McGill and Partners two years in: The journey to profitability
Two and a half years after launching, broking start-up McGill and Partners is on track to become Ebitda-positive, on an adjusted basis, by the end of 2021 as its spending on talent begins to earn through, the company has said.
In an exclusive interview, founder and CEO Steve McGill and strategy and innovation head Stephen Cross, along with backer Warburg Pincus’s managing director James O’Gara, said the company was on track to hit $120mn of run-rate revenues this year.
Former Aon president McGill said that, stripping out investments made this year, which will contribute to revenue growth next year, the business’s trajectory suggests an Ebitda-positive end to the 2021.
The management team also indicated that McGill and Partners is ahead of plan in terms of its scale-up, with Warburg Pincus so far having deployed only a third of the capital it has ultimately committed owing to the broker’s outperformance to date.
O’Gara said that McGill and Partner’s strategy of starting from scratch – rather than with a founding acquisition – was one of its key advantages.
“We’ve backed successful build-up plays in the past, including in the insurance industry, and usually our default is to start with a platform,” said O’Gara.
“That at least gives you a head-start, you have the basic plumbing and licenses in place. So that was our predisposition going in.
“But Steve was very clear that [McGill and Partners] needed to be different, we needed to have a model built around this unique approach, and that it was essential to build the initial platform organically as you couldn’t adapt anything else effectively.”
Revenue rising – but plateau ahead
Cross said run-rate revenue for the business had risen from just $7mn in its first year of operation, to $60mn last year and $120mn this year.
McGill added: “The trajectory is going to be high.
“That doesn’t necessarily mean [revenue] is going to double next year because it depends on the investments we make in the business and in talent.”
The CEO said that in most of the intermediary’s seven specialist departments are “performing exceptionally well”, although aviation and aerospace business has “challenges”.
He added that 2022 would “look a lot brighter” for the aviation team. The unit is led by former JLT aviation head Joe Trotti and staffed by former AJ Gallagher brokers Glenn Beadling, Edward Bond, Danny Hubbard and Pete Gilson, along with ex-Willis Towers Watson staff Martin McConnell and Michael Holt.
McGill added that the company’s energy division “is just beginning to pick up”, with the broker already a leader in renewables.
Talent investment earning through
McGill and Partners has followed a strategy of ambitious talent acquisition from day one, drawing its staff from across the broking sector.
CEO McGill noted that, with staff often unable to begin work for a year and subsequently being under restrictions, there can be “a bit of a lag” between the cost of hiring being paid out and resulting revenues coming in.
“We're very conscious about non-compete obligations and so we work around them,” said McGill.
“But you've got this phase now where a lot of colleagues have their non-competes expiring, and so they can be even more productive than when they joined.
The executive added that teams typically tend to take three years to reach full maturity in terms of productivity.
“The first period of time is just getting into the rhythm,” he said. “By the time you get into year three, you should see the productivity metrics moving up, which is exactly what we're beginning to see.”
And McGill said that the firm’s hiring has continued unabated, with expectations that it would recruit 110 people this year.
At the same time, McGill said the market had not yet reached its peak when it comes to clients shopping for new brokers as they attempt to find the best deals in a tough market.
He said clients will likely still be switching brokers in greater numbers in three to six months’ time.
“The market dynamics are presenting challenges to clients, and if their needs aren’t being met by the firms that they are working with, they need to look at alternative avenues,” he said.
McGill and Partners has made much in the past of its single profit and loss (P&L) structure.
Cross said the single P&L encourages collaboration between brokers dealing in different lines of business, and offices, and provides an opportunity to solve a broader range of problems for clients.
McGill rebuffed the notion that the single P&L, while good for collaboration, could disincentivise standout individuals.
“Our approach is everybody in the firm is an owner,” McGill said.
“If you're a really talented practitioner, the level of ownership you have in the firm reflects the quality of that person.
“Secondly, we pay competitive salaries, but then we have a discretionary bonus scheme that enables us to flex the bonuses to reflect performance.”
Broking in a hard market
Although there is evidence that price increases, in some lines at least, peaked in Q4 last year and are now tapering away, clients are still faced with the likelihood of at least an additional round of rate rises compounding what they have already paid.
McGill said that clients “are beginning to recognise that the market is continuing to harden with corrective action and rate increases continuing to occur” and highlighted some of the difficulties they are facing.
“We're working at the moment on a very large financial institution that couldn't get the cyber cover that they wanted from their incumbent broker,” he said.
He added: “The pricing of that proposition is not the consideration as much as getting the capacity.”
In another example in the highly distressed D&O market, McGill said a client was facing a 4,000% increase on the primary layer of its programme.
“The consideration there was: we need to be able to structure it to get the right price.”
At the same time, McGill added that the business is “very discerning” about the clients it works with, having only participated in 35 RFPs since launch.
Cross added that the broker had won around half of these, adding: “We've declined more than that number, having not been interested in participating.”