Keystone Agency Partners targets out-of-network acquisitions as revenues near $125mn

Bain Capital-backed Keystone Agency Partners (KAP) is executing on a strong deal pipeline of firms drawn to its unique ownership structure after seeing explosive growth from a string of acquisitions that have pushed revenues towards $125mn in its first calendar year of operations, The Insurer can reveal.

KAP was launched by agency network Keystone Insurance Group (KIG) and private equity firm Bain Capital in April 2020 initially as Keystone Agency Investors before a rebrand earlier this year.

The stated strategy was to create a platform and put at least $500mn of capital to work to acquire and invest in US retail insurance agencies in a move also aimed at accelerating the national expansion of KIG – the fourth-largest network in the US, currently representing $5bn in premium and $700mn in revenue.

It would look to provide liquidity and acquisition capital to KIG agencies, as well as acquire non-Keystone agencies, typically targeting so-called platform agencies with revenues in the $10mn to $15mn range.

The firm would act as a strategic buyer and bring resources, services and solutions to the table for the platform agencies it acquired, allowing them to execute their own growth strategies through tuck-in acquisitions and organic growth initiatives.

In an exclusive interview with this publication, KAP CEO Jeff Turner said that seven out nine acquisitions made by the new platform were of current network partners, with the remainder from outside the network.

But the expectation is that the majority of platform transactions going forward will be outside the network, which currently has more than 300 firms as partners, the majority of which are tuck-in size with less than $3mn of revenues each.

“Unique” structure

He explained that the transactions to date have involved agencies with dynamic, ambitious and entrepreneurial management that were not actively looking to sell and were instead drawn to the “unique” financial structure KAP can offer.

“Although we buy a majority stake in what we call platform agencies we don’t buy 100 percent, and we think that begins the ultimate alignment of incentives. 

“The agencies we’re partnering with are typically not for sale, so our total addressable market is much larger than for others. It is people that have strong growth aspirations they can’t achieve on their own, or a perpetuation issue with the next generation of leaders identified and they have growth aspirations,” he said.

As well as allowing the ongoing management and employees to retain an ownership interest in the agency, KAP also allows for co-ownership at the parent company level. 

Former Willis executive Turner said that this structure of co-ownership at the agency and parent company level is unique, especially as KAP also provides services and solutions to its partners.

Connected autonomy

It describes this element of the proposition for potential partner firms as “connected autonomy”.

“The profile of our agencies as people who want to grow combined with the alignment of financial incentives uniquely infuses the entrepreneurial spirit to really throw gas on what they’ve built over the previous decades.

“Then the connectivity happens. We have resources at the Keystone (KIG) level, but then at the KAP level we are very engaged, taking over a few major things that otherwise distract agencies from growth,” he added.

These include controlling the financial function, payroll, employee benefits and 401(k) as well as other areas.

“Then every other point of engagement around organic growth, inorganic growth and operational evolutions are born out of a strategy we put in place with the agencies in the first 60 days. We have teams of people that come in at those primary inflection points of organic, inorganic and operations,” the executive explained.  

Agencies continue to operate on their own P&L, but unlike a traditional sale where they’re only incented through the earn-out period, the co-ownership structure means they continue to get distributions from the profitability of the agency and can realise value accretion that happens as their agency grows.

Footprint and specialisation

The move to acquire agencies outside the KIG network is also aimed at expanding that platform by adding new members.

The 17 Keystone states are predominantly in the Midwest and Mid-Atlantic, but one of the KAP acquisitions is in the non-Keystone state of Texas with another under contract in New Jersey set to close at year end.

The ultimate plan is to build out to have sufficient platform agencies in every state of the US that can be built around. Initially it will build out the Midwest, New England, Northeast and down the Atlantic seaboard and into the Southeast.

As well as broadening the affiliated network’s geographic footprint, the nascent platform is targeting agencies that can bring industry specialisation.

“All of our agencies have a degree of specialisation. We think that’s important because it speaks to sales discipline,” said Turner.

The growth of KAP around specialisation means the platform can begin exporting specialty across the network, he added, with its first initiative recently launched with the creation of a specialty vertical for the financial services, trucking sector and more to follow in surety. This initiative will be built out more based on the acquisition diversification of 2022.  

“That’s part of the connected autonomy, and as we continue to gain scale we’ll look at how technology plays a role in helping the agencies,” the executive added. 

There is also the potential for carrier leverage with KIG bringing its members broad carrier access and also owning a captive, two carriers and a programs unit to allow the creation of proprietary programs to bring product to its agencies.

Long-term capital

With Bain Capital’s backing fuelling the initial phase of the platform build-out – along with a $105mn senior credit facility with Madison Capital Funding – Turner acknowledged the three to five year horizon of the private equity firm.

He said that rather than get on the “hamster wheel” of trading private equity partners, KAP will look to find a longer-term investment solution to support its strategy. 

“Preservation of the story and finding the next partner is first and foremost for us. Bain’s vision for this differentiated model has allowed us to build a unique proposition. We have a terrific relationship with them, and we will be focused on a solution that preserves and builds upon what Bain has started,” he concluded.

Fuelling explosive growth 

Turner said there has been “explosive growth” at agencies acquired by KAP, with an acquisition from earlier this year already doubling in size, and another that is expected to have grown by more than 100 percent in a matter of months.

While the sweet spot for platform agencies acquired is revenues in the $10mn to $15mn range, the rapid growth has come from tuck-in acquisitions after the platform agencies have become partners.

In typical cases, the platform agency will already have a pipeline of potential tuck-in deals that it is then able to rapidly execute with the support of its new majority owner.

KAP has built an in-house M&A team led by Dan Girardi which largely consists of former industry investment bankers and leaders in the space. Girardi is a former director of acquisitions at BroadStreet Partners.

Typically an in-house M&A team member partners with each acquired agency to identify an inorganic growth strategy and conduct due diligence and other deal-related activities, while its in-house legal team advises on potential transactions.

KAP also provides a corporate development function aimed at augmenting the platform agencies’ known tuck-in opportunities. 

Organic growth is a key focus and KAP has an organic growth team that engages to elevate sales discipline and targeted organic growth through the agency’s unique capabilities and focused cross-sell activities.