U.S. private equity firm KKR & Co and Canadian pension fund manager Caisse de dépôt et placement du Québec agreed to buy USI Insurance Services from Onex Corp in a US$4.3 billion deal, including debt.
The deal is the latest in a string of mergers in the insurance market, which has not grown quickly enough to support the smaller brokerages.
“It’s a sector we like,” Caisse Chief Investment Officer Roland Lescure said in an interview. “It’s quite defensive, it has high cash-flow generation, and it’s a growing sector where there is consolidation taking place.”
The Caisse, Canada’s second-largest public pension plan, is buying businesses to help it diversify from public equity and fixed income markets.
The pension fund, which has net assets of more than $270 billion (US$202 billion), wants to have 30 percent to 35 percent of its investments in areas such as private equity, infrastructure and real estate in the next four to five years, compared with 28 percent currently.
“At a time when there are lots of fears and questions on the potential protectionism and border adjustment tax,” Lescure said, “being exposed to small and medium companies is a safer way of exposing yourself to the U.S. economy.”
Valhalla, New York-based USI had net debt of about US$1.82 billion as of December 31 and generated earnings before interest, taxes, depreciation and amortization of US$353 million in 2016.
“USI … is uniquely positioned to help address the risk management, insurance and employee benefits-related needs of small and medium-sized business owners,” said Tagar Olson, head of KKR’s financial services investing practice.
Canadian private equity firm Onex bought USI in December 2012 for US$2.3 billion from Goldman Sachs Group‘s private equity arm, funding US$702 million of that through equity and borrowing the rest with debt placed on the company.
The biggest deal last year in the insurance brokerage sector was the merger of Willis Group Holdings and Towers Watson, which created Willis Towers Watson Plc, a company with a US$17 billion market capitalization.
Last November, Greg Williams, the chief executive of Acrisure LLC, an insurance brokerage that was controlled by U.S. private equity firm Genstar Capital, completed a US$2.9 billion management buyout of the company.
USI has been very active in buying small regional rivals. It has been seeking to beef up USI ONE Advantage, an interactive platform that helps the company share information with sales consultants sitting in offices around the United States.
KKR and the Caisse said they expected the deal to close by the end of the second quarter.
New York-based KKR managed US$129.6 billion as of the end of December.
Update: Toronto-based Onex said that upon completion of the USI sale, it will have received proceeds of about US$2.1 billion, including a prior distribution of US$181 million in 2015. This translates into a gross multiple of invested capital of 3.4 times and a 34 percent gross rate of return, Onex said.
(Reporting by Sweta Singh in Bengaluru and Matt Scuffham in Toronto; Editing by and Lisa Von Ahn)
(This story has been edited by Kirk Falconer, editor of PE Hub Canada)
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