partners, which bolstered its M&A war chest considerably, could suggest a desire to potentially look for a larger scale deal, as well as its ambitions in wholesale and reinsurance on top of European expansion.
Multiple arbitrage or synergies only?
Broker M&A is not simply a question of buying up as much Ebitda as possible. A major factor in the consolidation play is the Ebitda multiple arbitrage that becomes possible when private equity houses buy smaller businesses and increase their value by making them part of a larger whole.
Where two “platform” brokers are involved, the potential for a buyer to secure significant arbitrage falls away – with earnings likely to be bought and sold at a similar multiple.
For this reason, a potential combination of PIB with GRP would likely not bring with it an opportunity for arbitrage on exit, absent a further lifting of all boats on broker valuations.
And the absence of this powerful lever for creating value obviously makes a deal less attractive.
There would be upsides to a merger of two platforms besides this earnings arbitrage, however – and in an environment where opportunities for arbitrage are becoming harder to find within the UK market, those factors could come into play.
Other attractions of such a deal include the synergies created by joining together two significant businesses. In addition, bringing together two of the bigger consolidators would give the combined entity additional capabilities, more data and a broader talent base – as well as the prestige that comes with significant scale.
All these things could still point in the direction of a roll-up of roll-ups.
In this case, however, there is also a discrepancy between the entry multiple for Goldman Sachs and the prevailing valuations.
Goldman Sachs bought Aston Lark, however, for a multiple of 12x Ebitda. It did this slightly earlier than the other two deals at a time when multiples were lower, and at a stage when the business was still on the cusp of becoming an established consolidation platform.
This discrepancy could make Goldman Sachs more amenable to a sale, therefore, but there would be no expectation that a buyer – GRP or PIB – would be able to sell on the earnings at a higher multiple later.
Such a deal would therefore have to stand on its own feet in terms of the synergies available and the enhanced capabilities and scale benefits it would bring.
Of course, the permutations are rendered still more complex when you consider that any deal between two of the three parties could use a mix of cash and paper.
This would create scope for an existing backer to either roll fully into the enlarged business, partially roll or fully cash out. Carlyle in PIB and Bowmark in Aston Lark both showed a willingness to extend their hold periods after taking substantial money off the table – a trend seen more broadly in private equity.
Right now, this is just fantasy dealmaking, but each business must have thought about the prospects of merging with the other – and there seems no doubt that thinking will be revisited in time.