Holding company said to pay $100 million for its 70% stake in firm
The two founders of Townsend Group, who sold off 70% of the business last week to money manager holding company Aligned Asset Managers LLC, each get a multimillion-dollar payday from the deal, industry insiders say.
The co-founders — President and CEO Terry Ahern and Kevin Lynch, principal — along with other Townsend executives will hold a combined 30% of the real estate consultant and investment manager, with the co-founders expected to hold the largest interest in the firm, after Aligned, when the deal closes.
Neither Mr. Ahern nor Mr. Lynch would comment on the financial terms of the deal or how much money each will earn.
Townsend rocked the real estate investment community on Aug. 29 when it announced the sale of the majority stake to Aligned, a Stamford, Conn.-based holding company formed in January with capital from private equity firm GTCR LLC, Chicago.
The Townsend deal is Aligned's first.
Terms of the deal weren't disclosed, but industry insiders are estimating Aligned is paying more than $100 million for its 70% stake.
A GTCR executive said Messrs. Ahern and Lynch, along with the six other shareholders in Townsend, signed employment contracts of three to five years.
“The founders and others are selling out some of their ownership,” said Collin Roche, GTCR principal. “They are not retiring and they are retaining a significant ownership. The (eight-member) shareholder group generally is getting money to diversify their wealth.”
The capital is also being used to expand ownership to 13 from eight executives and to continue Townsend's global expansion. Townsend had $105 billion under advisement as of June 30 and $10.1 billion under management.
Industry insiders expect that Messrs. Ahern and Lynch will get about 40% of the remaining portion of the company and the future profits, less capital added to Townsend's balance sheet.
Whatever they end up gaining from the deal, it's not bad for two men who started Townsend in 1983 while still in their 20s, financing the Cleveland-based real estate consulting firm with their credit cards.
Mr. Ahern, an attorney, had a law practice that included real estate before switching to real estate investments. Mr. Lynch began his career underwriting real estate loans for a regional savings and loan. Before starting Townsend Group, both worked at New York-based real estate investment bank Stonehenge Capital Corp.
The pair started off providing real estate consulting services to investment brokerage firms, Big Eight accounting firms, insurance companies and Fortune 500 companies. Townsend's first institutional client was the now $12.3 billion Ohio Police & Fire Pension Fund, Columbus, Mr. Ahern said.
“We were real estate people that went into consulting vs. consultants that were trying to understand real estate. We continue to differentiate ourselves because we think like investment people, not like consultants,” Mr. Lynch wrote in an e-mailed response to questions.
David Minella, Aligned's CEO, said the purchase of a majority stake in Townsend is the largest investment made by a money manager holding company.
Capital left over
GTCR's Mr. Roche said a “meaningful portion” of GTCR's initial $200 million investment in Aligned Asset Managers was used to buy into Townsend Group, with enough capital left over to make a few more investments.
Townsend Group employees will own 30% of the company and share in 10% of future profits, Mr. Ahern said in a separate telephone interview.
The group of 13 Townsend executives will have a 37% stake in the firm going forward, he said. For starters, they will receive 10% of future cash flows. Of the remaining 90% of cash flows, 30% will go to the executive group, Mr. Ahern explained.
“We are very pleased that through a 10% profit interest and through a 30% direct equity ownership, the employees of Townsend will effectively own 37% of the future of the firm,” a letter to Townsend clients from Mr. Ahern said. “We believe this amount of ownership compares very favorably with other recent transactions in the real estate sector.”
In the client letter, Mr. Ahern said Townsend executives view the partnership with Aligned “as a critical next step in creating a global real estate platform capable of not only keeping pace in an ever-changing real asset investment market, but possessing the independent culture and thought leadership necessary to continue our mission.”
Real estate industry executives who spoke on condition of anonymity said the transaction underscores that Townsend Group is more of a money manager than a consulting firm. Townsend provides investment management services including funds of funds, co-investment funds and separate accounts.
However, both Townsend's Mr. Ahern and Aligned's Mr. Minella denied that is the reason for the deal. Both said that Townsend Group will continue to be committed to its consulting business.
“We looked at Townsend in a holistic way,” Mr. Minella said in a telephone interview. Aligned executives saw that Townsend was profitable both as a consultant and as a money manager. “We valued it as a combined business,” he added.
“We believe the consulting practice is a strategic part of our business ... We intend to continue to develop both practices,” Mr. Minella said.
Townsend executives provide advice to large capital sources and through that, the firm maintains significant goodwill, superior access to deal flow and “a unique window into the marketplace,” Mr. Ahern said. “Our discretionary (business) adds to the revenue of consultants and attracts the type of intellectual capital which benefits our consulting clients.”
Strategic part of business
In an e-mailed response to questions about the consulting business, Mr. Ahern said, “Consulting is a strategic part of our business. It will be business as usual. Nine of 13 equity participants have one or more consulting clients,” he stated.
Mr. Ahern noted that two of Townsend's most recent clients hired Townsend for consulting. He didn't name them, but Pensions & Investments reported that Townsend was hired in August by the $50.3 billion Massachusetts Pension Reserves Investment Management Board, Boston, and by the $15 billion New Mexico State Investment Council, Santa Fe.
“In both instances, we replaced another consulting firm. It speaks to consulting being a strategic part of our business, and I would suggest to the benefit of our model,” Mr. Ahern stated.
So far, client reaction has ranged from wait-and-see to undisturbed.
“The sale at Townsend is a change in their capital and ownership structures,” said Ricardo Duran, spokesman for the $154.2 billion California State Teachers' Retirement System, West Sacramento. “We don't anticipate that to have any effects on our account or on their service to our account.”
Townsend is in the fourth year of a five-year real estate consulting contract with CalSTRS, he added.