Insurance Post

Interview - Investor looks to shape a new sector

After deciding to enter the insurance broking market in 2003 and setting up the Oval group of companies - which now generates approximately £30m in premiums - Caledonia Investments' strategy has so far proved successful. Executive director John May tells Ralph Savage of his plans

Had Caledonia Investments been pumping money into the insurance broking market since the company first began, it would have had an outside chance of hitting Post Magazine's front pages and being delivered by the Penny Post from which PM took its name. However, it was not until 2003 that Caledonia, previously a family-owned shipping company and latterly a publicly quoted investment trust, decided commercial broking was in need of a cash incentive.

Two members of the Cayzer family, which formed Caledonia's predecessor Clan Line Steamers in 1878, sit on the board. As John May, Caledonia's new executive director explains, the company's investment philosophy has always been one of long-term support: "The Cayzer family is still a significant shareholder," says Mr May. "Caledonia, however, has been a diversified investment company for 40 years. It has backed businesses during that time in several sectors, but has had a particularly good track record in the financial sector. Businesses in which we have invested include Close Brothers and Isis, both of which we have been supporters of for many years."

The formation of Oval last year signalled a commitment to the UK commercial broking market that had hitherto been the exclusive focus of network builders like The Folgate Partnership and The Broker Network. However, Mr May is quick to assert Oval's - and Caledonia's - approach to investing. "Caledonia's stance is that of a long-term supportive investor, enabling companies to build their businesses. That's very important because where we have an interesting concept, backed by interesting people, we're quite happy to come in with financial investment and lend the benefit of the experience we've had in how to successfully develop businesses. After all, a company is primarily a function of the quality and motivation of the people who will run it."

With new initiatives, Caledonia would be looking to invest approximately £15m-£20m. Such a figure is indicative of its investment in Oval.

Ripe market

Mr May continues: "Financial services made up a 29.8% weighting of our portfolio in 2002/3. Insurance was an area of interest, though we didn't have any direct exposure until now. Our interest started in the commercial insurance broking sector, observing how it seemed ripe to bring together some of the well-established regional businesses.

The market is under pressure from regulation, so it made sense to get properly structured in an organisation that could handle the regulatory and technological challenges going forward. If you do bring together a critical mass of business, you can also develop some mutually profitable partnerships with product providers. If you were an insurance company, you would clearly like the opportunity to develop a good relationship with those responsible for a great deal of premium income."

Establishing Oval itself was the first step for Caledonia. Mr May said work on the concept was carried out through an investment house in Edinburgh called Noble & Company in the early part of 2003.

"I joined in September and the first acquisition was already under way in the form of RP Hodson. Having completed that, it then became a case of demonstrating this was attractive to other companies in the sector. It was important that our first move would capture the imagination of the commercial broking sector. I think we've achieved that, given the prominence Bland Bankart has in its area - it is the leading broker in the east Midlands. We're located all down the right-hand side of the country now, but RP Hodson also has a presence in the City."

The Oval group of companies is now turning over approximately £30m in premiums in a fiercely competitive market. Philip Bland, chief executive at the Leicester-based broker, said that no fewer than five other suitors had been courting his firm (PM, 22 April, p4).

Regional interest

Mr May says Bland Bankart was persuaded by Oval that the investment would not remove the broker's autonomy. "It is always quite reassuring that there are like minds in terms of perceiving the opportunities, but there are some key differences between us and the other consolidators. Our approach is to recognise that the businesses that will benefit Oval are strong, entrepreneurially run regional brokers.

"In bringing them together, there are three key ingredients. Firstly, you have to create the motivation for people to continue to think entrepreneurially. Therefore, continuing ownership in the shape of shares in Oval is important.

"Secondly, they need to be able to retain the relationships they have with their clients. The reason they are successful is that they are perceived as service-orientated and relationship-orientated, with strong client bases. And thirdly, creating an environment for people to realise their personal potential, but not structured in an overly corporate way."

And again, Mr May adds that Oval is a "minority investor" that does not seek to manage businesses itself. "We seek to back management teams that are capable of running their own businesses in a relationship that is strategic and financial rather than operational."

Brand and deliver

While Mr Bland and Mr Hodson remain largely in control of their companies, there will always be questions raised as to the future of the brands they have worked so hard to develop and nurture. Mr May seems unclear where the Oval brand will fit. "They (Bland Bankart and RP Hodson) are coming together because they share the same view of this opportunity. Certainly there is an intention to develop the Oval brand where appropriate, but it is key to make sure the businesses retain the idea they are controllers of their own destiny."

Oval's acquisitions will come thick and fast during the next 24 months, with Mr May confirming a target size of £100m and an eventual listing to gather more funds and continue the expansion. It will assess companies both large and small, creating a hub-and-spoke network, and it would seem there is no place for the Oval brand there either.

"We'd like to take the Oval concept of retained ownership and control in the business. We'd like to be a beacon in the business for others to follow. There are several discussions with businesses large and small going on. Looking at it from Caledonia's overall investment appetite, we're backing Oval. I think within the context of that there's a whole range of businesses that are available to us. Some of them are small, which would join regional hubs with major brands. Some of the smaller firms for whom the future is a little more daunting would be attracted to those hubs. It is a combination of establishing a footprint through significant acquisitions, not just organically but through smaller acquisitions into those hubs."

From the commercial broking market's point of view, Oval should be classed as a consolidator. It seems clear from Mr May's testimony that regional brokerages will retain their identity but Oval has influence as an overseer, with the recent recruitment of Stephen Bright as a finance director to join the executive directors (Philip Hodson and Lochie Spearman) who were there when the company was established. "It's important for us to see the business is properly resourced," says Mr May. "We have monthly board meetings and the objective is to recognise and become a successful business. We would ideally look for a listing within a reasonable time frame. We need to get those established early on."

Mr May says he would, however, be relying on the management of Oval's growing network to identify potential acquisitions now that it has the scale to do so. "We would like to reinforce the opportunity for informal dialogue whenever the need arises and when Caledonia can be helpful, such as discussions of potential acquisitions. It's a case of being active and looking for acquisitions, not waiting for people to come to us."

Target practice

So is it possible to make an informed guess of who the next target would be? The list of potential acquisitions is dwindling all the time and Mr May will not be drawn on specifics, only saying a company with the right characteristics can expect to receive a phone call. "It is ideal to find a business that is on a strong growth curve. The main idea is to find a business on a good foundation, which has a well-established franchise in the area it operates. We're happy to look at businesses that have an element of commercial broking and financial services, which again is different from other networks. We want profitable businesses because there's enough work in supporting the companies we've bought, without taking on the burden of a turnaround situation."

Long-term holdings

One thing is clear in the Caledonia/Oval strategy for growth and consolidation. The investor values longevity and, as an £800m unit trust, the group promises long-term holdings to its shareholders. "In Close Brothers' case, we've been shareholders for almost 20 years. This shows we are in the business for the long term. It's a very successful business and has learnt the trick for how you can build businesses and retain the motivation of the people who run those businesses." Indeed, Caledonia's annual report points to this fact with the acknowledgement of Close Brothers' outgoing managing director in October 2003: "Rod Kent retired after 26 years of leadership."


John Rastrick, investment director at 3i, a major investor in broker Smart & Cook, talks about the venture capitalist's plans.

3i is one of the best-known names in global private equity finance and in early March hit the insurance headlines by placing part of a £57m funding of Yorkshire-based broker Smart & Cook.

According to John Rastrick, the finances were formed through a combination of equity and debt financing, the latter provided by Smart & Cook's banker Royal Bank of Scotland. However, a confidentiality arrangement means 3i's precise contribution remains a secret.

3i's investment might never have happened had it not "usurped" a US-based VC with whom Smart & Cook's board was close to making a deal. "Royal & Sun Alliance had pulled out and Smart & Cook was looking for finance," explains Mr Rastrick. "We saw Geoff Cook was talking with a specialist VC and got in ahead of it."

The company's attraction to insurance is nothing new, Mr Rastrick adds: "We have had holdings across a wide range of insurance businesses since the 1970s. Most recently we placed £30m into the management buyout of Aspen Re; the Benfield Group; Frizzells, which we exited in the mid 1990s; and Burke Ford Holdings, which was sold to Jardine Lloyd Thompson in 2000.

"Most industry sectors go through a period of change - commercial broking is no different," Mr Rastrick continues. "I know it's not the sexiest subject but take caravan parks, for example, where there are lots of small, privately owned businesses protected by legislation but needing capital investment to accommodate demand as well as the fact that so many owners are approaching retirement age."

Indeed, the parallels with commercial broking are clear. And the deal has generated much publicity. Mr Rastrick says: "Momentum is increasing and we track and monitor the market carefully. Obviously the publicity from the deal has thrown up some more opportunities. We have six more firms at the top of our list but there are probably more than that. We want to go after businesses before anyone spots them and with Smart & Cook being so experienced in making acquisitions, we have the right management in place."

By its very nature, 3i looks at investment opportunities with the view to making a healthy return and developing an exit strategy. What this means for Smart & Cook is unclear. Mr Rastrick explains: "It is widely known due to 3i's heritage that we are a long-term investor. Some of our holdings in the insurance industry have lasted 10 to 15 years. However, we have a focused approach to assess when an investment is reaching its peak. While we are never prescriptive, an investment will typically be 3 to 5 years. We have a shared ambition with Smart & Cook and there are various options for the exit strategy but we won't suddenly start talking about them when the time comes; it's on the agenda now. An Alternative Investment Market or FTSE listing is viable and there are other potential buyers."

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