Last year was a record year for mergers and acquisitions in the employee benefit space, with a total of 77 employee benefit firm transactions, up from 69 in 2014 and 63 the year before.
Valuations are high, according to Dan Menzer, CPA with the insurance consulting firm OPTIS Partners. He says high M&A activity in the property and casualty space likely helped with the boost, but employee benefit firms are and will likely continue to reap the rewards.
“Valuations for agencies are high, higher than they’ve ever been,” says Menzer. “That’s driven heavily by the P&C side, but not exclusively.” While there may be more compression in the valuation of employee benefit firms, he says, “It is as good a time for buyers to be on the buyer’s side as it is a good time for sellers to be on the seller’s side.”
That’s because, he says, some of the larger firms, such as Gallagher, may be open to buying the smaller benefit firms.
On the EB side, “There was a big concern in 2009 and 2010 over the Affordable Care Act and what it was going to do to those brokerage firms. Were they going to lose those small accounts and half their revenue along with them?” says Menzer. “I think what we’ve seen over the last four or five years is that it hasn’t happened.”
He adds that agencies are now less unsure of the ACA as no major shakeups have occurred and, as a result, expects EB transactions to pick up over time.
"I would expect benefits side sales will pick up,” he says. “Will it jump like the property casualty side? No, but it will continue to consolidate. What we have seen and heard is there really is a stronger need to be bigger to be able to afford the costs of the services, information and resources that clients are demanding."
Who’s buying?
The report goes on to say that private equity-backed buyers were responsible for virtually all of the growth.
“I think what we’re seeing is that there is a lot of capital out there as evidenced by the private equity firms,” Menzer says. “There is still a belief on the buyer side that the valuations being applied to the sellers are reasonable and will generate sufficient profit and return over the long run.” He adds that business owners, many of whom are baby boomers, have not done a great job with succession planning and are now looking to sell their businesses.
The demand by private equity firms is relatively new. An abundance of capital, continuing low interest rates and limited options for investors seeking returns has pushed this segment of investors to the forefront and ultimately raised agency values to levels not seen in many years.
"What we have seen and heard is there really is a stronger need to be bigger to be able to afford the costs of the services, information and resources that clients are demanding."
“It’s great advertising for [private equity firms] to publicize that they are buying. It attracts capital and sellers to them,” Menzer notes.
While Menzer thinks that valuations will continue to be high for the foreseeable future, sellers who are considering making a move would still be wise to transact sooner rather than later to take advantage of current prices.
