The Insurer TV: Lack of “rational” opportunities set to slow down start-up activity

Investment bankers expect to see a reduction in the level of start-up activity in 2021 due to the lack of “rational” opportunities to invest in following a bustling 2020.

According to Pat Fels, head of FIG Americas at Goldman Sachs, while there are “always” management teams or private equity firms evaluating opportunities, this activity is not currently taking place on the scale witnessed in 2020.

“If we rewind the tape to a year ago or six to nine months ago, there was a tremendous amount of dialogue happening about newcos and start-ups and I would say literally dozens and dozens of executives, teams and private equity firms were looking for an opportunity,” he said to The Insurer TV in the latest episode of Prospective. 

“What ultimately got funded and emerged I thought was fairly rational,” he continued. “And in terms of just new companies that were formed and how much capital flowed in, it seemed logical.

“I know we don’t see the whole market, but from our vantage point we don’t see a lot of dialogue happening right now in terms of incremental newcos,” Fels said. 

However, Fels said the lower number of start-ups expected to launch in 2021 has nothing to do with the capital available to invest in potential newcos and was instead due to reduced opportunities.

“If there is an opportunity, then the capital is right there,” he said. “The hard part in today’s world is not the capital, it’s finding the rational opportunity.”

2020 was an energetic year for both start-up activity and capital raises, with the launch of several new carriers including the likes of Conduit Re, Vantage Risk and Mosaic.

Bill Cooper, head of capital advisory at TigerRisk, said the next tier of opportunity will be in more niche areas of the market, in terms of geography and class of business.

“I think it’s probable that the largest of the start-ups has already happened and that’s really because the most experienced CEOs and chairmen, or whoever is most likely to start new firms have done so, but we don’t think investor appetite is sated here,” he said. 

“If you look at the way in which the cycle appears to be turning out this time, the market hasn’t hardened as sharply as some thought it was going to across the board, and we’re seeing gradual continued rate rises across a number of areas of the market – retro would be an example of that, where at 1.1 I think many people thought it was going to harden more dramatically than it did,” Cooper added. 

According to Cooper, there are a “variety of examples” like retro which could provide some start-up opportunities, citing casualty as well. 

“I think investors can still see that there is more road here and so the investor appetite is not sated and financial investors will be open to new ventures and new opportunities,” he said.

Click the link below to watch our latest edition of Prospective, which focuses on one of the industry’s most talked about topics – mergers and acquisitions (M&A).

Prospective M&A: Will the momentum continue?