DEALS: Different type of parent

Last month, The Townsend Group, one of the largest and most influential real asset investment management and advisory firms, found itself with a new owner, NorthStar Asset Management Group. The New York-based asset manager bought an 85 percent ownership stake in the Cleveland, Ohio-based firm for approximately $380 million. The stake was acquired primarily from Chicago-based private equity firm GTCR.

NorthStar is Townsend’s second new owner in four years, following Aligned Asset Managers, a GTCR portfolio company that acquired a 70 percent interest in Townsend in August 2011. Townsend’s management team, which included co-founder and chief executive Terry Ahern, had retained a 30 percent stake at the time of the GTCR acquisition but now has sold an additional 15 percent interest to NorthStar.

For Townsend, NorthStar and GTCR represent very different types of parent companies. For one thing, GTCR invests in growth companies in financial services, technology, healthcare and multiple other industries, while NorthStar is focused specifically on managing real estate investment management platforms globally.
The former is said to have acquired Townsend with the intention of having the firm be part of a broader asset management platform under Aligned. NorthStar, however, did not find other businesses that fit the investment criteria for the platform and Townsend remained the only firm under the Aligned umbrella.

Stephen Ritchie, a partner at Kirkland & Ellis, which represented GTCR on the sale of its stake, said the private equity firm had invested in Townsend because Ahern’s leadership of the business fit with GTCR’s track record of investing in firms with strong management teams. He noted that GTCR did not sell its stake in Townsend because its investment was nearing the end of its hold period, typically five years to seven years in private equity. Instead, the investment climate in the private equity industry spurred the transaction, he said.

“The market is generally strong for private equity firms to sell their portfolio companies,” Ritchie said. “NorthStar made a compelling offer, and GTCR decided it was a good time to sell.” The transaction was understood to be struck off-market, not part of an auction process. While GTCR’s original purchase for its Townsend stake has not been disclosed, the firm is said to have made a good return on its investment.

Townsend expanded its business considerably under GTCR. At the time of GTCR’s acquisition, the firm was focused exclusively on real estate and managed or advised investor interests of more than $100 million. By the time GTCR announced the sale of its stake to NorthStar, Townsend had expanded into infrastructure, timber and agriculture, managed approximately $12.8 billion of assets and advised clients with real assets allocations totaling approximately $170 billion.

Its investment management platform, rather than its consulting business, moreover, had become the firm’s primary moneymaker, with the former accounting for 80 percent of its revenues.

For NorthStar, Townsend represented a missing piece of the puzzle as it has continued to build its real estate asset management platform. “It’s a very simple strategy: to grow revenues and earnings across a diversified portfolio, and to have multiple platforms across commercial real estate,” said Daniel Altscher, an equity analyst at FBR Capital Markets, an Arlington, Virginia-based advisory firm.

NorthStar already had public capital from managing NorthStar Realty Finance (NRF), a publicly-traded real estate investment trust (REIT); retail capital from its non-traded REITs; and property management fees through a 45 percent stake in Island Hospitality Management.

“The void has been in institutional capital,” said Altscher. “NorthStar hadn’t had large institutional capital, but now they do through Townsend.” Indeed, one of the benefits that NorthStar cited in acquiring Townsend was the latter’s significant investor and client base, which includes many of the world’s largest institutional investors.

Although Townsend is expected to further grow its business with NorthStar, that growth is likely to be broader in scope than it had been with GTCR, given its new parent company’s diverse product lines and investor base. “Public capital management and retail management at NSAM may be a way to expand for Townsend into other channels or other formats they weren’t familiar with,” says Altscher.

With NorthStar’s greater firepower – $24.7 billion in assets compared with GTCR’s $11.4 billion – Townsend’s new and richer parents certainly have the means to take it into new territory.