A steady flow of private equity money into the brokerage sector has fueled a spate of mergers and acquisitions in recent years. Amalgamations of smaller agencies and brokerages into large national operations have changed the brokerage landscape in ways that would have been unimaginable only a few years ago.
But imagine the unimaginable: what would happen if the financial spigot suddenly dried up?
If private equity dried up, I think you’d see valuations for M&A activity fall significantly, says Paul Newsome, managing director at Sandler O’Neill + Partners in Chicago.
“Theoretically…valuations and multiples would come down, and there would be less acquisition activity,” says John Ward, principal at Cincinnatus Partners in Loveland, Ohio. “And the segment would resort to the age-old strategy of internal perpetuation within the agency.”
The impact would depend in large part on the reason the private equity and investment money became scarce, explains Quentin McMillan, a director at Keefe Bruyette & Woods in New York.
“If it was due to interest deductibility going away, which would affect private equity to a greater extent than the public brokers, you could see a decline in M&A, causing the multiple paid-for businesses to decline,” McMillan says. “Private equity can afford to pay more.
“The public broker reaction would depend on the private equity firms’ plans with the businesses they operate—whether to keep ownership and focus on paying down debt, looking for a buyer, or taking them public. There are between five and 10 large brokers owned by private equity that at some point will likely sell.”
Kai Pan, an analyst with Morgan Stanley, says, “M&A remains competitive, and valuation multiples are elevated. If rising interest rates would increase funding cost for private equity investors, the acquisition environment could be more favorable to strategic buyers. That said, most brokers do not expect significant change in the M&A environment. They are instead focusing on acquisitions, which add strategic value and financial accretion.”
The possibility of a drought doesn’t concern Jim Kapnick, CEO of Kapnick Insurance in Adrian, Michigan. “We are a family-owned business looking to be around for many, many years. If the private equity money dried up, we would continue doing exactly what we are doing today.”