Palamon nets 13x in 13 years on Towry

The firm kept hold of the independent wealth manager – its longest-held portfolio company to date – to take advantage of regulatory changes.

UK mid-market firm Palamon Capital Partners has sold independent wealth manager Towry to Permira-backed Tilney Bestinvest in a deal valuing the business at £600 million ($856 million; €752 million), according to a statement from the firm.

The sale will generate a return on invested capital of 13x for Palamon investors, the firm said.

Palamon acquired what was then John Scott & Partners, a small founder-led wealth manager with £250 million in assets under management, in 2003 through an off-market transaction, using capital from its 1999-vintage debut fund, which closed on €440 million.

“No private equity firms were looking at the [independent financial advisory] industry at that time,” Palamon partner Daan Knottenbelt told Private Equity International.

“But what we saw was an industry that was hugely fragmented with lots and lots of little players, all sub-scale, not very profitable, which were already then under pressure from the regulator because they had a commission-based sales model that fundamentally created client conflict of interest.”

John Scott & Partners, on the other hand, had a fee-based model, which Palamon saw the opportunity to use to consolidate the smaller and less profitable players under “a model that was clearly truly independent, and therefore [had] a much stronger regulatory position,” Knottenbelt said.

Palamon was ready to exit Towry at an impressive multiple around 2010 when the business had already made a substantial number of acquisitions, including the reverse takeover of Towry Law in 2006 and the acquisition of the UK subsidiary of Edward Jones in 2009, Knottenbelt said.

However, in 2011 the UK Financial Conduct Authority announced that the Retail Distribution Review would be implemented in 2013, which would compel the industry to abandon commissions and adopt the fee-for-service model already in place at Towry.

“It would have been a fantastic result, clearly, in and of itself, but we suddenly saw this market shift coming down creating an opportunity, and we really saw a chance of doubling the EBITDA in a short number of years with an investment that we already knew we were in, in a market environment that we understood,” Knottenbelt said.

“It was really an opportunity for us to have a final phase in our consolidation plan and take advantage of that market shift, and that’s why we held it for longer than we otherwise would have done.”

Palamon agreed a fund extension with Fund I investors and Towry went on to complete a further six add-on acquisitions – 16 in total during Palamon’s hold period – including the take-private of Ashcourt Rowan in 2015.

Under Palamon’s ownership, revenues grew from £5 million to more than £120 million and client assets grew from £250 million to more than £9 billion.

“Every time we bought a traditional IFA business which was commission-based, we transitioned it into our fee-based model, so we properly integrated all of the acquisitions that we made,” Knottenbelt said. “We had a very extensive training programme to teach the advisors who were used to their selling model to adopt the Towry financial planning and client fee-based model.”

Following the sale, Palamon European Equity has one remaining business, Italian consumer finance company Sigla Credit, which it acquired in 2005 and is currently up for sale. Palamon chose to hold on to the business until market conditions improved as the firm was already extending the life of Fund I to accommodate the investment in Towry, Knottenbelt said.

According to performance figures from the Oregon Public Employees Retirement Fund, an investor in Fund I and Fund II, as of 30 September 2015, Palamon European Equity was delivering a total value multiple of 1.98x and an internal rate of return of 11.8 percent.

Palamon is currently in market with Palamon European Equity IV. The target size of the fund is unknown, but it is understood the vehicle has already made four investments, including Currencies Direct, which the firm agreed to acquire alongside US firm Corsair Capital in a deal valuing the business at more than £200 million.

Palamon declined to comment on fundraising.

Last summer Goldman Sachs AIMS Private Equity Group, Morgan Stanley Alternative Investment Partners, Rothschild Merchant Banking Group, Adams Street Partners and Dutch pension fund manager PGGM agreed to purchase stakes in Palamon European Equity and the €670 million Palamon Equity II as part of a stapled transaction in which they also committed to Fund IV, as reported by PEI sister title Secondaries Investor.

According to UK regulatory filings, at least 15 limited partners in Palamon European Equity I and Palamon European Equity II sold their entire stakes. These include Pennsylvania State Employees’ Retirement System, BlackRock, Oregon Public Employees’ Retirement Fund and Strategic Partners, Secondaries Investor reported.