Brit shows blueprint on how Apollo may exit $3.5bn+ Aspen

Aspen’s successful turnaround under the leadership of Mark Cloutier has seen the company return to profitability and reposition itself – in Cloutier’s own words – as a “dynamic portfolio operator” poised to take advantage of a prolonged hard market.

The group’s improved performance will have been welcomed by Apollo Global Management, the private equity firm that acquired Aspen in a $2.6bn buy-out in 2018 and subsequently installed Cloutier at the helm.

Cloutier has used the four and a half years since his appointment in February 2019 to remediate an underperforming book and ultimately position the company for a future capital event.

He has been candid that the work required was greater than he anticipated. Nonetheless, the foundations now appear to be in place to support the demands of operating as a public company once again.

In recent months, the firm and Apollo have met with a range of potential lead IPO banks as they consider the option of a stock market listing.

Of course, an IPO is not the only option open to Apollo. In an interview with this publication last year, Cloutier suggested the company could attract interest from a strategic buyer.

“If the landscape around a potential IPO or trade sale due to maybe current valuation metrics wasn’t right and we believed there was something we could put the business together with that made sense and would create additional value, I think we’re in a position that we could play there,” he said in May 2022.

Investor appetite?

A big question remains around investor appetite for the sector, and whether this will meet the valuation Apollo now places on the business. On that note, it is likely Apollo and Aspen will be watching closely how another planned New York IPO – that of Hamilton Insurance Group – proceeds.

Hamilton signalled its intent for a New York IPO earlier this month when it filed a confidential S-1 registration statement with the US Securities and Exchange Commission.

Assuming it proceeds, Hamilton will be the first sector IPO since Fidelis listed in late June. The value investors put on the business will be closely scrutinised after Fidelis listed at a modest ~0.8x price to book valuation.

In the case of Fidelis, there are specific reasons for investor caution – the unusual MGU/balance sheet structure and potential worst-case Russia-Ukraine losses, in particular.

Hamilton has itself been a modest performer until recent improvements. The Bermudian firm’s bankers must be confident of a positive reception but if it’s a damp squib then it will put pressure on private equity-owned businesses like Aspen that would like to follow.

Indeed, speaking last week at the Monte Carlo Rendez-Vous, Kelly Superczynski, head of capital advisory at Aon’s Reinsurance Solutions arm, noted that “investors still aren’t super excited about balance sheet investments in the reinsurance sector”.

The modest price achieved by Fidelis when it listed earlier this year was a further warning sign of the cautious investor appetite for (re)insurers that lack a pedigree of strong performance. Apollo acquired Aspen for 1x book and the investment was initially under water before the group began paying dividends.

However, there are signs of a cautious thaw, with valuation multiples rising in Bermuda. For example, Arch now has a price to tangible book value (PTBV) ratio of 2.24x, compared with 1.65x a year ago. RenaissanceRe and Everest have also seen notable increases in valuations. The average PTBV ratio for the Bermuda cohort in our analysis stands at 1.9x for 2023 YTD, compared with 1.4x a year ago.

Outside the public markets, CVC Capital Partners’ acquisition of Lloyd’s insurer Dale Underwriting this week suggests private equity may be rekindling its interest in specialty/reinsurance balance sheets after a decade-long obsession with intermediaries.

As Apollo considers its next steps with Aspen, one possible solution could be found in the example of Brit, which was acquired by a consortium of Apollo and CVC in 2011, also at around 1x book. As was later the case with Aspen, Cloutier was installed as CEO shortly after the £880mn buy-out completed and he re-engineered the business with a focus on Lloyd’s and selling off its underperforming UK commercial businesses.

Having reduced its Brit holding to 73 percent after Goldman Sachs took a share ownership in the firm in 2011, the Apollo/CVC consortium sold a further 27 percent of its holding through a London IPO in 2014 which gave Brit an implied valuation of $1.595bn.

Having sold down, Apollo/CVC then secured a trade sale less than a year later when Fairfax Financial agreed to acquire Brit for $1.88bn – a deal that represented a 2.6x cash exit on Apollo/CVC’s initial investment in 2010, when including dividends and coupon along the way. It may not have been a knockout trade but in the private equity world that is still regarded as a successful return over five years.

With the IPO market appearing to gain traction amidst tentative signs of an uptick in investor appetite, a similar approach may be on the cards. In other words, allow the market to set the price, enable a certain liquidity but retain a large enough holding to dictate terms when a strategic comes knocking with a 25-30 percent bid premium.

H1 2023 net tangible assets totalled $2.5bn. If earnings are retained, then an IPO valuation at around $3bn – or 1.1x book – feels achievable before a possible buy-out premium nearer $4bn than $3bn.

Can Apollo and Cloutier repeat the formula a second time round? Quite possibly, but a 2.6x exit may still prove a step too far…