Baldwin Risk Partners, founded in 2011, went public at $14 a share in October 2019, assuming the name BRP Group. The insurance broker operates in four areas: a small Medicare segment, middle market and “main street” segments and a faster growing specialty segment.

BRP is a highly aggressive roll-up.  The company closed 16 acquisitions during 2020 for total consideration (cash/equity, before earnouts) of $980 million. The company’s oft stated goal is to be a top 10 insurance broker within eight years.   

BRP is a story stock, fueled by the CEO’s hype.   The company’s long-articulated organic growth rate of 10% to 15% is likely to be called into question as Q4 growth comes in at the low end of the range. The industry has not sustained that level of organic growth at any point over the past 15 years.  Investors have been promised that margins would increase as the business scales.   Margins are not scaling.  The company has struggled to maintain ~15% EBITDA margins.  Margins are headed 200 bp lower during at least the next quarter, as BRP sees the need to invest in the business to grow it.   Below-peer margins argue against above peer-valuation.  BRP’s aggressive roll-up acquisition strategy, a major part of its story, will soon be constrained by its balance sheet.   Absent the story, BRP’s valuation should drop toward peers Arthur J. Gallagher (AJG) and Brown & Brown (BRO). 

BRP touts many things about its business model:

-          provides “insurance as a service” (aren’t all insurance brokers providing a service?)

-          features a “sheltered distribution ecosystem”

-          is an “InsureTech” company (comparing itself to Netflix)

-    led by its crown jewel, MGA of the Future, which “taps into white space across the habitational real estate risk infrastructure” (MGA is a wholesaler of insurance to property management software companies, splitting commissions with them)

-       operates a “flywheel”, building a “forever business” based on “permanent capital” (recently needing to raise $400 million in expensive term loan debt and twice issuing shares in 2020 to close acquisitions). 

BRP has never made a profit yet sell-side expectation is an inflection to $73 million and $113 million adjusted net income in 2021 and 2022.   BRP’s aggressive roll-up is also burning cash rapidly while sending S/O from 4.7M to 33.9M over the past two years.                                                                                                                                     2017           2018        2019               LTM

BRP trades at a steep premium to its peers, despite lower margins and an organic revenue growth rate which has slowed to 10% for Q4 2020. 

BRP paid 12.7x EBITDA for 2020 acquisitions (>14x in Q4).  This EBITDA is heavily adjusted and based on projected EBITDA 12 to 18 months in the future.  BRP projects the 2020 acquisition multiple drops to 10.3x with 10% growth and 8x with 25% CAGR over 5+ years.  While BRP suggests it can grow at these rates by noting the first-year growth of prior acquisitions being 21%, subtracting home-run acquisition MGA of the Future, that CAGR drops to 11%.   It will be very difficult to grow much faster than 10% in an industry growing at half that rate.

The fact that BRP is paying 12 to 14x EBITDA for deals means they are probably overpaying.   Only the best brokerage firms, led by seasoned management teams that remain in place for a long time, operating sustainably growing books of business are accorded that valuation today, according to one industry veteran involved with a top 20 roll-up.   Multiples in that range were uncommon in the past and are unlikely to be sustained once interest rates rise.

Private equity and low interest rates have driven multiples paid for insurance brokers up.   We talked to an insurance broker who sold in 2016 at 7.9x EBITDA (before earnouts) to a roll-up that today is a top ten industry player.   His parent group is losing out on deals to competitors who are offering multiples in the 10x EBITDA range for brokers with less than $10 million EBITDA.  His M&A team is typically seeing multiple well-capitalized bidders approaching each deal.  This broker referred to the past year’s environment as “frothy” now giving way to a “feeding frenzy”.    At least ten major PE-backed buyers are pursuing deals while carrying leverage of seven times EBITDA.  Over 800 middle market agency transactions were conducted in the US during 2020.    BRP is a buyer in a seller’s market.

BRP’s acquisition strategy is fragile, as it is not a meaningful cash generator.   It needs the capital markets to be open, witnessed by equity and debt issuances last year alongside BRP deal making.  BRP has had the advantage of a high stock multiple when making acquisitions.  However, with margins not scaling and organic revenue growth trending down, there is less support for BRP valuation at TTM EV/Sales of 7.2 and EV/EBITDA of 65.    BRP is unlikely to be able to issue more debt to fund deals.   BRP’s final 2020 acquisition took net leverage ratio to 4.3.  The company has stated its prudent leverage ratio range is 3.5 to 4.0x.   While $420 million remains available to draw on credit facilities to do deals, BRP’s balance sheet is likely to limit its deal making in 2021.

One other issue the company faces: following BRP’s 2018 audit, the CEO and CFO conducted an evaluation of the effectiveness of disclosure controls and procedures and concluded that, because of material weaknesses in internal control over financial reporting, these disclosures and procedures were not effective, which remains the case today.

Peers Arthur G. Gallagher (AJG) and Brown & Brown (BRO) trade at 15 and 16 times 2020 EBITDA, respectively. BRP is expected to generate $43 million 2020 EBITDA, which equates to an EV of $688 million at a multiple of 16 times EBITDA.   Net debt of $50 million and minority interest of $193 million against that EV, points to a market cap of $445 million on a peer-like EV/EBITDA multiple of 16, i.e. 70% below the current market cap.  The $400 million term loan and 10 million shares (23% dilution) issued in Q4 (and not counted in the above) add further weight to BRP’s equity value.