Acrisure 2.0 (Insurance Agency "GBO")
A Prepared Mind Deep Dive
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Over recent weeks, there has been a lot of conversation regarding the role of buy-outs in venture capital. Our friends at Slow Ventures penned a fantastic piece on growth buyouts (the “GBO”) that you can find here. This includes their thoughts on the larger opportunity, as well as examples of the methods they’ve seen effective for value creation. Many others contend that buy-out / roll-up strategies aren’t a fit for VC, and in many respects their arguments are valid. Skeptics often cite that venture capital is most appropriately used for R&D; that leverage and financial engineering are better left to bankers and PE; and that VCs are ill-equipped to serve anything but technology companies.
That said, we often discuss that the brush stroke of “venture capital” is far too limited. Our mandate isn’t exclusively to invest in SaaS startups (though that’s certainly part of what we do); it’s to invest in companies that we feel can provide an incredibly compelling return for our LPs. At Equal, not a single one of our last 3 investments sells software. In each case, we diagnosed the value chain of that particular industry and determined that the most transformative impact (and highest value-creating potential) was in developing a service that utilizes technology to disrupt and/or augment the existing stakeholders in the industry. When we look at an investment opportunity, we don’t just look at top-line revenue and ascribe revenue multiples. Rather, we diagnose the economic benchmarks of that industry segment to determine 1) is there an opportunity for an economic moat, 2) how that company may be valued at scale, and 3) whether the corresponding return to our fund would be sufficient to justify the investment.
The acquisition and GBO model will not work in all sectors. Retail (one of Equal’s core verticals) is an example of an industry where we are skeptical of the model (and consequently, a tremendous amount of money was lost on roll-ups of digital merchants over the past cycle). There are a number of reasons why companies in that category struggled, including the fact that the success rate in retail M&A is generally low). When we examined opportunities in retail digital merchant roll-ups several years ago, we determined that this model did not meet the 3 criteria defined above.
However, we believe other legacy-oriented categories may be particularly ripe for the GBO model. One such area we have spent several years digging into is insurance brokerage. In Equal’s “Prepared Mind” deep-dive into this category, we effectively pitch an insurance agency GBO. We started writing this piece in 2021, having had hundreds of hours of conversations with agency aggregators and operators. As we built knowledge and networks around how insurance agency M&A creates value, we have found the opportunity to be immensely compelling.
There are tremendous success stories among brokerage consolidators – including players like Acrisure (a prospective IPO candidate valued over $20B) and NFP (recently acquired by Aon for $13b). Unlike in retail (where M&A historically destroys values and the most frequent underwriting case is on cost-side synergies), insurance agency consolidators are able to achieve significant revenue side synergies. For example, agency commissions and bonuses expand with the scale/concentration of a larger platform, and access to more carrier appointments and products enables greater cross-sell and LTV of existing clients. We’ve also seen numerous data points suggesting that inorganic growth (i.e., M&A) within agencies is actually more cost effective than organic growth through traditional marketing methods. These synergies and others have made us excited about the opportunity to consolidate and scale insurance agencies.
As we outline in the deck, these synergies can be augmented and accelerated by deploying technology – both to increase the velocity of M&A and to increase the EBITDA margin profile of the integrated agencies. Since software adoption and GTM in sub-scale brokerages is generally challenging, this is consistent with Slow’s observations about monetizing software via owned assets rather than selling SaaS.
There are additional bespoke strategies and catalysts that we believe make the insurance agency GBO particularly compelling (some of which are in the deck, and others that we’ve held onto for now). As an investor in the Insurtech category for nearly a decade (that makes me feel old), selling software to the long-tail of agents is a nut I simply haven’t been able to crack – to be fair, very few have! Given that experience, and the insights described in the deck, we have increasing conviction that the most effective way to achieve digital transformation within the long-tail of insurance brokerage is to BUY rather than BUILD. We believe that the alignment of incentives within this structure is the missing piece that has prevented legacy agencies from modernizing despite the amply-documented benefits of technology adoption on profitability and UX. As we consider investments in this space, we see the opportunity to achieve rapid scale and its associated revenue side synergies with carriers, as well as to achieve an unparalleled level of efficiency through modern tooling and automation. Whereas PE-sponsored roll-up strategies that generally deprioritize technology have already demonstrated $10B+ outcomes, rapid advances in AI create the potential to deliver even more impactful results.
Again, our job as investors is not to invest in software for the sake of software. It’s to invest in companies that we feel can create immense value for our LPs. Sometimes that will be investing in software (or marketplaces and other traditional venture backed business models) and other times it won’t. We attempt to leverage our understanding of the nuances of that market to define the path best fit for generating returns, rather than confining ourselves to the conventions of venture capital. In insurance, this is particularly profound given that there is a single insurance software company worth >$10B ($GWRE) and only 2 broker enabling software platforms worth >$1B (Vertafore and Applied), yet there are hundreds of insurance companies worth >$10B and likely a dozen players who have executed the agency roll-up model to build enterprises worth >$1B (and on faster timelines then Vertafore and Applied). We will continue to hunt for conventional VC approaches to this industry segment, but there is clearly an alternate path capable of generating VERY large outcomes that we feel is worth exploring.
We hope that you will review our report and provide feedback. At Equal, we are always looking to learn as much as we can about our core industries and there are undoubtedly many gaps in our own knowledge base here. If you are working on consolidating and supercharging agencies (or interested to discuss the opportunity) we’d love to meet you.