This article was first published in the Harbor View Advisors.
About John Martins
John is a Partner and Co-Founder of Harbor View Advisors. He brings over 20 years of experience as an investment banker, investor, equity research analyst and management consultant. John leads Harbor View’s Catalyst for Corporate Development practice where he helps clients fuel growth through acquired innovation. Prior to founding Harbor View, John was a Vice President in the Technology Research Group at Goldman, Sachs & Co. in New York. As a publishing analyst, John’s research spanned companies with a total market capitalization of $100 billion across five industries including payment processing, financial services, travel services, business process outsourcing and business intelligence. Companies under coverage included Accenture, Amdocs, Automatic Data Processing, ChoicePoint, EDS, First Data Corp, Fiserv, Hewitt Associates and Sabre. John’s experience also extends to the “buy-side” as a Partner at Camelot Capital, a hedge fund with targeted investments in public and private software and services companies. John led the investment decisions involving 80 companies in ten industries including business and financial services, payment processing, telecom services and security. Prior to joining Goldman, John worked as Principal for A.T. Kearney in Chicago where he managed global consulting engagements in the U.S., Australia, Brazil, Denmark, Sweden and the United Kingdom. John’s practice expertise included international supply chain, global sourcing, process reengineering and strategic planning. John was active in helping A.T. Kearney establish new offices in Australia and Brazil and facilitated the integration of a consulting firm acquisition in Denmark. A sample of his client engagements includes Visa, Sears, Rolls Royce and General Motors. John received a Bachelor of Arts degree from DePauw University and a Master of Business Administration (MBA) from The University of Chicago. Outside of Harbor View, John is an Ironman, part-time triathlete and a father of three.
The Appraisal world is under intensifying pressure that will likely accelerate the pace of M&A consolidation. We see the new “registry” component of the Dodd Frank rollback as another potential catalyst for consolidation in the fragmented appraiser and Appraisal Management Company (“AMC”) arenas. In this note we highlight where the market is pricing transactions given recent notable deals, including CoreLogic’s high water mark of 13.5X EBITDA. While the larger captive AMCs appear to have satiated their acquisition appetite for now, we see newcomers gaining ground, particularly those with private equity backing, including LenderLive and Class Appraisals or public companies like Altisource (NASDAQ: ASPS) and Real Matters (TSE: REAL). Further, the savvy independents are sure to make a play at accelerating growth through acquisition including Clear Capital, Dart Appraisal, LRES, Pro Teck and The William Fall Group.
Beware of “small” rule changes
An executive at a leading MortageTech company once told me, “Beware of a seemingly small rule change in a highly regulated market like mortgages. The impact can be deadly.” The Appraisal world is facing one of these changes. We see the new “registry” component of the Dodd Frank rollback as a potentially massive catalyst for consolidation in the fragmented appraiser and Appraisal Management Company (“AMC”) worlds. The forces bashing this industry have been relentless:
- Appraiser population demographics leading to supply “shocks”
- Low margins and limited pricing power has advantaged only the largest providers
- Domineering government sponsored enterprise rule changes (GSEs – Fannie, Freddie)
- A fundamental change from a form-driven industry to more data-driven value proposition
- Looming disruptive technology innovations from drones to mobility
As every AMC tries to navigate these headwinds, along comes the “registry” change whereby an incremental fee is about to hit every AMC’s panel of appraisers. The larger providers are better positioned to absorb these new requirements and fees, however, basic math for the smaller AMCs suggests a new expense burden with no direct beneficial offset. Further, each state is likely to implement differently, potentially creating a complex, expensive and risky compliance environment for the AMC industry.
Merger activity is heating up
Expect continued consolidation within the AMC world, and given the permanent economic impact of “registry”, there may be further pressure on sellers to realize the valuation multiples of recent transactions. A review of recent AMC acquisitions suggests the market is pricing these assets between 6X – 8X EBITDA, with the exception of CoreLogic’s transactions as they were considerably above this range, continuing to set the market high water mark. In our client work, the key valuation drivers have been scale, diversity of services and technology leverage. See the table below for recent transactions:
Forces are driving greater scale and technology innovations
U.S. real estate assets are marked to market through a unique mechanism – the appraisal. While much has been written about the aging population and brain drain among the 40,000+ U.S. residential and commercial property appraisers, little attention has focused on the key node in the system, the AMC. The AMCs include large captives of loan, title or data service providers and more independent, often regional, companies.
Scale and technology forces will continue to define the landscape of players. We expect the strong AMCs to strengthen further while the middle market is more likely to consolidate the smaller players. We also expect technology advancement in key areas like mobility and analytics. The GSE’s are likely to drive accelerated adoption of these technologies and more efficient approaches – further accelerating industry consolidation.
Expect consolidation to pick up in the middle market
The larger captive AMCs appear to have satiated their acquisition appetite for now and we don’t expect to see much from CoreLogic, ServiceLink or First American in the near term. However, we see newcomers gaining ground, particularly those with private equity backing, including LenderLive and Class Appraisals or public companies like Altisource (NASDAQ: ASPS) and Real Matters (TSE: REAL). Further, the savvy independents are sure to make a play at accelerating growth through acquisition including Dart Appraisal, LRES, The William Fall Group and Pro Teck. We have summarized the AMC market segments below: