CFC Underwriting attracts Blackstone Group and OTPP

Blackstone is looking to make the investment via one of its Tactical Opportunities funds, one of the sources and a fifth source familiar with the matter said.

Mergermarket reported that Vitruvian was exploring sale options with Evercore in February, with any deal potentially valuing CFC at GBP 1.5bn.

Suitors have to submit non-binding offers for the asset over the next few days following the distribution of information memorandums and due diligence reports last month, two of the sources and a sixth source familiar with the matter said.

Bidders are rushing to conduct their work before the deadline, given the second stage of the process is supposed to be a week long, one of the sources said. There is suitor grumbling at the level of access to data and scope to ask questions, this source added.

OTPP may have an edge over other bidders given it already acts as a capacity provider for CFC's underwriting activities, one of the sources said. OTPP and Stone Ridge Asset Management were among third-party investors that provided funds to CFC's Syndicate 1988 established earlier in the year, as reported.

Among other bidders showing interest in CFC are Advent International, three of the sources said, as well as Bain Capital, one of them added. Hellman & Friedman and EQT have also been linked to a potential bid, while Singaporean sovereign wealth fund GIC is looking to take on the asset with another bidder, the third source added.

However, some sponsors have dropped interest in the auction, due to concern that CFC's exposure to underwriting ransomware-related risks could generate bad headlines amid such cyber-attacks becoming more commonplace, one of the sources said.

A sector lawyer countered that other private equity investors may instead see its cyber focus as a growth play.

While assessing and pricing cyber risks may be more challenging due to their emerging nature, the growth potential in the space is notable – and CFC has considerable experience, the lawyer indicated. The company started underwriting cyber policies in 1999.

Indications from sell-side adviser Evercore suggest CFC will be marketed based on EBITDA in the GBP 60m-70m range, one of the sources said.

The business, which offers coverage across hacking, terrorism and other areas, is targeting EBITDA of GBP 59m for 2021 after increasing growth from new business by 50%, the third source added. "It is being pitched as an insurtech business with a focus on cybersecurity," he added.

A deal could value CFC at an EBITDA multiple in the high teens or north of 20x, driven by its growth potential and tech-enabled services, the first source said.

However, a further source countered that CFC could fetch an even higher multiple, partly because of lofty valuations recently garnered by cybersecurity-focused insurance startups such as Coalition. San Francisco-based Coalition announced a USD 205m Series E funding round earlier this week, valuing the pre-IPO company at more than USD 3.5bn.

CFC should have even more valuation potential given it is an already recognised leader in the market and has a strong track record of growth, this source argued.

The minority stake sale of UK insurance software company Acturis in 2019 could be another comparable deal, another source said. But Acturis is "pure-tech play", whereas CFC has its own underwriting capability, taking on some of the risk itself, he said. UK insurance software firms Open Gi and CDL are among other comparable businesses, he added.

Vitruvian acquired a 40% stake in London-based CFC in 2017, reportedly valuing the business at GBP 230m or 15x its forward-looking EBITDA.

Turnover grew by 26% to GBP 84.4m and EBITDA by 31% to GBP 37.9m for the financial year ending in September 2020, according to Companies House. Growth was both organic and driven by its acquisition in 2019 of Solis Security, a US-based incident response provider.

Other deals by CFC include its acquisition of Insane Technologies, an Australian cybersecurity and incident-response business earlier this year; and in 2020 its bolt-on of London-based ThreatInformer, whose technology helps insurers better understand their customers' exposures. CFC also established a subsidiary in Belgium to preserve access to European markets after the UK left the EU in January 2020, according to Companies House.

CFC was previously owned by Hyperion Group, an insurance intermediary group with an insurance brokerage and underwriting agency arm.

CFC, Blackstone, OTPP, Advent, EQT, H&F and Bain declined to comment. Vitruvian and GIC did not respond to requests for comment.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• UK / Ireland
• Buyouts
• Exits
• Financials
• Blackstone Group
• Ontario Teachers' Private Capital