Not that clever?

Like many entrepreneurs Chris Giles is motivated by the desire to prove someone wrong. In this case it was his father who once told him 'you're clever - but you're not that clever'. This proved to be the most motivating comment ever directed his way and the effect, and perhaps it was the desired one, (to prove how clever he is) has proved a huge incentive. This is born out by the fact that Giles has rarely been out of the headlines in recent years, while reengineering his firm from a traditional family run business into an ambitious consolidator. Giles, a self-confessed keen study of the innovations made by Towergate, and backed by some canny Scottish money has set himself the modest ambition of building a global brand.

In terms of Giles' approach, and where the business is currently, Giles says: "We're ahead of budget from the start of our financial year and are confident we will beat budget this year even in a falling market. Acquisitions for us have to be built on a solid base and I've always maintained that we are a sales and marketing led business. We're sales people and, therefore, we grow organically. Our indigenous book grows in the hard and soft markets because we bolster our business with new business, so we're dropping acquisitions onto a solid base of high single digit organic growth in the current market."

Aggressive reputation

Despite Giles' reputation as an aggressive competitor he is careful to gently impose this sales and marketing-led culture on to acquired firms and maintain loyalty from all staff. This was also a consideration in the management buyout last July, backed by mid-market private equity specialist Gresham, where one-third of the firm came under the control of the Giles staff. He explains: "The MBO we did for a number of reasons. One was to get the Giles family out, to move it from a family run business to being a corporate one. I wanted to make a move south so I took a little bit of capital to relocate. Just as importantly was the enfranchisement of staff through the dissemination of shares."

Although the MBO took Giles' personal stake down from 70% to one-third he was also careful not to allow the venture capitalist a controlling stake. He continues: "They (Gresham) sit as a partner beside me and the management team. Derek Gardner, our financial director, is an ex-private equity guy so he thought out that structure and we think it's a perfect one for a broker that wants to expand. It was the third consideration to raise funds for acquisition because we wanted primarily to get the structure of the group right and get everyone pointing in the right direction."

What was unforeseen was how many post-MBO acquisition opportunities would quickly arise, leading to press attention after burning through its war chest, which prompted a quick rethink. Giles explains: "At the time of the MBO we were also buying Dallas Kirkland and MCIS, the charity specialist. Our view was in the first year we'd integrate those businesses and achieve our business plan but other opportunities came up. First came the two brokers in Bradford, then Miller. The intention was to prove EBITDA and raise more bank debt off the strength of that but it's hard if you've made rapid acquisitions to then go back to the bank that soon after. So there's a short term issue with funding and Gresham are working on a solution that won't be equity dilutive, which says a lot about of our relationship and how they want to support us."

Giles is bullish about achieving good results at the end of its financial year, in order to leverage further bank debt. Giles comments: "This is where Towergate are ahead of the game, as their model has worked so successfully they've been able to refinance with purely bank debt - fairly chunky bank debt but that says a lot about their underlying performance." To the obvious question about debt concern he says: "Derek is a very cautious FD and wouldn't countenance allowing Giles to work beyond the EBITDA multiples and borrowings that he's comfortable with, even though the bank may have the appetite. So there is a healthy degree of caution predicated on results."

In terms of balancing the considerations of the firms' three stakeholders, when it comes to the decision making and the leadership of Giles there is a board made up of executives Giles, Bob Screen, Gardner, managing directors Sean Finnegan and Michael Quinn, and Robin Kirklan plus non-executives Howard Posner, Jim Faulds and chairman Andy Marsh. Giles says: "In terms of the control of the company, I've always been as comfortable with the majority share as without it. To my mind a majority shareholding doesn't necessarily confer leadership and respect. I'm as committed and passionate about the business with 30% as I was with 70% and I don't believe leadership is associated with a majority shareholding of the business. We drive the business forward with board approval and the investor is happy for us to get on with it as long as we're on budget so the decision making process is very straightforward."

Third-party investment

On the speculation about Giles' debt position being too rich for some brokers' blood, Giles says: "This is a great industry and people snipe because all we do is pinch things from each other. When you're doing well then people really snipe but my view is if brokers got a bit of debt into their business they might be able to grow it. I joined Giles in 1988 and it had a revenue of £280,000. This year we will end close to £30m. What I'd say to brokers that sit there with £2m worth of brokerage is what's the impediment to them borrowing beyond the fear of debt? It's the old adage if you borrow a million pounds from the bank it's your problem but if you borrow £20m it's their problem. It's true that everyone then works together to make sure the return on capital is as high as it should be."

Giles also says that recommendations and advice from investors plus the introduction to the businesses in Gresham's portfolio has been another advantage of third-party investment. "Taking on debt has transformed the opportunities that Giles has," he says, adding, "it has also given us networking opportunities I could have once only dreamed of. The networking opportunities that have come out of working with Deloitte, as well as with Gresham and Clydesdale Bank, are huge."

However, Giles also says: "I would say to any broker that wants to make a £100,000 dividend a year and live debt free that's fine, they're risk-averse people and the industry is made up of those sort of brokers. There is some merit in that and what the smaller brokers are doing is providing a fantastic level of advice and there is a durability that seems to defy the constant predictions of their demise. I'm very proud to be an insurance broker, not a big broker or a regional broker, just a broker, because you see the durability and the fight that these guys have is amazing. It's perceived as a dull industry but the reality is it's far from that. It's one of the most dynamic industries especially at the moment with it consolidating fast."

Another aspect of what Giles has done, which gives many pause, is the short time horizons of outside investors - typically three to five years. Giles says: "The message I've given to staff about that is the bigger picture perspective. We're all on a 15 to 20 year journey and it's also worth making the point that we have one of the youngest management teams for our size in the market. We might have another exit at that point - it may be an IPO or it may be another investor or a trade sale. The point I've made is we can all still work together as a unit. I'm keen to drive the business forward in whatever shape or form is best and we should be considering exits every three to five years, so those that are in it for the duration may see a very good return on their equity over three or four exits. It's vital to have that staff alignment and buy in about the future and the opportunities to be had."

Concerning the future of distribution, Giles sees insurers becoming increasingly involved to address the stranglehold brokers have over commercial business. "Insurers are looking carefully at how they organise their own distribution, and you can see that with Carol Nash, Footman James and others. It seems to me that, because of Towergate's success, insurers need to develop an alternative strategy, particularly those that support Towergate, as it appears to control the distribution there and that is a very clever bit of business by Andy and Peter. Insurers may want a different strategy to that."

Natural evolution

The fact that insurers are buying brokers, Giles considers, is a natural follow on from the evolution of the consolidators, with the power of distribution gradually shifting towards a handful of players. He continues: "Tony Cornell talks about 20 brokers controlling 80% of the market within five years, which, if you're an insurer contemplating that scenario you've got to consider carefully. Insurers have been enjoying a nice return on capital for the past five years and consolidators realise there is an imbalance between the remuneration they're getting, compared with the returns insurers are getting, and insurers are now concerned about their return on capital.

"It's now getting to a tipping point, where instead of waiting for the business to come in at a slim return insurers are looking to grab it and vertically integrate and that could well be a natural economic conclusion. If the intermediary sector is becoming controlled by a smaller number of large players it makes sense that those controlling players have more leverage but the soft market does exacerbate it."

Regarding smaller specialist brokers, Giles says: "The insurer is working with them, taking 80% of the earnings out of the pot and only giving them a meagre return. I think they could be fairer and help the smaller firm maintain their independence by giving them a bit more money and more support but they're not, they're protecting their cash cow. However, that is also causing concern to insurers, because when the smaller specialists sell, the insurer then has to negotiate with a consolidator who knows the value of the book and there are other insurers that will pick up that book quite happily. In a specialist sector the broker controls the hearts and minds of the client, not the insurers, and that's a big part of the reason why insurers are buying these firms now."

Giles also considers consolidation will continue for another three years and is clearly focused on the opportunity to buy and build within that time frame. He is also of the view that broking is not an expensive sector in terms of prices being paid, and is keen to maximize the consolidators opportunity to leverage higher commission levels. He comments: "We are in an industry where there is an uneven playing field with remuneration levels lower for smaller brokers. That's why I think the durability of small brokers is incredible and there are some very efficiently run outfits with everything nailed down, the staff work hard and are loyal, there's no over expenditure and little marketing spend because of the community relationship. These are very clever business units that will survive and the broker is an amazing animal but there is the demographic issue now, plus the strain of regulation and it's less enjoyable as a result. I always laugh when people say brokers should be professional like accountants and lawyers - they are already there and are considered along side these."

He continues: "The other thing is that brokers are incredibly adaptable and we've done scores of deals and there are many principals that have immersed themselves in the Giles culture. They are still enjoying doing what they do and are quite happy to be free of the responsibilities and the paperwork they had and they've got cash in the bank. This is a people business so if you're if you're selling you know you're going to be treated well, because the only way you maintain hearts and minds is by treating people well. We like to encourage principals to do what they do, which is often client facing."

Giles also says he is careful to maintain principals' status regarding their job titles but continues: "Having too many chairmen has been the undoing of a few businesses. So we're careful to be upfront with vendors and say you can help us what do you want to do and we focus very much on that early on. That said we have to be flexible and allow them to modify things if six months in it's not suiting them."

Having watched the rise of Towergate, Giles now considers that in time all consolidators will have some kind of underwriting agency and Giles will be no different. "We are perusing that at the moment," Giles says, adding: "We have discussed it with the FSA and the process is underway." The promise of a better product, more control over rating, administration and service is an opportunity Giles is keen to embrace but not via acquisition.

He explains: "We're happy to start from the ground up. There is the option to pinch a team but teams can be expensive and I don't think it needs to be hugely sophisticated."

In terms of timing he states: "I'd be disappointed if we didn't have something live by the end of 2007. It's on the drawing board and it hasn't come to fruition yet because we want to get it right and do it properly."

Plans to grow

Recent recruit and chief operating officer Bob Screen will be instrumental in establishing underwriting. About his appointment late last year, Giles says: "I'm very sales driven and Michael Quinn and Sean are responsible for the sales effort. Dereck is responsible for finance and acquisitions and Bob will be the guy that makes other things happen. This includes insurer relationships, compliance, management information and HR. We have a compliance manager who is excellent but from a board point of view it's Bob's responsibility."

Screen's appointment will also alleviate pressure on Gardner, who Gresham decided would be an ideal chief operating officer. Giles says: "This put a lot on his plate in addition to his finance role. Gardner is also our mergers and acquisitions man and as the acquisitions came through we needed to move someone into the COO role, and it is right up Bob's street. So I'm very pleased with the appointment because there aren't that many people of Bob's caliber available."

Giles and Screen first talked about the possibility of him joining Giles in early December and, by the second week of January, Screen had his own desk at 36 Gracechurch Street.

Giles also plans to grow in his native Scotland and claims he is making ground on the organic front. This, he explains, is because insurers give consolidators an edge over local firms once they have demonstrated they can deliver volume. He continues: "It's very difficult to buy in Scotland but we are winning good quality business from nationals and value adders and we are a strong force there - possibly even stronger since I left as the guys have focused on what they have to do and they have a bit more autonomy. I was always confident about leaving. Of all our regions Scotland is the furthest ahead of budget than anywhere else, including the South where we are also growing fast. So although Scottish brokers aren't selling we will continue to hurt brokers in Scotland, there's no doubt about it"

Since Giles moved to Surrey from Scotland last summer he has made the observation that English brokers are better sports. "Broking is like football, we all hack each other to death for ninety minutes but the difference is at the end of play English competitors will go out for a beer with you, whereas in Scotland they begrudge you and take it personally when it is just business."

On the regulation front, while Giles is obviously of a size where it can take a lot of Financial Services Authority regulation in its stride, what is the situation with contract certainty? "We've got the monitoring going and we have been pleasantly surprised at our own performance, although sometimes it's out of our control when it comes to insurers. However, we have all the mechanisms in place and have leverage with insurers so we have a better chance of making it happen for our clients than smaller brokers who have no leverage."

On commission disclosure, Giles considers this will be a bad thing for insurers. He explains: "If brokers are working out how they vertically integrate in taking the business from cradle to grave, in terms of distributing to the client and via the underwriting, then insurers will become peripheral organisations just providing capacity.

"In setting up our underwriting agency we hope to achieve that, so if commission disclosure is mandated our argument would be we're providing all the work an insurer would normally do. That comes at a cost and also we're providing a service to clients and that comes at a cost, and that's how we'd maintain or improve our earnings."

Giles believes there needs to be a careful debate around this because insurers are dealing with increasingly sophisticated brokers. He continues: "If insurers think commission disclosure is suddenly going to give them control over distribution they're misguided. So we should have the debate, as objectively as possible - but that's the problem Tiner and the FSA have, there is a complete lack of objectivity. I don't know if it's inevitable and I don't care as we're well set up on the compliance side and will adapt as needed. However, if hard disclosure is brought in that could precipitate the final consolidation in the market as the smaller, proud, resilient brokers may feel this is the last straw."

Forward thinking

Looking ahead, Giles mentions more insurer control of distribution again but adds: "In the regional sector it will be much more like the German and French markets, with tied agents, for example, but I think there will also be an interesting combination. If insurer-owned brokers are left to get on with it, they will provide a fantastic distribution service for insurers if they are supported and if insurers don't spoil it by implementing their own slow-moving corporate culture to what is currently a good entrepreneurial mix in the broking sector.

"The combination of an insurer that can put the capital up to buy and support, plus have the bravery to leave the broker to do what they do best, could be a compelling combination and perhaps potentially that's where things will be in five years time. Of course, the biggest personal lines distributor is already owned by an insurer. Sadly, I hate to say it but I think the small broker will be a thing of the past at that point.

"The difficulty will be getting the balance right as big companies tend to be overly cautious and doing things properly in a corporate structure balanced with entrepreneurialism will greatly benefit those that can achieve that. For Giles that doesn't cap how big we become - it's down to having the right culture. It's also down to good leadership and a good management team plus good incentives."

GILES

2001: Chief executive, Giles Insurance Brokers

2000: MBA

1995: Joint managing director, Giles

1995: FCII

1991: Commercial department manager, Giles

1988: Commercial insurance account executive, Giles.