Briefing: Roman generals, rusty swords and the likely broker re-independence agenda

Somewhere between the bear hugs, tote bags and palm-pressing feast that was the Biba conference this year, there was a slight frisson in the air that I couldn’t quite place at the time.

Take, for instance, a chance conversation I had with a very senior figure from one of the larger consolidators. The chat turned to soft markets, debt and the unrelenting growth expectations of his investor masters.

As he spoke, his previously cheerful conference face settled into something approaching funereal.

For a moment, I saw genuine concern writ across his face as to whether the machine could keep feeding itself indefinitely.

As the macro picture has been suggesting for some time, sales have been delayed even though many of these figures had presumed that they would be sipping cocktails on a beach somewhere by now – having rolled up enough brokers under them and created many millionaires in the process.

And that, I think, is the faint tremor now running through the market.

Over the past decade, we have seen a glut of M&A deals in the broking world.

Founders, chief executives and hard-charging leaders of once-virile independent businesses sold to larger groups and then, in many cases, seemed to disappear into the furniture.

After the initial press announcement and the smiling photographs, their trajectory became that of eclipsed stars.

They stayed to fulfil earn-out obligations, then stayed again because of retained equity, promised future listings, higher multiples and the tantalising prospect of jam tomorrow.

The difficulty is that this fabled tomorrow has been on the menu for quite some time now.

Waiting game

For many, the dream was that these consolidator groups would then themselves exit to larger institutions – or float at valuations that made their breathless deals worthwhile.

Yet the waiting game continues.

Beneath that, a calculation is underway by the very founders and management teams that sit within these stitched-together groups. Is the remaining equity really worth waiting for? Will it ever be realised?

And, perhaps more dangerously, would they be happier, richer, and generally more alive if they simply started again?

It is interesting to speak with such characters. In almost every instance, they are not short of money. So, this is not poverty stalking – it’s more psychological.

These are people who built things, took risks, hired staff, sometimes made payroll by the skin of their teeth, charmed underwriters, cajoled clients and occasionally moved mountains by force of will.

Then they sold, entered the larger machine and discovered that being part of something bigger can also mean feeling rather smaller themselves – big fish in small ponds and all that.

To be clear, there is much to recommend about life in a larger group. In my own case, post-deal, I have enjoyed the broader investment canvas and, before anyone asks, I am very gainfully employed.

The ability to sleep at night knowing you are no longer solely on the hook is not to be sniffed at, either.

But from others, I hear a different note. There is frustration at bureaucracy, slower decision-making and a loss of appetite.

Ownership inevitably affects people, after all.

When it is your money, your name, your future valuation and your reputation on the table, you will be amazed how quickly mountains can be moved. When the reward is distant, diluted or possibly imaginary, the same mountain starts to look rather large and daunting.

Results and ramifications

So what does this mean for the industry?

With the number of independent brokers having declined so sharply, there is a decent argument that there has rarely been a better time to start one.

Even in softer market conditions, insurers are still keen to support good, independent distribution.

In fact, they may be keener than ever. Large broking groups have obvious advantages, but they can also shift capacity at scale, leaving material holes in an insurer’s plans. A nimble, focused, well-led independent broker has an appeal that should not be underestimated.

The bigger consolidator groups face a more complex, awkward equation. Many are burdened with debt incurred from deals priced on generous multiples and future growth assumptions.

In effect, they paid many years of earnings in advance and now need the acquired businesses and the people who made them special to keep delivering. Yet founders are not fixed assets. If they become bored, restless or simply disillusioned, the magic and ethereal elements that justified the multiple inevitably leave with them.

Debt, meanwhile, is totally unsentimental. Interest does not care about soft markets, integration fatigue and brokers’ sentiments about tomorrow. It simply keeps arriving with punctual menace – much like my personal Amex bill.

One ex-hard-charging chief executive I spoke with likened it to being a Roman general who had spent years on the empire’s harsh frontier, knowing nothing but conflict, then being lauded and sent back to Rome to enjoy the comforts of HQ and head up the praetorian guard.

After enough time among the cushions and committees, he was worried that he had become a rusty sword and wondered whether he would even remember how to fight again if asked.

Do these old campaigners still know how to soldier? I suspect many do. Muscle memory is a powerful thing. And once you have built a business – truly built one – the urge does not always disappear just because someone has paid you handsomely to temporarily stop.

The founders may have money in the bank, but money is not the same as relevance. Nor is comfort the same as purpose.

For people who once stood on the front lines, the prospect of drifting out of the industry with a ceremonial title, non-exec position, a retained shareholding and a diary full of committees may not be quite the ending they imagined.

There is a vast reservoir of talent sitting behind the dam. Founders, former chief executives and management teams who know the market, know the clients and know exactly where the weaknesses are.

The cracks are starting to show – and the leaks may follow.

And if the dam does break, the next phase of the broking market may not be consolidation at all. It may be re-independence.

Dylan Thomas told us “Do not go gentle into that good night”.

In insurance terms, it may be less a poem – and more a business plan.