Business Breakdowns
· Aaron Cohen
[00:00:00] S1: So I'll go back to our leader strategy, which is we look to meet great CEOs, build relationships and find assets to buy or build with them. And Jim Henderson is the quintessential example of a leader strategy CEO. We built a relationship with Jim because he was on the board of another insurance business. We were invested in a carrier called Ironshore. So makes the meaning less clear. Jim is a legend in this industry. I've never met a CEO more well-liked. When you're a hard-nosed CEO, you always cross some people—not on purpose. Jim is the ultimate gentleman and he's been incredibly successful. He had a reputation and preceded him when he joined the board of Ironshore. My partner and I would change seats at dinner to be able to sit next to Jim. And we built a relationship with Jim over time. And after a couple of years, he was looking to do something different and he called us down to Orlando where he lives and we literally built the Assured Partners idea truly on the back of a napkin in his backyard. I mean, it's straight out of a movie. So Jim and we formed Assured Partners. GTCR committed several hundred million dollars to Jim to build this company. Obviously Jim was in the space for 30 years prior, so he knew the entire industry, both people and target acquisitions. And our goal was to build an insurance broker with him. And he wanted to learn from what he did in his career and build a better broker. All about clients and clients and brokers. And that was our goal. And someone like Jim, everyone was dying to work for him. So before we even owned an asset, we had about six people on the payroll that we were funding with equity. A president, a head of M&A, a CFO because everyone wanted to work for Jim. So we were just burning cash until we found a platform. Now, we're not a venture capital firm, so we didn't say go hire producers and start writing your first piece of business. We were looking for a platform. And our first platform was a company called Neace Lukens in Cincinnati, Ohio. And it was a small business, but it was big enough that had some basic infrastructure and the ability for Jim to professionalize the business. And we went off. So that is the quintessential GTCR story. Find a great CEO and a management team. Find a business, bring that team in to run the business.
· Aaron Cohen
So at the time, Neace Lukens was a very small business, but the management team we brought in, they were used to running billion-dollar businesses. And then on top of that, people wanted to sell, people wanted to work for Jim. I wouldn't say we were getting a discount, but we were winning ties because people wanted to be part of what Jim was creating. So we built a wonderful, wonderful business over five years. Unfortunately, in private equity, we do have to sell our businesses, even our great ones. That being said, we at GTCR like to own businesses longer than the industry average. So we were coming up on our five-year anniversary and we were more than three times ahead of our back-of-the-napkin plan. Our goal was to get to $40 million of EBITDA in five years. Like I said, we were well in excess of three times that. So we were excited. We spent so much time finding the right people, investing in the technology, investing in growth that we wanted to keep on compounding. And frankly, Jim, who was a wonderful partner, said, I recruited all these people, I promised them that in private equity they were coming to work for me, for the equity, the equity side of private equity. And we owe them a payday. So we sold the business and it was a wonderful success and one of the best deals in our fund. And of course we stayed in contact with Jim. Jim is a personal friend at this point and we were staying in touch. And I remember I was walking through Disney World, my kids were young then. And Jim called me up and said, let's do it again. And I said, Jim, do what? And he said his current sponsors wanted to sell and we should work together again. At GTCR, that's the best phone call you can ever get, which is when a CEO wants to work with you again. And if you think about private equity and getting to little geeky finance, risk and reward are correlated. Our biggest risk, especially as you hear us talk about the leader strategy, our biggest risk is finding a CEO where you think you're well-aligned, putting them in a business and you're not well-aligned and you have to change management and all the leakage that comes with that. That doesn't happen often, but that is a risk. And here we've worked together, we've seen eye to eye, we understood the strategy we wanted to continue to execute.
· Aaron Cohen, Matt Reustle
So all of a sudden we had asymmetric upside because we had the same reward potential with a significant risk chopped off our other side. So we were very excited. We partnered with Jim and the management team to rebuy the business almost six years ago. And now we built it to over a billion dollars of EBITDA into a wonderful, diversified, specialty-focused business. And it was announced last November that we're selling the company to A.J. Gallagher, just one of the absolute role models in the middle market insurance brokerage space and a family we have tremendous, tremendous respect for. [00:00:00] S0: That's an incredible story that really encapsulates all of the higher-level investment frameworks along with the nuance of the industry. I love hearing that and spelling out the details on the point of the exits which you need to think about. The scale becomes bigger and there's certainly in private markets various chapters where I think I know some smaller market PE folks that look and try to build businesses that they can sell to middle market. And once you get up to the size and scale that you operate in, it becomes a bigger challenge or there's less natural buyers. So how do you view the opportunity set for when you're exiting? Whether it's finding strategic public companies that could potentially be buyers, IPO'ing, I'm just curious how you think through those opportunities and evaluate them.
· Aaron Cohen
[00:00:00] S1: So Matt, I think you're talking about exits for much larger platforms, hundreds of millions, even billions of dollars of EBITDA. And I do think there are exits for those larger businesses. Now I do appreciate you recognizing we're doing bigger deals, but at GTCR we still love doing what we've always done, which is small buy-and-builds consolidations in industries. And we do have a fund that allows us to do smaller deals as well because we have a flagship fund. Then we have a strategic growth opportunity where we are able to do smaller deals as well. But anyways, to your question Matt, I think there's a couple of different paths for liquidity or exits for these larger brokers. First, if you think about many other industries, they all consolidate at the top. There's very few industries where there's seven mega players and this is an industry where there's probably five to six players with billion dollars plus of EBITDA and there's probably another 10 players with $500 million plus of EBITDA. So I would expect the big players to consolidate and still get all those synergies of what you'd normally see in larger transactions of that size. Second, I do believe there are large strategics that still love the middle market and would be willing to do larger transactions. That being said, there's not that many and there's not enough large public strategics to buy the next 15 largest private companies. So last, you are talking about potential IPOs. This industry, as we've talked about, has performed incredibly well for public investors and you should expect to see a handful of private equity-backed insurance brokers go public over the next couple of years.
· Matt Reustle
[00:00:00] S0: We've talked a lot about what makes this a very special industry. When you think about the risks, what stands out the most to you just as a risk that could be on the horizon or you look for in the operational results? What tends to stand out the most for you?
· Aaron Cohen
[00:00:00] S1: I hate, hate, hate when people talk about investments and don't identify risks or ways to lose money because you could do that in any industry. But what is wonderful about this business is I'm going to go back to the diversification. And we always used to laugh with Jim: if we lost our largest customer, Jim wouldn't call us because Jim wouldn't know because your largest customer is way less than 1% of revenue. So there's not a risk out there. I don't look at AI and say that could take down this industry. Can it make it more efficient for the carriers? Can it make it more efficient for the brokers? Yes. Insurance is one of the oldest industries in the world. And on the insurance brokerage side, I don't see something that would fundamentally change the industry. You could have years of slower growth. We didn't talk about the insurance cycle, which is hard and soft markets based on capital availability and carriers' profitability. So you could have several years of a soft market where premiums are coming down and therefore your commissions are coming down. That would slow your growth and impact your cash flow generation. Now you'd hope in that environment, which we've seen before, tuck-in acquisitions probably get a little bit cheaper. So you could have, and there has been years of soft markets where the results aren't as strong as you'd like to see. But there is not an esoteric risk that is going to bring down this industry or I am worried about that will fundamentally change the structure of the industry.