Inside Howden - Targeting World Domination - Part 2

05/09/2023, 01:22 Inside Howden: Targeting world domination – Part 2
Inside Howden: Targeting world domination – Part 2

Adam McNestrie, Ben Wylie 04 May 2023
Howden’s decision to pursue its build-out at hyper-speed, and to seek to

achieve so much simultaneously, dials up demands on the management
team and elevates risk that execution will fail.
Yesterday, this publication wrote Part 1 of a deep dive on the London-headquartered broker,
outlining its plans for world domination. (For those who missed Part 1, here is the link.)
That piece revealed that Howden intends to make the key strategic step in the next two to
three years of entering the US retail market via a transformational $10bn-$20bn acquisition-
cum-merger.
It also covered other aspects of its ambitious growth agenda, including ambitions for mega
deals in Continental Europe and Australia, plus its intentions to build a true global reinsurance
footprint as it looks to disrupt the Big Three’s oligopoly in that segment.
https://www.insuranceinsider.com/article/2bm6d978tq6df74jj9nuo/brokers-section/inside-howden-targeting-world-domination-part-2 1/16
Today, in Part 2, attention will turn to the risks that come with this degree of ambition. The
gear shift on growth the group undertook in 2020/21 has elevated the group’s risk profile
across areas including M&A, financing, integration and liquidity.
Howden has proved an adept manager of risk to date, and there is a case to be made that all
these risks are individually manageable. But they multiply up, and with so many in play, there is
an increased chance that something, somewhere goes wrong.
If taking over the world was easy, everyone would do it.
Here are the key points for Part 2, with the detail below.
Howden is running financing risk given it is not self-funding M&A, and will need big debt
and equity infusions – although it manages capital markets adeptly
The group’s success relies on the continuous advance of the internal share price, with key
producers heavily aligned to its equity value – a halt or step back would be a threat
Team lifts are less expensive than peers think, as they are an M&A proxy at lower Ebitda
multiples, but negative intangibles like reputational damage and the creation of a
mercenary culture are real risks
Moving into US retail will create channel conflict with the £250mn third-party US
wholesale business, with potential for financial pain but also some injury to its
entrepreneur-friendly image
UK businesses struggle to go big in the US market onshore, with underappreciated
cultural challenges creating risks around execution of a US retail pivot
With Howden targeting perma-private status, the group has illiquidity risk, with staff
shareholders and institutional backers ultimately wanting to crystallise gains
The risks of empire building
David Howden has already staked a claim to being seen as one of the industry’s standout
entrepreneurs, but to do this many things at once, he will need a large A-team of executives –
call it 10, 15, 20.
One of the impressive things about Howden has been its success in holding onto the leaders of
the businesses it has acquired. It will need to find a way to extend this track record with the
likes of TigerRisk executive chairman Rod Fox and Align CEO Kieran Sweeney if it is to deliver
on all fronts simultaneously.
Howden's senior leadership includes a significant number of execu

joined via acquisitions
Name Role
David Howden CEO, Howden Group
Dominic Collins Executive chair, Howden Group
Mark Craig CFO, Howden Group
Louise Cable-Alexander Chief of staff, Howden Group
Jose Manuel González CEO, Howden Broking Group
Barnaby Rugge-Price Deputy chair, Howden Broking Group
Andy Bragoli CEO, Howden Global Specialty
Rob Bredahl CEO, Howden Tiger
Rod Fox Executive chair, Howden Tiger
Elliot Richardson Vice chair, Howden Tiger
Richard Clapham CEO, Dual Group
Kieran Sweeney Executive chair, Dual Group
Key: Joined Howden Group via acquisition

Source: Howden Group
A few risks that were written about last year post-TigerRisk are worth flagging briefly, but for
the detail refer to the prior piece.
First, by adding 3,000+ staff via the four deals to a headcount that was around 7,000 before A-
Plan, at the same time as a surge in hiring, Howden risks dilution of its culture.
Second, by growing so rapidly through M&A, Howden is taking on additional complexity risk,
which will make it harder to execute successfully. Building effective global broking machines is
hard work.
Third, if you move fast enough and are looking hard for mega deals, you increase the risk that
you get one wrong and buy a turkey. (This is probably the biggest risk to the group, and the US
deal is of course the one where it is most important to avoid this pitfall.)
All of these risks are still in play, but today I want to broaden out the analysis and look at some
new areas, including a) the risk around financing the business; b) the risk relating to team lifts;
c) risks arising from channel conflict; d) UK-into-US execution risk; and e) illiquidity risk.
Not all of these are equally challenging to manage, and in a number of areas, Howden looks like
a skilled manager of the risk. Others are more challenging.
Howden risk summary
Complexity/integration
Culture dilution
Poor M&A target selection
Financing
Team lifts
Channel conflict
UK-into-US execution
Illiquidity
Source: Insurance Insider
Financing needs
Howden defines itself as a growth business. The group has delivered a 27% revenue CAGR
since 2015 when revenues were only £388mn.
Howden's rate of organic growth has been consistently higher tha

listed brokers'
Annual organic growth of Howden Group since FY 2016, compared to average organic growth rate reported by
brokers
FY Howden Group Average public intermed
2016 8.1% 2.3%
2017 7.7% 3.9%
2018 6.5% 5.0%
2019 11.0% 4.9%
2020 6.0% 3.0%
2021 19.0% 12.6%
2022 19.0% 10.4%
M&A has been a major driver of growth, but in contrast to many acquisitive private equity-
backed brokers, it has a consistent track record of above-market organic growth, which is the
cornerstone of its value creation story.
However, in its current phase, the business is not self-financing even its small M&A. In the year
to 30 September, the business generated just over £400mn of operating cashflow, according
to sources.
Around half of the cashflow was used to pay taxes, dividends to minority interests and interest
charges. In addition, just under £100mn was spent on “investment in strategic initiatives” –
which includes team lifts, a major drag on cashflow.
So around three-quarters of cashflow is absorbed by operating costs and interest expenses.
After other items, such as almost £40mn of investment capex and £27mn of non-recurring
items, around £50mn of cashflow remains.
As such, the firm is self-financing non-M&A expenses – a critical requirement to support its
rating – but is relying on external financing for both new deals and earnout payments.
In 2022, M&A costs comprised around £110mn on deferred consideration on past deals and
~£1.4bn on new transactions.
All told, the group had negative cashflow of just under £1.4bn before financing, it is
understood.
Howden did demonstrate the confidence of its capital markets partners last year through
extensive capital raises, issuing £900mn of net equity to existing backers and almost £950mn
of new debt.
And it followed this by tapping GA, CDPQ and Hg for £300mn of new equity and issuing
$500mn of new debt in March. Sources said the debt raise was 1.5x over-subscribed, despite
coming against the backdrop of the recent banking crisis. When Howden announced the raise,
it said it was supported by 60 lenders, including 10 new lenders.
A number of the privately owned brokers are in this position of relying on external capital to
finance M&A, and debt markets and private equity have typically been all too ready to provide
support.
However, a period of major tailwinds for the private brokers is reversing as the cost of capital
rises, platform valuations start to come under pressure, a slower growth outlook in insurance
threatens and private markets face a tougher macroeconomic backdrop. After the Boom
Times, the private brokers are set to face The Squeeze.
Leveraged debt yields have shot up over the last year

Yield to maturity on the Morningstar LSTA US Leveraged Loan 100 Index since Jan 2021
10%
9.5%
5
0
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr
2021 2022 2023
Index measures the performance of the 100 largest facilities in the US leveraged loan market
Source: S&P Dow Jones Indices
Managing the debt

Howden does look relatively well placed to ride out a tougher financing environment, but it is
not immune, and unlike some of the other private brokers, will require billions of dollars of fresh
capital in coming years to fund the full extent of its growth ambitions.
Historically the firm ran with relatively low levels of debt for a broker with private equity
backing, but the same thing is no longer true following its recent deal-making.
The debt restructure is reproduced in full below. But the firm has net debt of £3.57bn,
equivalent to 5.25x pro forma Ebitda of £681mn. (Gross debt is significantly higher at £4.57bn,
but the firm holds substantial cash for future M&A.)
In addition, Howden has £690mn of preference shares – equivalent to just over 1x Ebitda –
pointing to total net debt including the payment-in-kind notes of 6.26x Ebitda.
Howden Group's current debt structure
Mar 23
(£mn)
Gross first lien debt 4,123
Second lien debt 369
Other debt 75
Gross total debt 4,568
Payment-in-kind (PIK) notes 690
Gross total debt (incl. PIK) 5,258
Unrestricted cash 996
First lien net debt 3,127
Total net debt 3,572
Total net debt (incl. PIK) 4,262
Ebitda multiples calculated based on pro forma LTM Ebitda of £681mn at 31 Jan 2023
There are several reasons why Howden is better placed than its debt profile may suggest, and
which likely explain why Moody’s and S&P have its issuer credit rating at B2 and B despite its
level of debt. (Moody’s noted in March that the leverage is “high for the rating level”.)
The chief positive is its organic growth profile, which is rivalled only by US retailer Alliant and
US wholesaler Amwins, with diversification another key credit positive. But there are positives
too around the way its financing is arranged.
First, Howden uses the US leveraged loan market, which is deeper than that available in the UK
and carries a lower cost of debt than the European private debt market.
Second, the group has been amongst the biggest hedgers of interest rate risk among the
private brokers globally. Sources have said that around two-thirds of the debt is hedged over
the next two years, and half in year three. The hedges are at a variety of levels spanning
1%-4% but are providing Howden with some protection against the inflation of financing costs,
which is creating cashflow pressure for the levered brokers.
Third, Howden “pre-finances” its M&A/team lifts by raising debt and equity and holding large
amounts of cash on its balance sheet – totalling £996mn after its recent raise. If it were to
become distressed, it would be able to use this cash to fund its obligations over multiple years.
Interest costs for the year are projected at £349mn, or £265mn post-hedging. It also has an
undrawn £360mn revolving credit facility.
Fourth, Moody’s points to the “longer debt maturity profile” of the capital structure, with some
of the debt not maturing until 2030.
Managing the equity investors
On the equity side, Howden has around 68% of its shares in institutional hands, with 22.6%
ownership stakes held by each of GA, CDPQ and Hg. The remaining 32.2% sit in staff hands.
Staff currently own around a third of Howden's equity in its balan

structure
Current equity ownership structure of Howden Group
0% 25% 50% 75% 100%
Staff: 32.2%
Hg: 22.6%
CDPQ: 22.6%
General Atlantic: 22.6%
All the institutional backers have shown a willingness to inject equity in recent times, with
Howden disclosing recently that each had put up £450mn since 2021.
Late last month, Howden said that the three had injected a further £300mn of equity to
support growth.
No details were provided on valuation in that announcement, but sources suggested that the
enterprise value placed on the business was in the region of £11.5bn.
Up-to-date adjusted Ebitda numbers for the business have not yet been released to
debtholders, but sources believe this money has been raised at ~16.5x-17x Ebitda.
Back-of-the-envelope maths suggests the equity value of the business is ~£7.2bn, implying
~£2.3bn in staff hands, and £4.9bn split between the three institutions.
The equity held by Howden staff is valued at £2.3bn

Breakdown of current enterprise value of Howden Group
Net Staff Non-staff Enterprise

+ + =
debt equity equity value
+ + =
£4.3bn + £2.3bn + £4.9bn = £11.5bn
Circa £1.6bn equity positions are significant even for these large institutions, and although all
have significant additional dry powder and broking remains a relatively attractive sector,
Howden may test the limits in the coming years on what it can do with these backers.
There is no question that Howden will continue to be able to draw in equity, but if it were to
stumble with a failed deal or a significant strategic misstep, especially if it happens in a
challenging funding environment, then the raise may not come at an attractive valuation.
Much of Howden’s success in managing its talent base of producers rests on the escalating
value of their equity where it has a stellar track record. If this upward march were to halt, or to
take a step back, then some of its highly mobile production talent could take fright and
ultimately take flight.
As such, managing to bring equity into the business with continued growth in value represents
not just a measure of success, but a key precondition of it as well.
Maintaining its impressive organic growth record will be key here. In the three months to 31
December, growth dropped rapidly, sliding to 7% from 19% the prior year, with Dual at -1%.
However, there is an expectation of a bounceback in the three months to 31 March, with
transactional revenues starting to improve.
The benefits and risks of team lifts
Howden has probably attracted most market attention in recent times via its aggressive team
lifts, in which tens of staff have resigned from competitors over 48-hour periods. The business
is now executing this talent acquisition strategy with a frequency and severity that marks
Howden out as the international Alliant – and it is believed that this will only escalate.
Select Howden team lifts
Date Line Key personnel No. of staff
Mark Wood, Sarah Hughes, Adam 47 (financial lines + real

Apr 2019 Financial lines
Codrington estate)
Apr 2019 Real estate Nigel Todd
Bradley Maltese, Dean Smith, Paul

Mar 2021 LMX reinsurance 31
Esterbrook, Vijay Mavani
Aug 2022 US program Michael Jameson, Matthew Beard 12
Oct 2022 Bloodstock Mike Godfrey Unknown
Massimo Reina, Sebastian Cook, Tobias

Apr 2023 European reinsurance 38
Andersson
Luke Foord-Kelcey, Toby Lampier, Mark

Apr 2023 London cyber 6
Lynch
Source: Insurance Insider
The details of the compensation offered to the teams being hired look eye-wateringly
expensive when set alongside their previous deals.
The compensation deals are complex, according to sources, but often included a) sizeable
cash signing bonuses; b) guaranteed bonuses across a number of years; and c) major equity
incentives that vest based on a combination of five-year team revenue growth and Howden
group revenue growth.
It is further understood that interest-bearing loans are being offered to some of the most
senior staff, which are paid back through the return of vesting equity at the end of five-year
periods. This is a mechanism employed to effectively compensate producers for walking away
from unvested stock at their prior company.
As expensive as all of this sounds in the context of a public company, it looks very different
viewed through the prism of value creation in a levered private business.
Effectively, brokers carrying out team lifts are operating a parallel inorganic growth strategy to
M&A. Except instead of paying a consideration to the other enterprise, the hiring firm is paying
it to the staff, with the inclusion of quite a lot of structuring around equity awards to limit the
downside.
Sources have said that firms like Howden are probably paying in the region of 4x-5x mature
Ebitda to assemble and align these teams, and to pay out the professional services fees and
legal settlements associated with them. (In 2022, Howden spent £9.6mn on litigation related to
hiring, and in 2021 £17.4mn.)
This growth strategy creates a lot of upfront cash burn and is riskier than M&A because the
producers have an incentive to exaggerate their ability to move business, and sometimes
underestimate the disruption caused to clients by moving. But this is likely more than
financially compensated for by the fact the effective entry multiple is perhaps one-third of
what would be spent on M&A.
In addition, Howden is being valued off adjusted Ebitda figures, and these adjusted figures
allow a significant amount of the cost relating to these team hires to be stripped out, driving
enterprise value higher faster.
Importantly, however, there are also potentially a range of negative intangibles from sourcing
growth like this. These include the reputational damage attached to being seen to disrespect
employment contracts, or simply from being attacked in court. All companies tend to say that
they ask their staff to respect their restrictions, but hiring 30 people at once leaves huge scope
for misbehaviour, whether it is sanctioned by the hiring firm or not.
In addition, it can be challenging to fit this kind of compensation within existing schemes,
which can antagonize long-term staff.
Last of all, if a business is built by paying producers heavily to move business, there is a
danger that an organization becomes quite mercenary and vulnerable to seeing the same
teams lifted out once they have achieved liquidity.
Long-term, the higher compensation levels from Howden Tiger, Lockton Re and others create
the risk of the erosion of the 40%-50% margins that Aon and Guy Carpenter operate at in
reinsurance. But even with much higher comp and benefits, Howden Tiger would still be margin
accretive for Howden if it operates above about a 30% margin.
Channel conflict risk
One of the biggest challenges faced by all large, diversified broking groups is that as they
expand across more of the value chain, the different units they have start to get in each other’s
way.
If Howden can land its US retail deal, its London market wholesale business will be put to the
test.
Under these circumstances, its wholesale unit would have to compete for both clients and
talent with businesses like Ardonagh, BMS, Amwins and Miller that would be able to emphasise
their independence, or lack of involvement in US retail. Howden would have a full-capability
wholesale platform with lots of talented staff – but elsewhere in the group its US retail broking
arm would be competing with that wholesale platform’s client base.
There has been significant consolidation in London market wholesale that has left much of the
market in the hands of the biggest half dozen players, and this, combined with inertia effects,
could inhibit the loss of talent and business.
But the base case would suggest that Howden loses some important producers and some
valuable business to the independents.
This would have historically blocked the
move, but the group’s growth and
diversification means that the US third- “If Howden can land its US retail
party wholesale business has been deal, its London market wholesale
business will be put to the test”
significantly diluted as a percentage of the whole.

Sources have said that Howden has only around £250mn of US third-party wholesale
business, which would be equivalent to ~11% of group revenues, although presumably
somewhat more on a bottom-line basis.
Additional international deals and growth outside of the London market could further dilute this
over the next couple of years, as would a merger with a large US retailer.
In addition, there would likely be at least some offset from becoming the preferred London
wholesaler to the major US retailer acquired.
Nevertheless, there is real pain here. As well as the financial damage, the messaging would be
challenging internally given Howden presents itself as a good custodian of entrepreneurial
assets which will not interfere excessively with management teams.
UK-into-US execution risk
A transformative US retail deal would carry a lot of risks, but a potentially under-appreciated
challenge would be cultural.
A union between a US broking group and a UK broking group in which the former was the
junior partner would create testing cultural dynamics that Howden would need to find a way to
successfully navigate.
Howden has made much of its status as a British and a European company and thumbed its
nose at the “US global brokers”.
Holding together a diverse global business and building an effective common culture will be
crucial to success.
At minimum, Howden would likely need to refine its story and voice, banging the “Best of
British” drum a little less.
Illiquidity risk
The last important risk to the group’s ambitious plans is illiquidity risk. Much of the company’s
relentless momentum comes from the collective endeavour of driving the internal share price
higher.
But as beguiling as growth is, staff shareholders will ultimately want to realise their wealth
through a liquidity event. The pressure to ultimately reach this point is heightened by the fact
that Howden – unlike US wholesaler Amwins – does not pay out dividends.
In slightly different ways, the same imperative exists for Howden’s institutional backers. They
too will ultimately want to lock in at least some of their gains and secure some liquidity for their
own capital providers.
Howden is understood to have an internal share market that allows staff to sell a proportion of
their shares yearly, and the business can sometimes buy out retiring shareholders. Sources
said that Hg bought $100mn of shares from Howden staff when it bought into the company to
provide liquidity. All told, Howden has done more than other private businesses to offer
liquidity outside of a full group event.
Such measures can ease pressure for a full or majority liquidity event, but they are
nevertheless likely to build over time if Howden remains in its current aggressive growth phase
into the medium-term.
The expected US deal would likely exacerbate the challenge of securing liquidity for
shareholders in that it would swell the size of the group that needs to be successfully
refinanced.
Even at a $23bn enterprise value, Hub International’s recent refi exercise has demonstrated the
challenges of mobilising enough money from private markets at an attractive valuation to
refinance a minority of the business.
Some bankers believe there is the breadth and depth in private markets to refinance
businesses – particularly if they outgrow their peers as Howden has – at $40bn, $50bn or
$60bn of enterprise value. They point out that Howden currently lacks a sovereign wealth fund
in its common equity or point to isolated examples outside the sector where six to eight PE
houses and pension funds own a business collectively.
Potentially these kind of refi deals could be used to offer substantial liquidity to staff equity
holders in time, although this would also depend on management’s willingness to allocate
capital for liquidity, not growth.
If Howden does hit the limits of what can
be done privately, it will ultimately have to
float the business, which would provide a “Sustaining the same degree of
full solution on liquidity for staff and aggression in the model as a public
institutional backers. company may be impossible”
But to do that it would need to
substantially de-lever. It would also lose
various advantages like the willingness of private equity houses and debtholders to allow it to
add back costs on team lifts and take credit for unrealized synergies. Plus, management
distraction and regulatory attention would increase.
Sustaining the same degree of aggression in the model as a public company may be
impossible. Howden PLC just wouldn’t be the same firm anymore.
Howden will face tough tradeoffs as it tries to navigate the path forward. No one ever said
taking over the world would be straightforward…
TAGS ANALYSIS BROKERS HOWDEN

OPERATIONS/TECH
Adam McNestrie
EDITOR-AT-LARGE
Ben Wylie
SENIOR DATA JOURNALIST

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05/09/2023, 01:22 Inside Howden: Targeting world domination – Part 2

Inside Howden: Targeting world domination – Part 2

Howden’s decision to pursue its build-out at hyper-speed, and to seek to

Howden's senior leadership includes a significant number of execu

David Howden CEO, Howden Group

Dominic Collins Executive chair, Howden Group

Mark Craig CFO, Howden Group

Louise Cable-Alexander Chief of staff, Howden Group

Jose Manuel González CEO, Howden Broking Group

Barnaby Rugge-Price Deputy chair, Howden Broking Group

Andy Bragoli CEO, Howden Global Specialty

Rob Bredahl CEO, Howden Tiger

Rod Fox Executive chair, Howden Tiger

Elliot Richardson Vice chair, Howden Tiger

Richard Clapham CEO, Dual Group

Kieran Sweeney Executive chair, Dual Group

Key: Joined Howden Group via acquisition

Howden risk summary

Poor M&A target selection

Source: Insurance Insider

Howden's rate of organic growth has been consistently higher tha

FY Howden Group Average public intermed

2016 8.1% 2.3%

2017 7.7% 3.9%

2018 6.5% 5.0%

2019 11.0% 4.9%

2020 6.0% 3.0%

2021 19.0% 12.6%

2022 19.0% 10.4%

Source: Howden Group

Leveraged debt yields have shot up over the last year

Managing the debt

Howden Group's current debt structure

Gross first lien debt 4,123

Second lien debt 369

Gross total debt 4,568

Payment-in-kind (PIK) notes 690

Gross total debt (incl. PIK) 5,258

Unrestricted cash 996

First lien net debt 3,127

Total net debt 3,572

Total net debt (incl. PIK) 4,262

Staff currently own around a third of Howden's equity in its balan

General Atlantic: 22.6%

Source: Howden Group

The equity held by Howden staff is valued at £2.3bn

Net Staff Non-staff Enterprise

£4.3bn + £2.3bn + £4.9bn = £11.5bn

Source: Howden Group

Select Howden team lifts

Date Line Key personnel No. of staff

Mark Wood, Sarah Hughes, Adam 47 (financial lines + real

Apr 2019 Real estate Nigel Todd

Bradley Maltese, Dean Smith, Paul

Aug 2022 US program Michael Jameson, Matthew Beard 12

Oct 2022 Bloodstock Mike Godfrey Unknown

Massimo Reina, Sebastian Cook, Tobias

Luke Foord-Kelcey, Toby Lampier, Mark

Source: Insurance Insider

significantly diluted as a percentage of the whole.

TAGS ANALYSIS BROKERS HOWDEN

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