Acquirers Bet Change in Control Won't End Flow of Business

While private equity investors may reap rewards from owning and growing a large well-known wholesale franchise like Crump Insurance Services Inc. or Swett & Crawford Group, there are risks associated with making such an acquisition.

 

J.C. Flowers & Co. L.L.C. will find out firsthand about these risks. Last week, the New York-based private equity firm purchased Crump from Marsh & McLennan Cos. Inc. Terms of the deal were not disclosed.

 

And although the levels vary, a certain amount of business from retail brokerage operations flows to wholesale subsidiaries. In fact, it is that flow of business and its appearance of a conflict of interest that resulted in Marsh and Aon opting to divest the units earlier this year in the wake of New York Attorney General Eliot Spitzer's investigations into the brokerages.

 

But just how much of that business will continue to flow to the wholesalers after their divestitures is a risk private equity players will have to contend with, insurance analysts say.

 

"It's probably the No. 1 aspect that's being looked at as both an opportunity and as a threat," said John Ward, a Cincinnati-based independent insurance analyst who is currently advising a large private equity firm looking to invest in the wholesale market.

 

"If you're an investor or private equity firm looking at Swett & Crawford...you're concerned about the level of business being referred by your parent and whether you can depend on that going forward. But at the same time, you're looking at other firms in similar positions and looking at the opportunity to take away market share from other wholesalers," said Mr. Ward.

 

"The amount of volume that was flowing through Marsh and Aon to their wholesalers will be addressed in the transaction," said Rob Lieblein, president and managing principal with WFG Capital Advisors L.P. in Harrisburg, Pa.

 

Mr. Lieblein and Mr. Ward were interviewed before the Crump deal was announced.

 

"I would imagine it will be dealt with from a pricing standpoint whether in the deal structure, as to how much is paid up front vs. how much is paid over time, or in the overall pricing" of the wholesale operation, Mr. Lieblein said.

 

For example, the deal structure might include some type of earn-out, a supplementary payment based on earnings above a certain amount, that would indicate that a parent company would have to place a certain amount of business through its wholesaler for a certain period of time, Mr. Lieblein said. This might take the form of attempting to keep existing client relationships intact with the wholesalers for a year or so.

 

He noted, however, that "that's going to be a very sensitive issue they are going to have to deal with," given that Aon and Marsh are divesting the units due to perceived conflicts of interest. "They would have to be careful with any deal structure that would say, `We're going to continue to use you just so we get the best deal for the company,"' he said.