The new shape of broking – consolidation, investment and the next generation of broker businesses

Dominant consolidators have reshaped the broking landscape, but they are not the whole story and increasingly, there are alternatives for those who want to buy, sell or expand organically.

Joe Steidl heads Invesco’s UK insurance distribution team and says investors are attracted because of the broking sector’s “recurring revenue model, strong cash generation and relatively low capital intensity”.

But brokers who do not want to be acquired have options. Steidl says the ownership landscape “has more shades of grey than the traditional choice between remaining independent or selling outright to a consolidator.

Retaining independence

“Brokers wishing to retain their independence while tapping the capital markets can explore minority investment partnerships, MBOs and other strategic funding arrangements. This can provide access to capital for technology investment, recruitment or acquisitions while allowing founders and management teams to retain control.”

The people, culture, specialisms and long-term opportunity have to make sense. There are fewer high-quality independent brokers available, but opportunity hasn’t disappeared. It puts more emphasis on identifying smaller businesses and understanding what they could become with the right support.

Tim Forshaw, Tower

Those most likely to secure investment, he says, will have “a strong management team, limited succession issues, a strong growth story and high levels of client retention. Investors are more willing to back entrepreneurial businesses that can demonstrate a credible growth story without requiring a full change of ownership.”

Consolidation brings economies of scale through areas like technology, compliance support and procurement, but he sees this becoming less important.

“Technology is becoming increasingly accessible and cost friendly, which could narrow some of the traditional advantages enjoyed by larger consolidators. Independent brokers that leverage technology to improve productivity and client service may be able to compete more effectively without giving up independence.”

Attractive opportunities

PE firm Inflexion has now re-entered the sector after selling its stake in DR&P to BMS Group. In January, it purchased Ascend Broking Group and has launched platform AIH, to enable further acquisitions.

Investment director Dominic Clark has a passion for the broking sector, describing it as “fabulous and with great people. It’s a market we know well and there are some attractive opportunities.”

AIH is a key part of Inflexion’s proposition, taking on the administrative burden, compliance and providing IT access. Clark says this will include AI, “but only where it gives people more time” and training via an academy.

He adds the Ascend deal shows a “third option” for brokers who want to be freed from debt and focus on service and growth.

“Old-fashioned consolidation meant a broker would become part of a large group and could lose their identity. Or they would need to take on borrowing risk.”

Ascend was founded by Matt Collins, and Clark explains: “One of the reasons we work well is Matt’s way of running the business. He’s focused on clients, but also on data, where he takes a sophisticated approach, together with risk management emphasis.”

Spark

Brokerages can lose their spark when the owner leaves and characteristics are subsumed. Clark believes the opposite will be true with Inflexion. “We enable the broker to take risks they are confident will work, but which they could not when it was their own money, such as taking on a new team or launching schemes.”

Tower Insurance Brokers is a new acquirer name, having secured funding from investor TDC and recently purchasing Wilmslow-based Riskworks.

Tower CEO Tim Forshaw says: “The people, culture, specialisms and long-term opportunity have to make sense. There are fewer high-quality independent brokers available, but opportunity hasn’t disappeared. It puts more emphasis on identifying smaller businesses and understanding what they could become with the right support.

“Having started Tower from zero and remembering early years, gives us a slightly different perspective when sitting down with a smaller broker owner. We’ve been on that journey.”

Creating value

He adds: “If you can attract an outstanding specialist with strong market relationships and give them the infrastructure to build a £5m or £10m book, that can be as valuable as acquiring an existing business – and potentially creates more value.

“You also cannot build an acquisition strategy around how insurance is bought today. We must take a view on how clients will buy insurance in five to 10 years’ time.

“AI will change parts of distribution and servicing. Clients will expect greater speed, better data use and a more seamless experience. Some simpler products will become automated. But emerging risks, changing regulation, cyber exposures, new technologies and increasingly complex businesses will create areas where specialist advice becomes more important.”

People as an asset

And people are vital – he points to Aon’s US purchase of USI – the $17bn (£12.9bn) deal includes $400m for retention. “It’s a telling number and recognises a substantial proportion of the value you are buying resides in its people.”

But independence still has a place. Amish Mamtora is managing director of Harrow-based Forum Insurance Brokers, founded by his father. “His guiding principle was straightforward – if you wouldn’t give this advice to your own family, don’t give it to a client.”

He says the loss of community brokers and consolidator presence has created more of a one size fits all model, adding there can be client conflict of interests with such firms when pressured into using scheme facilities or with carrier targets.

However, Forum is growing organically, in particular through referrals, and will also consider acquiring smaller brokers.

“Independence is a differentiator, allowing customers to trust the broker has their best interests at heart. We’ve seen larger brokers only supporting insurers they have ‘deals’ with – we’re often able to find better cover or value for clients when up against consolidators.”

Looking ahead, there are choices available for the 1500 or so independents remaining – and whether prepared to sell or not – this scarcity will certainly create demand.

Join the debate: Sign up to attend the Broker Expo on 8 October at the Birmingham NEC

The session ‘The new shape of broking: consolidation, investment and the next generation of broker businesses’ takes place at 10:20 AM – 10:50 AM on the C-Suite Stage.