With the takeover of Ed, BGC president Shaun Lynn believes he now has the person in its CEO Steve Hearn to help it realise its insurance ambitions. The pair spoke to Jonathan Swift about how an investment in technology, talent, globalisation and a finely tuned acquisition strategy will help it take advantage of the market tailwind to succeed
“When I first went into Lloyd’s it took me back to the floor of the London Stock Exchange. I recognised a lot of things about how we traded back in the day and I said to [Besso non-executive chairman] Colin Bird, there is such an opportunity [in insurance] for BGC because we have lived through this; and for the second chapter of our financial life we could bring our knowledge into this market.”
Those were the initial impressions of BGC president Shaun Lynn on entering One Lime Street, although he admits to have been amused by underwriters and brokers walking around the City with bulging slipcases of paper for many years.
Today Lynn helms one of the pre-eminent global inter dealer brokers, BGC, having played a key role in spinning the business out from Cantor Fitzgerald in October 2004. But following the acquisition of London market broker Besso at the beginning 2017, a deal for Ed in September has seen him acquire – in its CEO Steve Hearn – the man he has faith in to oversee a new vertical push, insurance. With Lynn hoping BGC’s learnings in regards the use of technology, underpinned by its $1.7bn investment over two decades, will give it a platform to become a force across the world.
“Myself and [BGC chairman and CEO] Howard [Lutnick] made a plan some years ago based on the footprint we had built through technology and our understanding of the [inter dealer] brokerage market. We decided broking takes on many different aspects, but that it always involved people,” Lynn says.
“It is about people and relationships. But you also need partners. And when we entered commercial real estate [in 2011] we had a partner in Barry Gosin who had taken his firm [Newman Knight Frank] as far as he thought he could; and he was looking for the next chapter in his life.
“And what we did is reach an agreement for him to come into BGC and build that franchise aggressively with our infrastructure, manpower and financial capability. And we intend to do exactly the same with Steve in the insurance asset class.”
A runway to grow
Lynn admits that insurance was among a number of verticals it looked at, beginning talks with Besso as far back as 2011.
“And we continued talking,” Lynn continues. “And eventually completed that deal, with the proviso that we had a good runway to grow organically, hire the best talent and acquire likeminded businesses that will be with us long term. But the biggest thing we needed was a professional, someone like Steve.”
Hearn for his part had been with Ed for three years, joining from Willis to facilitate the rebranding of Cooper Gay Swett and Crawford to Ed, the sale of its North American business to BB&T, restructure, and the turnaround in financial performance. Before then he had experience of both large [Sedgwick and Marsh] and small [Glencairn] employers and overseen deals such as the acquisition of Miller while at Willis.
Having met with Lynn last year, Hearn was interested in what BGC could offer his business, but to do a deal he needed the buy in from his management team, and most importantly Ed’s lead investor Lightyear.
“Lightyear had owned us for six years and it had to be right for everyone for the transaction to work,” adds Hearn. “We had turned the organisation around and concluded four consecutive quarters of strong growth, so there were some metrics that proved what we were doing was working. We had also hired 180 people since we rebranded and so there were a lot of proof points.
“From the very first conversation I had with Shaun, his articulation about why BGC wanted to come into the insurance business – that was my first question too – has been consistent and compelling. We had lots of people interested in working with Ed as prospective investors, but he arrived not just with capital, but a desire to transform the sector with experience in other intermediated areas and a $1.7bn investment in technology. BGC looks for sectors where talent and technology can come together and the insurance industry is ripe for that; and Shaun articulated that in our very first conversation and every one since. And that has resonated with us and excited us.”
BGC Partners formed after Cantor Fitzgerald spins out its voice brokerage business
Merges with Maxcor Financial Group
Merges with Espeed
Acquires MINT Partners and MINT Equities
Acquires US business of real estate advisory firm Newmark Knight Frank
Acquires assets of Grubb & Ellis to strengthen commercial real estate arm
Agrees to sell Espeed to NASDAQ OMX Group
Acquires Apartment Realty Advisors
Completes largest acquisition to date with takeover of GFI Group
Notches up three financial services acquisitions and five real estate purchases throughout the year
Acquires Berkeley Point Financial
Acquires Poten & Partners Group, a ship brokerage, consulting and business intelligence firm
Spins out real estate advisory firm Newmark
The big story
The ultimate plan is for Hearn to take up the reins as CEO of BGC’s insurance holding company with a board that will sit above the individual companies, that to date numbers Besso, and when regulatory approval is granted – most likely in quarter one 2019 - Ed.
“We told Besso from the start about our intentions and Colin Bird knew this was where we were going, as did [co-CEOs] Russ [Nichols] and Rob [Dowman],” comments Lynn. “That our intention was to grow and build in the insurance, reinsurance and MGA space. And Besso has gone from strength-to-strength and we are very proud about that.
“We have empowered them to think bigger and bolder and not be hesitant to build their business. And also attract people and tell them the [BGC insurance] story; because it has been a small story to date, but it is now part of a much bigger one.”
Which brings us to the technology. A topic that is especially timely with what is going on in EC3, something Hearn has been heavily involved with in his previous capacity as chair of the London Market Group.
“A lot of the technology efforts in the London market are virtuous like PPL. But the reality is that those are simply putting technology around the existing process. The real opportunity is far more significant than that, and not just in London, but globally,” explains Hearn.
“Today 42 cents of every dollar of customer premium disappears in administration costs of one form or another; whether it is brokerage, underwriter salaries or friction. When you start to understand in the world of BGC what electronic capability can bring, in terms of efficiency, compliance, economics, margin and effectiveness, there is a massive opportunity.
“Even walking around the trading floor [here in Canary Wharf] and comparing it to us sending people up and down Lime Street with bits of paper under their arms demonstrates the opportunity that is there, and that is not to just become another incumbent. There is a more significant one bringing their experiences in relevant financial services sectors and marry it to our world.”
Five words to best describe Shaun
Five words to best describe Steve
Reflecting on his experiences as a trader, Lynn comments: “Back in the 1980s it was pretty much all voice. Then, whether we were dragged or pushed, we adopted technology and it wasn’t just about the execution, it is also about pre and post-trade. The information flow when a trade is done, created and agreed - and how that gets to the back office.
“And one thing that came out of the credit crisis was that the regulator was demanding much more transparency around the sturdiness of institutions. They needed to know in real time effectively where each bank and institution was - and we have to supply that information in milliseconds.
“And if you can’t deliver that to an institution they won’t talk to you. You might have the best price, but unless you can tick all the boxes they will not onboard you. And you cannot stand still to stay ahead of what the markets expect, you always need to look towards the future.”
As Hearn and Lynn were concluding the deal with Lightyear for Ed, news broke that Marsh & McLennan Companies had agreed to buy JLT in a £4.3bn deal. Hearn comments: “Occasionally you get a tailwind and so when we started these conversations in May 2017 we could not have envisaged that Marsh would acquire JLT. Well we could have envisaged it, but the fact that MMC would acquire JLT was not part of the investment thesis. I had a telephone call from Shaun on the day it was announced and we agreed it was good news because opportunities will inevitably arise from clients, from prospective employees, and frankly the insurance market. Because we have become more relevant to certain parties as a result of that transaction.”
Lynn and Hearn make no secret that BGC will buy again in the broker or MGA space, but that it will not rack up deals for deals sake.
“My view that there is a lot of private equity in insurance, and that has an attraction for certain sellers,” Lynn explains. “But from our perspective we want to be attractive to the companies that want to marry with a like-minded partner and want to go forward and grow. We are not looking for an exit strategy, we are not sellers. We are long terms holders and builders of businesses. And that is the type of institution and company we are looking for.
“From Steve’s point of view, he will highlight the institutions [he feels fits our criteria] and I will sign the cheques.”
In terms of drivers for businesses looking to sell Hearn identifies a raft of issues from the cost of regulation to succession and equity structures. “Also it is all very well been owned by private equity, but you could be bought by PE again, and even again,” he adds. “And at some point you could even get owned by one of your competitors and that is a problem. You have got that dynamic in there. Another factor we have to be aware of is globalisation; London no longer has the monopoly on insurance and reinsurance specialty, and there are lot of brokers in EC3 who only offer a London proposition today. So people are starting to understand those kind of issues.”
Expanding on the type of businesses he might be getting Lynn to dust of his cheque book for, Hearn says: “People who want to operate the old model will not work; we need people who can embrace the dynamics we have described and can see the way the world is going. And there are plenty of smart, bright people out there who understand that and we are going to go out and get them.”
In terms of positioning, Hearn notes that Ed and Besso are true to the M&A cliché, complementary businesses, in that there is little crossover between them.
Whether future deals pose more of a challenge is not a concern for him either: “In London alone there are many things that neither Besso or Ed do, or that we do but are subscale in, and so there are opportunities for us to acquire teams of businesses which give us depth, breadth and scale in some quite interesting sectors. So there is a long way to go before we run into any problem [in terms of duplication].”
Hearn adds that today there are no geographies or markets that stand out as priorities. And asked whether it would even look at regional SME brokers as Arthur J Gallagher has, he remarks: “You can never say never, but that is not front of mind for me.”
Looking at how BGC’s insurance businesses could work with other areas of the BGC empire, Lynn says: “[With Besso] we have been working quite a lot on ILS opportunities and that will hopefully bear some fruit in the near future. That has been our main focus. That is the big opportunity. There are definitely some hedge funds that are looking to become more involved in insurance and we know we can help, and that is a natural marriage for us.”
Hearn concurs: “There is an intellectual property synergy here; the capital markets guys I met here know more about ILS than anyone I have met in the reinsurance and insurance industry in 30 years, so being physically proximate to people like that has its benefits.”
The purchase of Ed by BGC might not be on the scale of MMC and JLT; it might not have even garnered as many headlines as Ardonagh and Swinton, but it does stand out given the size and ambitions of the purchaser, and lack of disruption to the acquired when compared to many other deals in 2018.
Which poses the question what has Hearn heard in terms of how Ed’s traditional competitors view the deal: “I would be staggered if the board rooms of the bigger organisations aren’t sitting there and thinking this is significant. In fact a few of my [former] colleagues at senior level have said that, so they will take note.”
When it is pointed out that that over an admittedly short sample size of two years the BGC insurance M&A run rate is a deal a year, Hearn and Lynn laugh but stress there is no explicit target in terms of deals.
“It is fair to say that will continue looking, even more so when the regulators have approved the [Ed] transaction” adds Lynn.
Both are more forthcoming when asked about whether the plan is for the insurance vertical to grow at the rate the commercial real estate one has done – publicly quoted at five times revenue growth since 2011. Which given the combined Besso and Ed business has revenue of around £150m, would mean it being in the region of £750m by 2025.
“I think we would be quite disappointed if we had not got to that figure,” Lynn responds, whilst Hearn smiles and comments: “I have been given a bigger target.”
Lynn concludes: “We of course must do deals that are sensible and within the right parameters that are a good fit. It took a while to find and agree the Ed deal and we are not looking for people to sell and run away.
“We want people that are hungry and share our beliefs and it not revenue for revenues sake. We want to go to the next level and believe that technology is the DNA and backbone for business growth. I need people, want people to believe in that, and that will attract the right ones to us.”
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