Barring any significant financial, political or economic events that may change the underlying market, we do not expect the current M&A dynamics to change markedly in the near-term. Despite the worst January performance of the stock market since 2009, the U.S. economy continues to improve. While insurance prices are softening, they are not deteriorating significantly, and they likely will be offset to some degree by increases in exposures and coverages. Meanwhile, interest rates have slowly begun rising, as many Federal Reserve watchers had anticipated, and likely will continue to inch up over the next several years. However, rates still continue to hover near historic lows.
The environment has also been affected to a material degree by a sellers’ market, as there is a very robust group of well-capitalized buyers chasing a finite number of sellers. In addition, industry demographics indicate that with the aging population of boomers, many of whom hold major equity stakes in brokerage firms, the inventory of sellers will increase.
Over the long term, however, we believe the current valuation levels may not be sustainable, as we anticipate one or more of several likely developments may pull transaction values down from their current historically high levels. These developments may include:
· PE owners fail to achieve their expected returns from their investments.
· Public company stock values drop.
· A shift, albeit gradually, from a sellers-market to a buyers-market.
With the sales last year of several PE-backed brokerages to other private equity firms, private equity sellers were able to achieve their targeted returns through the transactions. This also supports the theory that other investors believe adequate returns are still out there, even with the high multiples being paid.
From this point, buyers should be very diligent in their financial analyses to ensure that their required returns can be achieved at the investment level they are prepared to make. Sellers and those who are potential sellers within the next few years ought to seriously consider their position and alternatives sooner than later if they hope to take advantage of current market valuations.
Everyone else, sit back and run your business the best way you can, invest in the future, and build your organization for the long run, because today’s M&A environment has no direct impact on your world.