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Townsend sale a tale of the times

Deal illustrates problems facing specialty consultants in a world full of pressures

Stuart Blair said more pension funds are skipping specialty consultants in favor of generalists to save on fees.

The sale of real estate consultant The Townsend Group to Aon PLC is an example of how tough it is to be a specialty consultant in a world of massive fee pressure and increasing competition from general investment consultants.

Industry observers said an acquisition can help specialty consultants keep fees down by generating cost efficiencies while also expanding their offerings.

Aon announced on Sept. 1 that it would acquire 100% of Townsend in a $475 million deal that includes the 84% stake held by real estate investment trust and real estate manager Colony NorthStar Inc.

But fee pressures are hardly the only issues roiling the world of specialty consultants.

Real assets consultant Courtland Partners, founded by the late Michael J. Humphrey, a former Townsend consultant, is facing succession challenges.

The consultant is being shopped for a sale or merger. Mr. Humphrey, a Courtland managing principal, died unexpectedly in November 2016. At the time, he owned 90% of the firm; Steven C. Novick, also a managing principal, owned 10%.

Acquisitions of alternative investment consultant firms also have picked up in recent years.

Strategic Investment Solutions Inc. was bought by consultant and outsourced CIO firm Verus Advisory Inc. in 2016. In another deal, Pavilion Financial Corp. acquired Altius Holdings Ltd. in 2016 and LP Capital in 2014. Also in 2016, StepStone Group LP purchased European private debt and hedge fund consulting firm Swiss Capital ​ Alternative Investments.

Adding to the pressures, asset owners are beginning to hire general investment consultants for specialty consulting work to reduce the workload on their staffs, said Stuart Blair, director of research at Newport Beach, Calif.-based Canterbury Consulting Inc.

"Managing multiple service providers and coordinating their output while focusing on asset allocation is difficult," Mr. Blair said. "Who will coordinate all that?"

Townsend has been affected by this trend.

In June, the $11.2 billion San Diego County Employees Retirement Association terminated Townsend. SDCERA's general investment consultant Aon Hewitt and Albourne Partners Ltd., a former hedge fund consultant, are now sharing real estate consulting duties.

SDCERA officials said they made the change to save on fees, adding the move will save an estimated $280,000 a year.

Neither the board nor staff knew about the upcoming Townsend acquisition by Aon when the decision was made, said SDCERA spokeswoman Mary Montgomery.

The Dallas Police & Fire Pension System terminated Townsend as its real estate consultant last year and expanded current general consultant NEPC LLC's role to include real estate and natural resources consulting.

Last month, the pension fund sued Townsend to recover fees, alleging the consultant "repeatedly failed to adequately advise DPFP regarding its real estate investments. Under Townsend's supervision, DPFP's real estate portfolio was heavily overweighted in high-risk, speculative, undiversified investments — investments of a kind not typically pursued by public pension systems," said the lawsuit, filed in state court in Dallas on Aug. 31.

Colony NorthStar and Aon executives declined comment. Joe Olszak, chief operating officer of The Townsend Group, could not be reached for comment by deadline.

In addition to fee struggles, many of the alternative investment consultants are grappling with succession issues. A merger can be an attractive option, observers said.

"Most of these firms are going through generational or transition struggles," Canterbury's Mr. Blair said. "The independent consulting world started around 30 years ago. Many of the founders are in their 60s and are more in the business development phase. Some are winding down, and it is time to hand the baton" to the next generation, he said.

"That's not easy to do … you have to put a plan in place 10 years or more ahead," he added.

A legacy firm

The sale of Townsend is a major development in the industry.

Townsend Group practically invented the real estate consulting business and became the go-to consultant for asset owners. When the majority of the firm was first sold to Colony NorthStar's predecessor company in 2015, Townsend had $13 billion in assets under management and about $170 billion in assets under advisement.

As of June 30, Townsend had $14.2 billion in AUM, more than it had in 2015, but about $400 million less than six months earlier. It advises on $175.7 billion in global assets.

Aon said its investment group manages more than $100 billion of worldwide assets and advises on $4.2 trillion. It currently has $30 billion in real estate under management and under advisement.

Colony NorthStar appears to be selling the real estate consulting firm for less than it paid. Its 84% interest in Townsend was acquired on Jan. 29, 2016, for $383 million net of post-closing adjustments. It will be receiving an estimated $379 million in net proceeds when the sale to Aon is completed later this year.

Colony NorthStar officials declined comment beyond a news release announcing the sale.

A 'win' for Aon

The Townsend acquisition is a win for Aon clients and the firm, which is in "growth mode," said Cary Grace, Chicago-based CEO of Aon's Retirement & Investment Solutions business. Townsend executives, headed by co-founder and CEO Terry Ahern, will report to Ms. Grace.

"We love the Townsend team. We love what they've done and their relationship with clients," Ms. Grace said. "We will have the ability to drive revenue synergies together."

She added that Aon's clients "are looking to simplify. ... That's one big reason clients are moving into the OCIO space. A number of clients are wanting us to take on more responsibility for their entire portfolio."

There is also pressure across the board to "drive better outcomes," she added. "Fees is one lever, asset allocation is another."

Ms. Grace said Aon's purchase of Townsend is complicated.

NorthStar Asset Management, a real estate manager, acquired its majority stake in Townsend before it merged with real estate manager Colony Capital and NorthStar Realty Finance, a REIT. That deal resulted in Colony NorthStar.

This made Townsend's sale more complicated than most transactions, "which was a huge credit to Colony NorthStar," she said. "It was a very competitive process over the summer."

In the Colony NorthStar news release, the company said part of the motivation to sell Townsend was potential conflicts of interest.

"Townsend is a terrific non-core legacy NorthStar business, but by the closing of the Colony Capital/NorthStar merger in January of this year, it became clear that the market perceived a conflict with Colony's institutional investment management business," said Richard B. Saltzman, president and CEO of Colony NorthStar, in the release.

Ms. Grace said selling Townsend to Aon eliminates the conflict because Townsend's consulting arm can be independent of the manager, which was its history.

"From Aon's standpoint, we are very happy with the deal," Ms. Grace said. "We feel we acquired the leader in the space. We've known Townsend for years and we saw we had the opportunity, we jumped at it."

The acquisition also allows Aon to expand its real assets consulting business. Aon has been in the real estate consulting business for 30 years, Ms. Grace noted.

"Our colleagues and clients are incredibly excited," she said.