Private Equity can provide partnership

Private equity firms looking to move into the insurance industry aren’t looking to just buy and flip a business but rather join with the owner as a team to grow the business, according to panelists on the Private Equity: Impact on the Insurance Industry panel at the recent Mid-Year Workshop.

“Private equity is not an exit for your business,” said John Kraska of Hales & Co. “Private equity firms provide some partial liquidity at the time of a transaction, but to achieve good value in those transactions it requires partnering with these firms. And the real money comes at the second exit when the private equity firms is exiting the investment.”

Other panelists were Matthew Kelty of Allied Capital Corporation; Gerard Vecchio, Century Capital Management; and Mark Watson, Argo Group International Holdings, Ltd. Mid-Year Chair Dale Pilkington and Bob Sargent of Mercator Risk Services served as moderators.

Mr. Kraska said getting involved with a private equity firm requires owners to decide if they want to stay involved in growing the business as private equity can provide the equity to grow the business.

Mr. Kelty agreed, saying, “We are not operators. The most important or key thing that will determine if we have any interest is the management team and the role they want to take going forward. We are not an exit for someone, we are a partner.”

Mr. Kraska said private equity ownership in insurance brokerage has been quite strong. Five years ago private equity owned insurance broker on the retail side controlled $325 million of commission revenue.  Today it is over $2 billion.

“In the last year and a half it has been a sellers market. Anyone who has been interested in approaching the capital providers have a lot of different opportunities,” said Kraksa.  

Private equity was defined by the panelists as the investment of private capital in businesses.  However, there are different approaches to private equity.  Many people think of private equity and venture capital as the same, but venture capital tends to refer to investments in startup and early-stage firms and private equity typically refers to investments in more established firms.

“We are looking at investing in companies that already are profitable, that have customers, and that already have revenue, as opposed to venture risks that may not have any of those characteristics,” said Vecchio. 

Panelists said recent changes in the economy has changed the amount of money firms were willing to pay.

“There has been a tremendous amount of capital raised within private equity and a lot of firms have dry powder and there is a lot of pressure to put that money to work,” said Mr. Vecchio. You will see some high multiples paid until that capital runs its course.”

Panelists said if an owner is  thinking of working with a PE firm they need to understand the long term goal of the transaction.

“I think it is really important to agree on the end game going in and what a private investor’s time horizon is, what their expectations are,” said Watson.  “They will be far more financially analytically driven and a lot less qualitatively driven. They may not be so concerned about the market and the changes in the market but being focused on what the numbers are.”

Vecchio said one approach is provide the owner some funds to encourage them to work to expand the business through taking risks they took when they started their business.

“They’ve stopped taking those calculated risks because they have so much invested in the business that they’ve changed their perspective from building to maintaining,” Vecchio said. 

“The idea is to give that entrepreneur partial liquidity so even if everything else goes wrong they’ve got their nest egg. They can go back to taking those calculated risks and you will see an up tick in the business.”