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Sketched on a backyard napkin
The backyard pitch
GTCR, a Chicago private equity firm, knew Henderson from the board of Ironshore, an insurance carrier it had backed. He was a legend in the industry, and two GTCR partners would swap seats at dinner to sit next to him. When he was ready to do something different, he called them to Orlando.
GTCR committed several hundred million dollars, and Henderson brought three decades of knowing the industry's people and acquisition targets. About six people went on the payroll, funded with equity, before the company owned a single business, because everyone wanted to work for him.
The napkin plan pays off
The first platform was a small insurance business in Cincinnati, Ohio, with enough infrastructure for Henderson to professionalize. The napkin plan called for $40 million of EBITDA in five years, and the company was more than three times ahead of it when the fifth anniversary came up. GTCR sold, since Henderson had promised the people he recruited an equity payday.
Doing it again
Later, Henderson called one of GTCR's team, who was walking through Disney World with his young kids, and proposed doing it again. His new owners wanted to sell. GTCR bought the business back almost six years ago, grew it past a billion dollars of EBITDA, and announced its sale to Arthur J. Gallagher last November.
Why do buyers roll up many small brokers?
Small insurance brokers typically sell for a lower multiple of earnings than large ones. A platform company buys many of them and combines their earnings into one larger business. That larger business can then be valued at a higher multiple than the pieces were bought for. Finance professionals call this gap multiple arbitrage.
Why do private equity funds sell so soon?
Private equity funds are usually set up as limited partnerships with a fixed life, commonly around ten years. Investors expect their money back with a return before the fund closes. That pushes managers to buy, improve, and sell each holding within a few years. Common exits include selling to a larger company, selling to another private equity firm, or taking the company public. A sale from one private equity owner to another is called a secondary buyout.
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