NEWS ANALYSIS: Lynch's mob

Kevin Lynch and Terry Ahern, co-founders of The Townsend Group, set tongues wagging last month when they sold a 70 percent stake in their consulting and investment management behemoth to Aligned Asset Managers.

Personal riches aside, the transaction caused a stir among the fraternity of US consulting firms for its surprise and shock value. Indeed, news of the deal failed to leak despite the fact that both parties had been in due diligence for more than a year.

In the immediate aftermath of the surprise announcement, people busied themselves analysing the move. Here was Townsend – this huge global force with more than $100 billion of assets advised upon and a client list stretching to at least 87 institutions, including just about all the major US pension and retirement plans and a growing list of sovereign wealth funds – giving up its independence. Not only that, it was – gasp – giving up its independence to buyout firm GTCR, of which Connecticut-based Aligned is a portfolio company. 

Perhaps the biggest mystery of the transaction, however, is why Townsend’s founders decided to sell a majority stake in their firm almost exactly 25 years after winning their very first institutional client, the Ohio Police & Fire Pension System. Was this the culmination of the founders’ hard work and therefore something of an anniversary pay-day? Alternately, was it a statement on the fundraising climate? A prognosis for the wider consultancy business as a whole? A result of macroeconomic uncertainty? Or was it simply about retirement?

Of all those questions, the last one is easiest to answer. Lynch, who is in his late 50s, and his longtime business partner Ahern are not calling it a career just yet. Instead, both have signed on to stay as senior managers for another five years. “We are both deeply into the company,” Lynch added. “In my case, this will keep me going into my 60s.”

Lynch explained that, at its heart, the deal was going to help Townsend continue to grow and retain its top senior talent. Without a new capital source, the firm would find it difficult to meet its plans solely from revenue.“The income from our investment management business has been good,” Lynch said, “and so has the execution. That is why, at this point in our evolution, the relationship with Aligned and GTCR was timely.”
All about growth

The level of resources that are required today is not just about the US or UK anymore; it is global
Kevin Lynch, Townsend

At Townsend, all of the partners recycled their capital into the firm, as demonstrated by the expansion of personnel and offices in London and Hong Kong. “We have added 14 senior-level portfolio and acquisition professionals over the past 24 months, which is an outlay of $6-7 million of capital including the office expansions,” Lynch said. “However, it is difficult to continually recycle capital at that pace. By having a very strong capital source come in, we now have other avenues for enhancing the personnel at the senior level and extending office locations, if we so choose. We don’t have any envisioned at this point, but the capital is now available.”

Lynch continued: “The feedback has been very positive from clients. They knew we had to create a vehicle to continue to grow in terms of hiring and retaining human capital. The level of resources that are required today is not just about the US or UK anymore; it is global. The number of managers that are out there and the number of strategies and investment opportunities has grown exponentially. In order to operate effectively, we need more human resources and they don’t come cheaply.”

The transaction also has made a significant difference to the structure of the company, with ownership expanding to 13 partners from eight partners currently. “That is a huge difference,” Lynch added.

Given that Townsend has opted to merge with a holding company, does that mean that it never envisaged a deal with a like-type firm?

On the contrary, the idea certainly crossed the minds of senior management. “We have had a variety of discussions with a number of either like-type companies or investment managers,” Lynch said. “However, the issue from our standpoint was the cultural fit.”

The issue of cultural fit revolves around Townsend’s view that its consulting practice and its investment management practice are complementary and give the firm a competitive advantage. “In the past, people would approach us and say: ‘We don’t want your consultancy or we don’t want your investment management. We want one or the other’,” said Lynch. “However, we think, from a business perspective, those two practices work in harmony to the benefit of everyone.”

Lynch elaborated, explaining that the combined buying power of Townsend provides the firm with unique access to deal flow via global investment opportunities because of the amount of capital it influences. “With that amount of capital, we can effectuate change in the investment or fund through fee negotiation or corporate governance, advisory seats, vision and so on,” he said. “We think that keeping those two pieces of the practice integrated is a strategic advantage.”

Aligned and GTCR felt the same way, hence the cultural fit. “Right off the bat, they shared our vision,” Lynch said. “A lot of firms we came into contact with in the past had some sort of real estate product within their platforms. We view that as a huge conflict of interest, as we have never sold ‘product’. We want to keep an open architecture, so whoever happens to be the best in class or have the best idea or best execution, that is who we are going to use.”

So, how did the transaction actually materialise?

Lynch revealed that Townsend did indeed enter into talks with one undisclosed party last year, but it came to naught because his firm “didn’t feel comfortable in the execution.” After that, someone from the firm in question happened to mention the exploratory talks to another and word reached Aligned.

That tale also explains why the deal remained such a tightly kept secret: there was no ‘marketing’ of the firm. “This was done very quietly – principal to principal – with no intermediary involved,” said Lynch. “It went very smoothly for the last year, and then it became very hectic for the last week.”

For Townsend, the deal could not get any better. “This is like the best of both worlds for us,” Lynch said. “All the management remains intact, and there are no operational changes at all. Everything stays exactly as it was.”

Aligned with Aligned

For the purposes of Aligned, the purchase of a 70 percent stake in Townsend is a long-term investment. James Cahill, chief financial officer of Aligned, noted that his firm was set up in January of this year for just that purpose: to acquire asset managers in both alternative and traditional sectors.

Cahill set up Aligned with chief executive David Minella, who was the former chief executive of Value Asset Management, a company ultimately shed by the Bank of Boston. After that, the pair had set up a special purpose acquisition vehicle that went on to merge in 2009 with California-based real estate group Kennedy Wilson, whose management also remained intact. Following the closure of that deal, Minella and Cahill formed Aligned, and Townsend has duly become its first acquisition.

“As an asset management holding company, we want to work with leading companies,” Cahill said. “Townsend is a leading company with a global platform led by a very experienced team. We think that real estate is a good sector in the long term, so we don’t bother thinking about the current real estate cycle today. Long term, we think the franchise will be successful and manage through all kinds of cycles.”

This was done very quietly – principal to principal – with no intermediary involved
Kevin Lynch, Townsend

As rivals digest the Townsend situation, it seems the transaction is a statement less about the future of real estate consultancy per se and more about how firms can grow. Aligned is interested in both the investment management and consultancy practices at Townsend and has bought into the argument that both practices are complementary.

One seasoned consultant that discussed Townsend with a contemporary reported that his peer wondered if the deal didn’t lift the skirt of Townsend. In other words, the transaction seemed to indicate that Townsend’s core business is investment management rather than the typically less lucrative consultancy work. The assumption behind that is, if one assumes a private equity firm is looking for a certain multiple on its investment and you believe the usual mantra that consultancy work is not brilliantly rewarded, the private equity firm must be attracted to Townsend for its outsized money management.

Aligned declined to say which of the two practices offered the greater revenue. However, signs are that Townsend will continue to grow regardless.