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.