by B.P. Marsh | Oct 17, 2017 | Portfolio News
B.P. Marsh & Partners Plc, the niche venture capital provider to high growth businesses, announces its unaudited Group interim results for the six months to 31 July 2017 (the “Period”).
The financial highlights for the Period are:
Net Asset Value (“NAV”) at 31 July 2017 of £88.8m (31 July 2016: £73.8m)
- Increased NAV per share of 304p (31 Jan 2017: 273p, 31 July 2016: 253p)
- Increase in the equity value of the portfolio of 24.6% in the Period
- 8% total shareholder return (31 July 2016: 5.8%)
- Significant rise in profit after tax (unaudited) of £10.2m (31 July 2016: £4m)
- Final dividend of 3.76p per share declared and paid in July 2017
- Dividend of 3.76p per share intended for year to 31 January 2018
- Cash and treasury funds balance of £22m, of which £13.2m uncommitted
- Current uncommitted cash of £8.6m available for investment
- Increase to the top limit of funding to £5m from £3m
The portfolio highlights for the Period are:
New investments in CBC UK Ltd (“CBC”) and XPT Group LLC (“XPT”)
- Disposals of Besso Insurance Group Limited (“Besso”) and Trireme Insurance Group Limited (“Trireme”) delivering combined proceeds of £32.0m before tax
- Additional investment in LEBC Holdings Limited (“LEBC”)
- Follow-on funding to Nexus Underwriting Management Limited (“Nexus”)
- New investment post-period end in Mark Edward Partners LLC (“MEP”)
Brian Marsh, B.P. Marsh Chairman, commented, “This solid set of results demonstrates substantial growth in our Investment Portfolio in line with our strategy to deliver value to shareholders.”
Chairman’s Statement
I am pleased to present the unaudited Consolidated Financial Statements of B.P. Marsh & Partners Plc for the six month period to 31 July 2017.
The Net Asset Value has increased to £88.8m from £73.8m as at 31 July 2016, representing an NAV per share of 304p (31 July 2016: 253p), and unaudited profit after tax in the Period was £10.2m, compared to £4m in the six months to 31 July 2016.
The disposals of Besso and Trireme during the Period provided the Company with combined proceeds of £32.0m before tax and we will deploy this into new investments and our existing investee companies.
We have for some time been following North America as an opportunity base and we are pleased to have made two new investments in US insurance intermediary businesses founded by industry veterans: XPT in June and Mark Edward Partners after the period end.
Meanwhile in London we made a new Lloyd’s broking investment in CBC, a typical B.P. Marsh venture in a small business with big ambitions and a capable team to fulfil them.
Within the portfolio we took the opportunity to make an additional investment into LEBC, the national UK financial advisory business. LEBC has grown strongly in recent years and continues to do so by developing its traditional advice model to incorporate the best in technology advancement and steadily growing its corporate project work.
In addition, we provided additional financial support to Nexus by means of a £4m loan facility to enable Nexus to continue its M&A activity, with three new acquisitions made in 2017 to date.
We have a strong pipeline of new opportunities to consider and a healthy cash balance and our decision to increase our top limit for new investments from £3m to £5m in February has proved fruitful, opening new investment avenues for us to explore. The portfolio now has a healthy geographic spread, reflecting our overseas investment strategy to only invest in territories with a well-developed regulatory and compliance framework and where there are good opportunities for growth in partnership with a London-based investor. Our portfolio businesses in Australia, Canada, Singapore, and South Africa, whilst currently small scale, provide a solid footprint for development.
The Board is pleased to note the continued narrowing of the share price discount to NAV per share, continuing the progress we have made over the past five years. We value all our shareholders, large and small, and are pleased to record a 12.8% shareholder return in the period. We paid a dividend of 3.76p per share in July 2017, with this intended to be repeated in the coming two years. In addition, we have a stated Buy-Back policy that enables us to buy back shares should the NAV discount threshold reach 25% or more.
On a wider note, the 2017 Atlantic hurricane season is expected to rank among the costliest in recent years after a decade or so without major losses to the insurance industry. None of our investee companies are exposed to underwriting risk and, indeed, they should benefit from any tightening of rates following these events. However, the full effects will not become clear for some time.
The global political situation remains uncertain and we continue to keep a watchful eye on events. Meanwhile, with the Company making solid progress, we remain measured, diligent and energetic in pursuing our objectives.
Business Update
Summary of Developments in the Portfolio
New Investments
Investment in CBC UK Ltd
On 17 February 2017, the Group acquired, through a newly established company Paladin NewCo Limited (“Paladin”) (now called Paladin Holdings Limited), an effective 35% shareholding in CBC.
CBC is a Retail and Wholesale Lloyd’s Insurance Broker, offering a wide range of services to commercial and personal clients as well as broking solutions to intermediaries. For the year ending 31 December 2017, CBC has a forecast Revenue of £5.55m with a forecast EBITDA of £0.63m.
As part of the transaction, the Group partnered with CBC’s management team and Andrew Wallas, who joined the Board as Non-Executive Chairman, delivering a 50% and 15% shareholding to both parties, respectively.
This transaction was made through Paladin to which the Group provided £4m of funding. This was provided via the subscription for a 35% shareholding in Paladin for nominal value and a Loan Facility of £4.0m which was fully drawn down on completion.
Having exited investments in two Lloyd’s brokers, Besso and Trireme, during the Period, the Group was pleased to establish this new position in the Lloyd’s broking sector, one of its traditional markets.
Investment in XPT Group LLC
On 13 June 2017, the Group invested US$6m into XPT, a New York based specialty lines insurance distribution company, subscribing for a 35% stake.
XPT is a newly established operation which is in active discussions with a number of parties over potential minority and majority investments into established entities in the US wholesale insurance arena. XPT plans to make one or two US-based acquisitions before the end of its first year.
The management team at XPT is a line-up of industry veterans, including Tom Ruggieri, formerly of Marsh, Advisen and Swett & Crawford; Mark Smith, former president and CEO of Stewart Smith; Jeff Heath, the founder of Heath Group; and Mason Power, former COO and Chief Marketing Officer at Swett & Crawford.
The investment in XPT is a return to the North American market for the Group, following on from the Company’s recent investment in Canada, Stewart Specialty Risk Underwriting Ltd.
Investment in Mark Edward Partners LLC (post Period end)
On 12 October 2017, the Group invested into MEP taking a 30% equity stake and providing a US$2m loan facility available for future growth.
MEP is a specialty insurance broker offering a wide range of risk management services to both commercial and private clients. MEP is a national U.S. firm with licenses to operate in all 50 states and has offices in New York, Palm Beach and Los Angeles.
By investing in MEP, B.P. Marsh is entering into partnership with Mark Freitas, who has over 30 years of experience in the insurance industry. Having begun his career at American International Group (“AIG”), Mark joined Crystal & Company, where he subsequently became President and Chief Operating Officer, and saw the business increase its revenues significantly. He then left Crystal & Company in 2009 to establish MEP.
Increased Holdings
LEBC Holdings Ltd
The Group purchased a further 17.84% stake in LEBC for aggregate consideration of £7.14m on 26 July 2017.
The shares were purchased for cash from several sellers, including retiring employee shareholders, members of Management via LEBC’s Employee Benefit Trust and Joint Share Ownership Plan and the Founder and CEO, Jack McVitie. As part of the transaction, the Joint Share Ownership Plan repaid the outstanding loan facility of £1m in full.
Following the purchase, the Company has an aggregate shareholding of 60.88% in LEBC, while the balance continues to be held by Founder and CEO, Jack McVitie and LEBC Management. The Group’s usual strategy is to take minority equity positions. However in this instance the opportunity to make an additional investment proved compelling. The increase to a majority position will not result in any changes as the existing management will continue to run the business day to day. However, the Group has appointed Oliver Bogue as an additional director of LEBC alongside Camilla Kenyon, subject to regulatory approval.
Follow-on Funding
Nexus Underwriting Management Ltd
On 10 July 2017, the Group provided Nexus, in which it holds an 18.14% shareholding, with a £4m Loan Facility secured as part of a wider debt fundraising exercise, to undertake M&A activity.
Nexus secured £30m in loan facilities in total, with the balance of £26m provided by funds managed by HPS Investment Partners, LLC (“HPS”), the global investment firm.
To date, Nexus has drawn down £18m of this £30m facility, including £2m from the Group, using it alongside existing cash resources to acquire Vectura Underwriting (“Vectura”), Equinox Global Limited (“Equinox”) and Zon Re Accident Reinsurance (“Zon Re”) with further M&A activity planned for the remainder of 2017.
Vectura was established in 2007 and is a Managing General Agency based in London and offering clients a wide range of insurance products in the Marine Cargo space, in particular international cargo and freight liability insurance.
Equinox, founded in 2009, is a Trade Credit Managing General Agent with Lloyd’s Coverholder approval with offices in London, New York, Paris, Hamburg and Amsterdam.
Zon Re is a management-owned Reinsurance Underwriting Manager based in New Jersey and founded in 2003 which offers domestic and international reinsurance capacity in the accident reinsurance space, specifically for primary life, property & casualty and accident & health.
By way of background, since the Company’s investment in 2014, Nexus has grown its Gross Written Premium income from £56m in 2014 to a forecast £157m in 2017, an increase of 180%. In the same period, commission income has increased from £12.3m to a forecast £31m, an increase of 152%, and EBITDA has increased from £2.6m to a forecast £11m, an increase of 323%. The 2017 forecast figures include the three acquisitions noted above on a full year basis.
Disposals
Besso Insurance Group Ltd
The Group announced on 4 January 2017 that it had reached an agreement to sell its entire 37.94% shareholding in Besso for cash to BGC Partners Inc (“BGC”). Completion was announced on 28 February 2017, with the Group receiving £21.6m in cash (net of transaction costs and pre-tax) following BGC’s 100% acquisition of Besso for an enterprise valuation of approximately £70.5m. Various adjustments were then made by reference to completion accounts, resulting in additional £0.4m consideration proceeds (net of transaction costs and pre-tax) being payable to the Group.
The Group’s final proceeds from this sale represent an increase of £0.7m on the valuation at 31 January 2017 and an IRR of 21.9% since 1995, when the Company originally invested. It also represents an increase of 58% on its last published valuation of the same stake in Besso of £13.9m at 31 July 2015, being the last valuation prior to the commencement of the sale process.
Trireme Insurance Group Ltd
On 3 April 2017, the Group announced its intention to dispose of its 29.94% shareholding in Trireme for £2.96m cash, to its fellow shareholder US Risk Midco, LLC (“US Risk”). Due to the aggregate quantum of disposals and loan repayments within the portfolio over the previous 12 months, this required the approval of the Company’s shareholders at a General Meeting. Such authority was given on 19 April 2017 and accordingly the sale completed shortly thereafter.
This disposal represents an uplift of 15% over the Group’s valuation at 31 July 2016 and an IRR (including fees) of 15.6% since 2010, the date of investment.
As part of the disposal, Trireme repaid in full the outstanding £2.16m drawn down under its £2.42m loan facility with the Group, plus fees and accrued interest. As such, the total pre-tax proceeds received by the Group amounted to £5.19m.
Portfolio news
The Group’s portfolio businesses have continued to develop as anticipated during the Period. Specific instances or developments are noted below:
The Fiducia MGA Company Ltd (“Fiducia”)
Fiducia, the UK Marine Cargo Underwriting Agency, has opened a new office in Birmingham and launched a comprehensive marine trades facility for the UK regional marine market.
The office will be headed by underwriter Marc Watts, with assistant underwriter Gemma Ballard and with Bob Watts leading development. The team had previously worked together, both at Groves John and Westrup and at Northern Marine Underwriting.
CEO Gerry Sheehy commented “Fiducia officially launched in November 2016 with ambitions to recruit experienced specialists with the aim of broadening the firm’s product base. Further expansion is planned over the next year and we are also seeing interest in our product set and capabilities from Europe.”
LEBC Holdings Ltd
LEBC became directly authorised by the FCA on 1 August 2017. The business, which was previously an authorised representative of Tenet, has a compliance framework in place that has enabled the authorisation process.
Jack McVitie, Chief Executive, commented “Direct authorisation ensures we will be able to continue to put our clients at the heart of everything we do and will provide them with unequalled service across our 16 offices nationally. Given the pace of change we have seen in the business and the industry at large over the last few years, now is clearly the right time to make this change.”
LEBC continues to be at the forefront of technological change within the wealth management sector and to look at ways to drive additional business and revenue using technology, in combination with its traditional face-to-face advice model. On 3 October 2017 LEBC announced that its “bionic” advice service had passed £1bn of new clients’ assets invested, an increase of 100% in only nine months and with more than 37,000 clients using the service.
The corporate projects work undertaken by LEBC The Retirement Adviser continues to grow. The 2017 Moneyfacts Awards announced in September saw LEBC The Retirement Adviser winning the Retirement Adviser of the Year Award.
Sterling Insurance (PTY) Ltd (“Sterling”)
MB Prestige Holdings (PTY) Ltd (“MB”)
The Group’s two investments in Australia; Sterling and MB, continue to perform in line with or above the Group’s expectations at the current time.
Summa Insurance Brokerage, S.L. (“Summa”)
For the year ended 31 December 2016 Summa met its budget, reporting Revenue of €6.1m and recurring EBITDA of €1.4m.
Despite some consolidation following the global financial crisis, the Spanish insurance intermediary market remains fragmented, with a high number of small regional players. Summa is one of the largest consolidators of regional insurance brokers in Spain, with an extensive network of offices and agents throughout the country. As such, the Group believes that Summa is well positioned to take advantage of growth opportunities moving forward.
This has been demonstrated by Summa’s recent acquisition of the Mikel Lasa Correduria de Seguros, a regional insurance broker based in Mondragon, the capital of the Basque Country.
Additionally, the Group continues to work with Summa to develop their interaction with the Lloyd’s and London Insurance Market.
The Board of both B.P. Marsh and Summa are aware of the ongoing independence movement in Catalonia and are monitoring the situation closely.
Walsingham Motor Insurance Ltd (“Walsingham”)
Walsingham, the specialist fleet motor insurance underwriting agency, has continued to exceed expectations this year and is forecasting to deliver revenue and profits above budget for the year.
Dividend
A final dividend of 3.76p per share declared and paid in July 2017.
The Board aims to find a balance between utilising cash to invest in the existing portfolio and new opportunities, with providing investors with a healthy but sustainable yield. It is the Board’s aspiration to maintain a dividend of at least 3.76p per share for the years ending 31 January 2018 and 2019, subject to ongoing review and approval by the Board and the shareholders.
Share Buy-Back
During the period of six months to 31 July 2017 the Group undertook seven Buy-Back transactions from the Market in line with its Buy-Back policy as announced on 3 March 2017 and 24 July 2017.
The Group’s Share Buy-Back Committee meets periodically to decide if Buy-Back transactions should be undertaken when the discount to Net Asset Value of the Group’s share price exceeds 25%. The suitability of the 25% threshold is regularly monitored by the Board. The Buy Backs are intended as a stabilising mechanism and have been particularly useful during periods of market instability.
The Group bought back 28,646 shares in total during the Period for an aggregate price of £53,967. These shares were transferred into Treasury and formed part of the award to Management and other staff as part of the Group’s Share Incentive Scheme as announced on 29 June 2017.
Business Strategy
The Group invests amounts of up to £5m in the first round of funding and takes minority equity positions in Financial Services intermediaries, normally acquiring between 20% and 40% of an investee company’s total equity. During the holding period, additional investment can lead to the Group having a majority holding, as is the case currently in LEBC and Summa. In these circumstances, day to day business operation remains with management, with the Group providing input, advice and assistance, as with all of its portfolio businesses.
The Group is comfortable with taking a long-term investment horizon. Based on our current portfolio, the average investment has been held for approximately 3.4 years.
The Group requires its investee companies to adopt minority shareholder protections and appoint a director to its board.
Since 1990 the Group has generated an average NAV annual compound growth rate of 11.7%. Its successful track record can be attributed to a number of factors that include a robust investment process, management’s considerable sector experience and a flexible approach to exit.
Cash Balance
The Group has a current uncommitted cash balance of £8.6m available for new investment opportunities and for developing the existing portfolio.
Board Change
The Board was pleased to announce the appointment of Nicholas Walker as a Non-Executive Director, with effect from 6 September 2017. Upon appointment, Mr Walker also joined the Company’s Remuneration Committee and Audit Committee.
Mr Walker is well-known to the Group, having worked with him in his capacity as Joint Managing Partner of Socios Financieros, the Madrid-based corporate finance firm which he founded in 1991, on matters relating to Summa, the Group’s Spanish investment. This involvement resulted in Mr Walker’s appointment as Non-Executive Director of Summa in February 2017.
Prior to founding Socios Financieros, Mr Walker was Vice President and Country Head of the Spanish M&A team at Citicorp from 1988-1991 and was an Analyst and Vice President at Bank of America International, including a member of its European M&A Group from 1985-1988.
The Board considers that Mr Walker’s long track record in European and international M&A will bring additional depth to the Group and provide an excellent resource for the Management team and look forward to his contribution.
Outlook and New Business Opportunities
During the six-month period the Group has continued to see a strong flow of new investment opportunities, both in the UK and internationally. Discussions are ongoing on a number of these.
At the present time, both the MGA and broking sub-sectors are producing good potential deal flow in quality businesses in the insurance market, both in the UK and overseas. The increase in the Group’s top limit of first round investment funding from £3m to £5m, announced in February, has had a positive impact by widening the Group’s sphere of opportunity.
In the insurance sector, MGA start-up opportunities are a continuing trend. Insuretech opportunities continue to make headlines, however the Group has yet to see one that fits with its investment model and is suitably compelling.
On the wealth management side, the Group continues to be interested in businesses with ambitious and capable management teams, whether IFAs, fund managers or other intermediaries.
The impact caused by Hurricanes Harvey, Irma, Maria and Nate and the Pueblo earthquake in Mexico, is still being measured, with latest estimates of industry insured catastrophe losses for 2017 to date from $100bn – $130bn. The Group’s investee insurance intermediary businesses are not exposed to primary insurance risk but may witness positive adjustments to risk pricing that typically follows such events.
During the Period the Group reviewed 38 opportunities, of which 66% were insurance-related, 5% IFA and wealth management, 10% fintech and platforms and 10% other financial services opportunities (recruitment, consultancies, etc.). By way of comparison, during the interim period to 31 July 2016 the Group reviewed 45 new opportunities.
Brian Marsh OBE, Chairman
17 October 2017
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