Private equity is taking technology advisor investment strategy cues from a far-off source — insurance brokers. The playbook has yielded a wave of industry consolidation.
Last week’s investment in ARG by Bear Creek Partners underscored the trend: Institutional investors that have previously backed insurance brokers have set their sights on TAs. Both types of companies are asset-light, have recurring commission-based revenues and are ripe for scale.
“We said, 'Great business model, great fundamentals. Where else in the economy does this business model exist?'” Bear Creek Founder and Managing Partner Rob Clark, whose previous firms backed large insurance brokerage platforms, told Channel Dive.
TAs agree that the markets bear similarities, but the insurance broker market matured decades ahead of TAs. Investors may need to be patient.
“They have time to shape the space,” said Procure IT CEO and Managing Partner Randy Jeter, who is developing his own platform. “The space is not shaped yet, because the models of managing the end user experience are still in flow or in development.”
Mass consolidation hit insurance brokers in the last 20 years. Clark said the number of PE-backed platforms at the beginning of the investment push was somewhere between five and fifteen. The number has surely exceeded 100, Clark said. The industry is in the seventh or eighth inning of consolidation, if not the ninth, Stratix Advisory Founding Partner Syed Ahsan said.
“These companies have been stood up, and in some cases, they've already traded ownership once or twice. So it's much more mature compared to telecom brokerage,” said Ahsan, whose firm provides outsourced CFO services and M&A advisory to the telecom brokerage market.
The TA market is starting on the same path. Approximately a dozen so-called superagents have accepted PE backing and acquired other agents. Tales of insurance broker consolidation and success are being used to lure agents.
“They're trying to use that as a way of trying to incent and persuade independent firms like ours to take a stronger look at a roll-up,” Rise Technology Advisors Co-founder Eric Ludwig said.
Similarities
The parallels are undeniable from a financial perspective.
Though many TAs shirk at the word "broker," they make their money through brokerage, earning monthly commissions paid by the carrier. While insurance agents sell policies from large providers like PNC, TAs sell services from vendors like AT&T and Zoom.
In both models, the agent focuses on stacking up their residual commission stream. Churn is considered rare in both industries, with insurance and technology brokers often enjoying client relationships that span multiple contract cycles. As a result, the business models have both historically focused on customer acquisition.
“When you take out these policies, they're often for multiple years on end. These contracts end up being very sticky and very high-ticket,” Ahsan said.
Insurance brokers even have their own version of a technology services distributor: a managing general agent. The MGA and TSD both hold contracts with carriers and pass commissions onto the broker. Some MGAs resemble TSD firms like Bridgepointe Technologies, which sell to the end user while also holding contracts.
Differences
That’s where the similarities stop.
Investors say insurance brokers offer a relatively stable product — insurance policies — that has changed very little since the 1990s, while TAs add new products and services from their vendor partners. This creates a distinction between advanced, commodity and obsolete products that vendors market to their brokers with varying levels of enthusiasm, and that TAs must spend more time vetting.
Moreover, the MGA parallel to TSDs is limited. While both parties draw up contracts with carriers, the MGAs are actually helping underwrite the policy for end customers.
“TSD is not changing the product at all. They're not pricing it. They're not creating anything. They don't have leeway to offer a different version of Zoom,” Clark said.
And while there are thousands of MGAs, the TSD market only has six major players.
“There's a limited ability to pursue that thesis,” Clark said.
The newest generation of TAs say that customer acquisition is not their only focus. TAs are increasingly hiring account managers and project managers to support clients after the sale. As TAs move beyond basic connectivity services, it’s easier to lose clients at renewal if they don’t have a good experience.
“We are going to make investments into our clients, we are going to stay with them throughout the life cycle,” Ludwig said. “Even if it means slower growth, it means stickier clients and a better relationship and a more value approach, rather than churn-burn-churn-burn, which is the insurance business.”
Jeter said the vendor community now expects long-tail management of the client.
“A lot of this [industry] is, 'I met this person. They have a problem. They don't have the time to go do this. I told them I could save them money, and I did it,'” Jeter said. “That doesn't work for the provider. The provider wants a contracted, obligatory relationship, and they want to know that that account is managed.”
And as TAs increasingly sell solutions baked with AI and security and grow their foothold in highly regulated industries, they will need to add resources in compliance, Jeter said.
“If the private equity guys build this right, you'll have mass organizations with certification-level compliancies internally,” Jeter said.
TAs will be happy to hear that the insurance brokerage market remains a relationship-based industry.
Clark said it was easy for an entrepreneur to spin up their own insurance agency twenty years ago because being a client’s trusted advisor was the starting point. Although billion-dollar platforms have emerged in the insurance market, the foundation still stands.
“At the end of the day, the power in the industry sits with the individual agent,” he said. “I would say it's rare that you'll find a client that says, 'I just love Marsh McLennan. I just love Hub.' No, they say, I love my insurance agent who has taken care of me for the last 10 years.”
