Global broker-led acquisitions to outpace private equity buyouts, S&P’s report says

Thanks in part to a fundamental shift in the debt market, the era of private equity-leveraged buyouts in the insurance broker sector is over, and a new era of broker-led acquisitions has begun, Standard & Poor’s says in a new report.
The contraction of credit in the markets “has disrupted the private equity acquisition model predicated on cheap debt and strong cash flow generation,” says the S&P’s report, Big Insurance Brokers Set Up While Private Equity Steps Out of the Acquisition Game.
“As such, we expect that future acquisitions will be predicated on larger brokers acquiring smaller brokers with the goal of enhanced economies of scale.”
The lack of credit available to the private equity firms is only one part of the dynamic leading to this shift, the S&P’s report notes. In addition, an amended settlement with the New York State Attorney General in May 2008 has levelled the playing field between global brokers and private equity firms.
The May 2008 settlement “allows the global brokers an extended period of three years for collecting contingent commissions from acquired companies,” the report notes.
Previously, as of 2004, a global broker pursuing an acquisition had to factor the immediate suspension of contingent commissions when assigning value to a target, which placed the global brokerage at a competitive disadvantage to the private equity firms.