MarshBerry: Specialty distribution M&A set to pick up amid strong buyer demand

By David Bull

Feb 28 - (The Insurer) - After a significant drop in deal volume last year, the number of M&A transactions in the specialty distribution space is expected to pick up this year, according to MarshBerry.

Speaking at the firm’s Peak Performance Summit in Park City, Utah earlier this month, vice president Pete Kampf highlighted a decline in deal volume from 181 to 120 transactions.

He attributed this to demand outpacing supply in the specialty distribution space.

The overall volume of deals in the wider U.S. insurance distribution space increased by 5% last year to 847 announced transactions, which was the third-highest annual total on record.

Kampf suggested the 33% decline from 181 in 2023 to 120 in 2024 was linked to the smaller number of potential targets in the sector compared to the wider industry.

For 2018, MarshBerry estimated there were around 2,000 independent specialty firms, compared to the much larger population of around 30,000 retail brokers and agencies.

Prior to 2024 there were “really strong” deal volumes for specialty firms of between 170 and 181 transactions in the previous few years.

“Each of those years, 9% to 10% percent of the independent specialty firm marketplace was consolidated. So, of course, that’s going to drive some limited supply of those firms that are still willing to sell. Even in 2024, at those lower deal volumes, 120 transactions is still 7% of the marketplace consolidated,” Kampf observed.

He added that compared to the higher volumes seen in the retail space, specialty firms are consolidating at 2.8x that seen in the retail space in 2024.

Kampf noted that, while the volume of deals was down in specialty distribution, the quality and size of some of the significant transactions that did get done was “very noteworthy”.

PUBLIC ADVANTAGE

Although PE and PE-backed buyers maintained their overall dominance in relation to the volume of deals done, publicly traded brokers took advantage of their “unique” market position in 2024 to be active acquirers.

“In a heightened interest rate environment, you have these publics that are leveraged at two to four times, with the private equity-backed world closer to six to eight times.

“So with a little more flexibility with their capital paired with … the increasing valuations these firms are getting in the public markets, they were in a unique position. They certainly took advantage of it in 2024,” he commented.

MarshBerry included analysis of the most active buyers in 2024, with Hub’s Specialty Program Group, Ryan Specialty and DOXA sharing top spot with four deals apiece, followed by Amwins and Bishop Street Underwriters at three each.

Kampf highlighted a “new trend” of the emergence of new buyers of specialty distribution assets, also pointing to PE-backed Beyond Risk, and High Street’s specialty arm Brightstone.

“What’s going to help drive these rebounding volumes is the deals that got pushed out of Q4 2024 into 2025 after the Trump administration election lessened concerns around tax changes as well as the next wave of specialty buyers. Additionally, these new buyers entering the marketplace are likely more willing to look downstream to sellers with less than a million dollars of EBITDA,” he predicted.

MarshBerry’s Kampf also commented on the record valuations being seen in the specialty distribution space, identifying a widening gap in valuation spread.

All-in EBITDA multiples for specialty distribution firms in the U.S. ranged from around 12x at the low end to the low 20s at the high end last year. Overall, valuations on the high end were driven by strong synergy opportunities specifically on the distribution front, as well as a rising rate environment resulting in high earn-out payments.

For specialty distribution firms, the median valuation went from around 12x in 2020 to around 16x in 2024. For the top quartile it went from around 13x to over 21x over that period.

Looking ahead to 2025, Kampf said buyer appetite is expected to remain strong.

In addition to rebounding deal volume in the specialty distribution marketplace, he suggested valuations could even eclipse those seen in 2024.

Drivers would include a continuation of the “unprecedented” hard market for most lines and premium continuing to flow into the specialty marketplace, both E&S and delegated authority.

“If those trends continue, it means more growth for specialty firms. That translates to stronger valuations if you’re considering a sale, or it will help in hitting your earn-out goals if you’ve already sold and are trying to get that second bite of the apple,” he suggested.