Mergers and acquisitions are top of mind for many in the industry as administrators are being acquired at a rapid pace. In the last three months, it has been announced that Portfolio Group is being acquired by Abry Partners, American Auto Guardian was acquired by Amynta, and Spectrum Automotive Holdings (d.b.a. Vanguard Dealer Services) was acquired by Cornell Capital.
"There is a significant level of buyer interest resulting from the deals that have been in market over the past few years, and valuations are higher than we have seen."
Over the past three years, more than 10 administrators have been acquired by strategic and private equity firms … and more deals are in the market.
Across all sectors of the economy, private equity has ample funds to be deployed, which, coupled with historically low-cost debt, is driving competition for deals. As of June, there was $1.5 trillion of private equity that had not yet been invested.
A noticeable trend in private equity investing is that, according to Pitchbook, add-on investments now account for 68% of all deals. Add-on acquisitions average down the aggregate acquisition multiple over time and drive growth for the original platform. There are numerous examples of add-on acquisitions in the F&I industry, including Madison Dearborn Partners-backed Amynta’s aforementioned acquisition of American Auto Guardian.
What Drives the Value of Administrators?
There are multiple factors driving value, but the most important are persistence of and growth opportunities for revenue, such as:
- Distribution channels: Distribution through a direct sales force is more valuable than distribution through independent agents. When an administrator owns the relationship with the dealership, there is a higher certainty that those sales will continue.
- The stickiness of relationships with dealerships: Buyers evaluate the strength and persistence of relationships. Relationships built on more than product sales — such as income development, private label products, reinsurance, compliance training, and website development — are stronger.
- Client diversification: Higher diversification insulates administrators from the volatility arising from the loss of a client. Note that revenues by client are measured at the dealership group, not store, level. Generally, the minimum threshold per dealership group is 20%.
- Scale: Larger companies trade for higher multiples. At scale, administrators likely have more diversification and efficiency.
- New vs. used mix: Private equity buyers have concerns about declining new car sale forecasts and currently prefer a mix of more product sales on used vehicles.
- Financial performance: Continuously improving historical and projected profits.
How Can an Administrator Prepare to Sell?
First and foremost, a company should have its financial house in order. The financials should be audited and a sell-side quality of earnings on modified cash financials should be completed. The finance team should have a fast monthly close (15 days or less) on both cash and modified cash financial statements.
Second, a third-party actuarial report is a necessity. The insurance company providing the CLIP evaluates an administrator’s reserves, however, this will not be sufficient in a buyer’s diligence process.
If the seller does not have a third-party report, the buyer will bring in an actuarial firm to review the portfolio, which, can take several months and delay the close of a deal. Even with a seller report, the buyer may bring in its actuarial firm to review the portfolio.
Why sell now? Well, there is a significant level of buyer interest resulting from the deals that have been in market over the past few years, and valuations are higher than we have seen.
Gina Cocking is a managing director and partner at Colonnade Securities, a boutique investment banking firm that specializes in mergers and acquisition and capital raising advisory services for clients in business services and financial services.