Business Breakdowns
· Matt Reustle
[00:00:00] S0: My guest is Aaron Cohen, Head of the Financial Services and Technology Group at GTCR, and our topic is Insurance Brokers. Now, I was initially intrigued by Aaron and GTCR after seeing their announced $13 billion sale of Assured Partners to Arthur J. Gallagher, an incredible success story in the insurance brokerage space that we covered in a previous breakdown. But what I failed to appreciate, and you will hear Aaron correct me in the episode, is that not only did GTCR own Assured through two separate periods, they actually built the business with CEO Jim Henderson from the ground up. So we get into GTCR's approach to scaling businesses. We use the lens of insurance brokerage, but we get into the nuances of their leadership strategy and why this space is so attractive to the PE market. The last thing I need to highlight—if you listen to these episodes, you know my frustration with not acknowledging risks to a business thesis. But the way that Aaron addressed this was a great example of conviction to me, not intellectual dishonesty. And that really stood out, so I needed to mention that. Please enjoy this breakdown on the insurance brokerage space. All right, Aaron, I'm excited to have you here and I think we'll spend the majority of our conversation on insurance brokerage. It's a fascinating subsector that's proven valuable to the public market investors, private market investors like yourself. But I thought a good place to start would be table setting with your industry coverage. What encompasses what you're looking at, because I know it goes broader than just insurance brokerage? And maybe you can just start there and we can take the conversation down a few notches as we go on.
· Aaron Cohen
[00:00:00] S1: Of course, Matt. So just to level set who I am and what we do, I'm Aaron Cohen. I'm a Managing Director at GTCR. GTCR is a Chicago-based private equity firm. What we do is we invest behind a strategy that we've created called the Leader Strategy—backing world-class CEOs to build and transform companies in industries we know very well. So private equity has a lot of things in common, but the one thing that differentiates us is the intersection of our Leader Strategy, as well as domain expertise. And maybe that'll help get into a little bit about what I do. I lead our Financial Services and Financial Technologies investing industry group, and that actually is a good example. So for instance, that's a sector—Financial Services and Technology. That's a sector that's so large, and within that sector we probably invest in nine or ten different industries within the financial services industry, with insurance being one of them. Even though I oversee that industry, I specifically spend all of my time investing in two primary industries, and of course insurance being one of them. And in insurance, that's everything—it's insurance brokerage, it's the carrier side of the business, it's insurance premium finance, it's data and analytics software, claims management. We love the insurance ecosystem that we look forward to digging into and discussing. But GTCR as a whole invests across four different industries. We've been investing in that space behind that same strategy for over 45 years.
· Matt Reustle
[00:00:00] S0: And on the Leader Strategy, no one would argue the importance of management teams. At the same time, it's thrown around a lot and carelessly sometimes. So can you just spell out a bit more about what that means for GTCR? What great looks like—anything that you can get into in terms of what it means to separate great leaders?
· Aaron Cohen
[00:00:00] S1: Absolutely. For us, we think the CEO is the most important decision we make when we underwrite an investment. So what does that mean? Everybody in our industry chases deals, does proactive work in industries to find opportunities. But for us, the deal is secondary. Everyone's looking for the next deal—we believe there's plenty of companies out there that with great leadership we could improve, transform and create a market leader. But for us, the scarce resource is a CEO. There's very few CEOs that can do what we want to partner with them to do. We're spending all of our time in our investment committee with our deal teams talking about our pipeline of CEOs that we're building relationships with, we're nourishing, and we're hopefully eventually going to be able to partner with to bring in to an investment that we make to help us grow that business. Then your question—what does great look like? So even though we invest across four broad industries, we invest in Business and Consumer Services, Healthcare Technology and Internet Infrastructure, and my group, Financial Services and Technology. Actually our CEOs have a lot of similar characteristics. One, and most importantly, they're proven money makers. How do you define a money maker? It's someone who has created equity value in the past for their shareholders. It could be for public shareholders, private equity, family-owned businesses. But it's great leaders who've created value because a lot of times you'll see a wonderful CEO on paper and they grew a business 100% over five years. But if their stock price didn't move, that's not what we're looking for. We need people who create value because that's what we're paid to do from our investors. So that's the most important one. Then there's other critical components that you just have pattern recognition when you meet a lot of CEOs over your career. And the other one is people. And what do I mean by people, Matt? It's CEOs always have great executives that will follow them from job to job, company to company, through thick and thin. They will work and make things happen. And that is one of the hallmarks of a great leader—when we hire a CEO and he or she says, "I have a great CFO, I know who's perfect for operations, and I have a fantastic CMO."
· Matt Reustle
[00:00:00] S0: And I'm curious because it's such a fascinating concept and I generally align with your views about the importance and it being paramount for these businesses. When you consider the different size and scales of businesses, do great leaders transcend across those various milestones? Size points? Can you talk a bit more about that looking at maybe a smaller business versus some of the bigger scale businesses that you've certainly stepped into in recent years?
· Aaron Cohen
[00:00:00] S1: Great CEOs, Matt, don't always transcend. They might not transcend across size nor industries. So at GTCR, when we say we're going to back a great CEO who's proven to have created value in the past for his or her investors, that doesn't mean we're going to back them to be a CEO of any business. We're going to—we back insurance CEOs to run insurance companies. We back pharma CEOs to run pharma companies. I would not even back an insurance brokerage CEO to go run an insurance data and analytics business. We want to back CEOs in industries they've built and created value in in the past. And then it allows them to avoid the simple mistakes that first-time CEOs make, or it avoids them having to take tremendous amount of time to learn a new industry. So we back CEOs in industries that they've created value in in the past. And then your question on size—I think CEOs are comfortable at different size levels. I think there's certain CEOs who can see the forest through the trees, but also love to be in the weeds and be a command-and-control CEO and really have ownership of every single functional area in their company. You can't do that in a $5 billion company the way you can in maybe a few hundred million dollar company. And then sometimes we have great CEOs who are wonderful at trusting and managing their direct reports, and they're great at setting strategy and managing people, and they could run a five or $10 billion company. So I don't think that every CEO can transcend across size.