Consolidators - The road ahead - Where do they go from here?

The march of the consolidators in recent years has been truly impressive, though now it seems that the giants of the broking jungle are beginning to weigh up where they go from here, as evidenced by a spate of recent corporate activity.

In February this year, venture capitalist 3i paid £29.8m for a 27.9% stake in Bristol-based Jelf Group, while in the following month Giles Insurance Brokers sold out to private equity group Charterhouse for an undisclosed sum and stated that a staggering £500m was available to fund acquisitions. More recently still, corporate advisor Hawkpoint has, it is understood, been working with Oval to explore refinancing options.

Oval has made it clear that it is not thinking of selling, yet this does not rule out other significant alternatives. One of these includes the possibility of flotation, as chief executive Phillip Hodson conceded in a 2006 interview with this magazine (PB, September 2006, p. 22). When asked what the strategy for the company was, Hodson replied: "We might float ... the aim is to stay independent; that might mean we need to go in for a flotation for the realisation of share value."

Whether or not Oval decides to go down the flotation route, one thing is clear for both it and the other consolidators: they need to be thinking about their end games now. Consolidation cannot go on forever and other ways of growing the business and returning value to investors have to be sought.

Crucial to all of this has been the increasing involvement of venture capitalists - not exactly the most docile investors as they demand lucrative returns for their valuable cash. "Venture capitalists will expect a 10-fold improvement in five years. That's massive and there's not that much chance of achieving it, even with decent businesses; they cut their losses very quickly with those brokers that aren't working, so there's an awful lot more change to come," says Grant Ellis, chief executive at Broker Network.

Ellis explained, however, that the problem for some of the consolidators may well turn out to be that the cash injection provided by the venture capitalists may have come too late: "If you pay £1 for a business, by the time you take advantage of the opportunities it provides it will be worth £3. Of course, that's why the venture capitalists have become involved: they see opportunities. However, you then end up in a position where they go too far. Just look at some of the brokers that have been given cash recently; they've got to find targets but it's now at the fag end of consolidation and there's not much around, so the next step is to consider buying the consolidators."

Ultimately, Ellis added, "everyone has an end game, which is building some value". For some of the consolidators for whom selling out is not an attractive option, the other logical route is to go public. Ellis stated: "Towergate has made no secret that a listing is something that it would consider. That gives opportunities to widen the share base and for venture capitalists to exit and be replaced by City shareholders."

Some feel strongly that the rush to consolidation may not have a happy ending. According to Paul Samways, group operations director at Kerry London, "something has to give".

Samways commented: "I almost feel there may be some implosion. If the carriers are going to cut commissions then the consolidators can't give the venture capitalists the return on capital that they have based their investment on. There will be some economies of scale and they can make some cutbacks, though only to a degree. I just don't understand it. Is the revenue stream protected? Will insurers look to back these businesses as tied agencies?" As the march of the consolidators continues, the second-guessing of end-game strategies will become more popular.

Now here's a thought: consolidation leading the UK broker market closer to the European model of tied agents.