Business Breakdowns
· 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.
· Matt Reustle
[00:00:00] S0: I love the nuance. It's incredibly helpful and I think it's just such an interesting topic and subject. We can transition a bit into the insurance brokerage space itself and I'm sure we'll mix in some of the other categories within insurance to cushion out the conversation. I love talking to guests who have extended tenures in certain industries or subsectors. Can you share just a bit about your history with the space? And to some extent, what has changed versus what has not changed over the years as you've looked at the insurance brokerage space?
· Aaron Cohen
[00:00:00] S1: So I've been investing in the space for a little over 20 years. It's an interesting question: what has changed and what has not changed? I'd say the core fundamentals of the industries have not changed. What is that? I'd say most importantly, it's an industry that is less cyclical than most. This is an industry where, regardless of what's going on in the economy, you need to have insurance, you need to have your employees covered, you need to have your property covered, and you need to make sure you have the appropriate insurance. So it's less cyclical than most industries. Second, it's an asset-light business model. Third, the cash flow characteristics are fantastic in this industry. You have EBITDA and there's not much else below that for cash conversion. When you think about the cash flow characteristics after EBITDA, CapEx, it's not a capital-intensive business. We used to joke that when your CEO broke his iPad, that was the capital you spent. Now, of course, with time, a lot of these companies are investing in data warehouses and technology to help drive more efficiencies. But it's still relatively capital-light. And then second on the cash flow side of the business, since it is an acquisitive industry, you get tremendous tax benefits by acquiring these tuck-in acquisitions that give you a tax shield. So cash flow characteristics in this industry are fantastic. Then I'd say, which we'll talk to, is the M&A. This is a highly, highly fragmented industry. And for GTCR, when we think about tuck-in acquisitions, you have a great management team, you have a great platform, you invest in the infrastructure and the technology, and then M&A just becomes an additional leg of growth and value creation for the story. And with M&A, when we have the centralized oversight and infrastructure and people to support our tuck-in acquisitions, it gives them the opportunity to clear off their plates. Where when you do a small acquisition, that management team might be doing payroll, investing in their technology, and selling insurance. We take all that off their plate so their producers can do one thing, which is sell new insurance. So this industry has evolved in a couple of ways, but those things have stayed the same.
· Aaron Cohen
I'd say what's unique in this industry or what's changed over the last 20 years is what I mentioned is their ability to embrace technology and data. Now that being said, there's still a long way to do that. I think this industry is still behind many others. And second, what's changed is these brokers have become bigger and they've been able to have more influence over their insurance carrier partners. So what does that mean? That means that you could drive better commission rates, you could drive better contingent commissions based on volume levels. It's allowing the broker to have a real seat at the table where not too long ago, in the mid-80s—maybe that's a long time ago now, maybe the mid-90s—insurance brokers were small, but back then they didn't have the ability to influence their financial situation. Now they do. Because if you think of an insurance broker and they're putting billions of dollars of premiums with a certain carrier, they are really reliant—they being the carrier—on the broker and their ability to bring them business, which should drive more value to the broker. And I'd say just generally speaking, another reason why insurance brokerage is so fantastic is because we believe in financial services, the person who owns the customer relationship should be able to drive more value out of the entire ecosystem. And brokerage is a perfect example of how that's evolved over the last 20 years.
· Matt Reustle
[00:00:00] S0: To that point. On the carrier-broker relationship, you could in theory have carriers underwriting, talking to customers themselves. I think you certainly do still have that direct selling out there. But has there been a material change just in the percentage of the market that's represented by brokers over time? Has that been a share gainer or a tailwind for the market?