The reinsurance market has seen a number of start-ups, scale-ups and management buy-ins this year, as management teams look to take advantage of opportunities from a hardening market.
The majority have used the private capital markets to finance their ambitions, but some have gone to the public equity market through share sales or initial public offerings (IPOs).
Conduit Holdings is selling $1.1bn of new shares through a London IPO to underpin a new Bermuda reinsurer led by founder Neil Eckert and former senior Hamilton executive Trevor Carvey. Toronto-based Brookfield Asset Management announced in November it is creating BAM Reinsurance as a new publicly traded business in Bermuda.
Why would new and existing carriers consider raising capital on the public markets over private markets - and what are the key things to consider for those that do?
The comeback
The main reason for having a quoted structure is the ease of coming back to market if ever needed, as a stock market quotation effectively provides an evergreen pool of capital. Therefore, if companies are able to raise more money at an unspecified future point in time, it can more easily smooth and ride out the downturns in cycles.
Samantha Harrison, director of corporate finance for Grant Thornton UK, notes that going public provides some relatively quick routes for companies to raise capital.
“As we've seen during recent times, [public] companies have been able to get the support of new and existing shareholders in a very quick manner for further equity,” says Harrison. “It also provides liquidity for existing shareholders, so you do not have to go through any form of corporate restructuring if you have shareholders looking to exit.”
Covid-19 has focused the attention of management teams on their long-term capital structures, which they may want to be more sustainable and flexible because of the uncertainties ahead, according to Neil Shah, director of research at Edison Group.
He says: “In order to have a sustainable business, you probably want to start accessing public capital. When you're dealing with private equity, it's like a marriage for life to a certain extent as you're usually backed by just one player – but they may then choose to flip the company to another private equity firm. Whereas, in the public markets, you open yourself up to a much wider pool of investors.”
Reinsurers considering going public need to go back to first principles and look at the long-term business strategy and the requirement for funding, as well as stakeholder expectations.
“It is only if all of the elements come together that the company would go down the public route,” says Harrison. “It has to be supported by management and the shareholders, and internally the company also has to be willing to take on the additional regulatory considerations of being a quoted company.”
The pitfalls
Once listed on the public market, companies are much more visible and need to behave in a particular way – and it is often more expensive than being a private company. Public companies are subject to stricter regulations, oversight and reporting requirements, including trading updates about what is going on in the market and how that affects the business.
Being public is all about guiding market expectations and delivering against them, says Harrison.
“That leads to potential concerns around the company's own ability to internally forecast and be able to provide that form of guidance, because volatility may not be particularly good for a public company,” she says.
“You also have to consider if you are able to get the appropriate shareholder mix so there is a balance between long-term shareholders and liquidity. Because coming to market is not an end game.”
According to Harrison, coming to market is a “step in the life cycle of a company”, and “life as a public company does take management time and effort for it to work”.
Another reason why companies may not go down the public route is because the investors that are typically interested in the sector may be more interested in private funding rounds.
“That might give them more structural comfort or flexibility or cater to their investment horizons. If they are in a fund structure, they might want to opt for private rounds where they can influence an exit event, or they might be seeking a higher level of management information or control,” says Harrison.
As (re)insurance is a specialist sector, one of the things that might be a concern is the right kind of information getting into the market and the security being priced correctly.
“The short-term nature of public markets with the focus on quarterly earnings does not necessarily always suit a (re)insurance business,” says Shah.
However, he points out that smart investors are wise to this: “If you see a (re)insurance company being hit, because of some unusual event, a lot of smart investors use that as a good time to get into those companies.”
Choosing the right place
Whether London, New York or Zurich, there are different markets and regulatory systems operating within each jurisdiction.
One of the key questions to ask when choosing the location is ‘Will you have a sizable pool of investors who understand and support your business model?'.
"I would take a look at the multiples and the investment community in each and then conclude that I'm getting a better return for my type of business in this particular market,” says Shah.
Markets such as London have a well-established set of institutional investors and a structure of supporting start-ups.
The difference between the UK and US markets is that there is more appetite for smaller companies in London, which means start-up entities are able to come to the UK market quite regularly.
“If your equity story meets the London investment community’s requirements, then listing here is an appropriate step,” says Harrison. “If you don't have that support from London, you would be looking somewhere else. There's no point having a listing in a market where the investors aren't supportive of that specific type of business proposition.”
