Business Breakdowns
· 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.
· Matt Reustle, Aaron Cohen
[00:00:00] S0: Just on the soft markets, is that typically tied to macro cycles? Is there something else that drives when you do have a slowdown? [00:00:00] S1: So it's funny because we've done a tremendous amount of work and sometimes soft markets have correlated with soft economic times. But it's not always the case. They're not perfectly correlated. What really drives them is insurance carriers' profitability. And the one most important thing to identify a potential hard or soft market is: forget about carriers' revenue, their profitability, their net income, cash flow. When carriers have positive cash flow, they're happy, they're generating returns. It's when they dip into negative cash flow area that you'll see the market harden because they got to push rate to drive returns. So cash flow is the number one predictor of a potential hard or soft market. And the insurance industry's profitability, yes, it's underpinned by the overall economy, but you could have two horrible storms. You could have an earthquake in California and a hurricane in Florida in the worst economy in the world and all of a sudden prices are going up and the insurance brokers are going to make more money because they get a percent of that premium. So there are risks that are independent from the broader global macro economy that would drive a hard and soft market.
· Matt Reustle, Aaron Cohen
[00:00:00] S0: Very interesting. The last thing that I wanted to touch on, you brought it up earlier, was it's a highly regulated industry. It seems like the impact for the brokers is mostly on the filing and whatnot. But in terms of regulation as either a risk or a potential catalyst and tailwind, are there any things out there that would directly impact the brokers from a regulatory standpoint that you're watching closely or there's a milestone that's upcoming that you would be looking out for? [00:00:00] S1: There's nothing on the horizon that's being discussed, whether at the state or federal level that people are worried about. You had the whole Spitzer situation back in pre-financial crisis that really shook this industry. But right now it's pretty well regulated. It works very well. And I think an advantage of being a slightly bigger broker is you have the ability to track the regulations and be able to grow by state because it's regulated by the state. So every state is different and you have the capital to be able to support having a regulatory team to just follow the regimes and understand what's going on. But there's nothing on the horizon that's material to this industry right now. [00:00:00] S0: Well Aaron, this has been a pleasure. Thank you for sharing all the knowledge, the history and some fun stories along the way. I appreciate you joining us. [00:00:00] S1: Matt, thank you for having me. It was a lot of fun.