Deal Mechanic: Towry

A “thesis investor”, Palamon Capital Partners identifies and researches specific sectors and then seeks investments within them. When it began to research independent financial advisory firms in the early 2000s it was virtually the only private equity firm interested in the field.

“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,” says Palamon partner Daan Knottenbelt.

Through its research Palamon discovered Marlow, Buckinghamshire-based John Scott & Partners, a player with 13 advisors and an EBITDA of £900,000. Unlike its peers, John Scott & Partners had an integrated model combining financial planning and investment management. It also operated a fee-based model instead of working on commission.

“People in those days always said, ‘The UK consumer will never pay for advice because advice is meant to be free,’” Knottenbelt says. “It was just not true. If you do a good job, they will pay you a fee.”

Palamon acquired 85 percent of John Scott & Partners in 2003 in a deal valuing the business at £9 million, immediately setting aside 10 percent for the starting management team with additional sweet equity issued over time.

1 STRONGER MANAGEMENT
Palamon brought in a CEO it had identified prior to acquisition who had experience with multi-location advisory-based businesses.

Over the course of Palamon’s ownership John Scott & Partners also recruited a CFO, an operations director, a head of advisors to manage the advisor pool, a head of proposition to make sure the client offering was structured and standardised, and a head of HR.

Palamon later worked with the company to establish a board. This attention to governance stood the business in good stead when it came to applying for change of control approval from the Financial Conduct Authority (FCA), which was required every time the team made an add-on acquisition.

“[The FCA] were clearly very comfortable with the Towry model, but also with the way the company was run,” Knottenbelt says.

Palamon also worked with the business to make it scalable, putting in place several measures to optimise the integration of add-on acquisitions – of which the company completed 16 during the hold period – into the fee-based model.

“[We] developed a very well-honed integration machine,” Knottenbelt says. “We had a very extensive training programme to teach the advisors who were used to selling their model to adopt the Towry financial planning and client fee-based model [and] we outsourced all the operations and administration to an external, very large global administrator business called SEI. That gave us the scalability.”

2 THE EARLY ADD-ONS
Within 12 months of the initial transaction Palamon provided equity for John Scott & Partners to acquire two companies: Scottish market leader Aitchison & Colegrave; and Bristol and West Country-focused Holden Meehan.

“What then happened was the key to the subsequent success [of the whole deal],” Knottenbelt says.

The effect of these two add-ons “blew through all of our expectations”, augmenting the company’s £250 million of assets under management (AUM) with monthly inflows of around £20 million, doubling the size of the business within a year.

“What that said to us was there is this massive part of the market that is underserved, because people are responding this quickly and this easily to our services model,” Knottenbelt says.

As a result, Palamon and management said to themselves “‘let’s go big, let’s reset our expectations of how big this can become, and really go for a much bigger upside than we had ever really expected”.

3 SCALING UP
Early add-on success led to the reverse takeover of Towry Law in 2006. A much bigger traditional IFA, Towry Law allowed the team to apply the same integration approach on a much larger scale.

During the first two add-on processes, Palamon had perfected its due diligence approach; as many of these businesses had limited profitability, the focus was on the strength of the client base and the quality of the advisors.

“We didn’t really care about size, scale, profitability, cost base. That was much less important.”

Following the reverse takeover of Towry Law, John Scott & Partners rebranded, first to Towry Law and then, a few years later, to Towry.

Several smaller acquisitions followed, and in 2009 the business acquired the UK subsidiary of US private client stockbroker Edward Jones for £1.

“We integrated the advisors and clients into the existing Towry platform and shut down everything else,” Knottenbelt says. “As a result we reduced our cost base from a very big sum to a much smaller sum and got hold of a very accretive transaction.”

4 PLOT TWIST
Following the integration of the Edward Jones subsidiary Towry had reached AUM of around £4.2 billion. Palamon and management agreed it was time to sell.

The initial plan was to list the company in the autumn of 2011. However, anti-austerity riots in Greece that summer weakened equity markets, making an IPO less attractive. The listing was abandoned and work began on a private sale.

At that point the FCA issued a white paper which included a restructuring of the IFA industry. The new regulations, which would be implemented in 2013, would compel the sector to abandon commissions in favour of a fee-for-service model, and require a high degree of qualifications among advisors.

“The regulator was going to force the industry to adopt effectively what was the Towry model,” Knottenbelt says. “That’s when we decided, ‘This is our moment.’”

The firm could have made a healthy return of five to seven times money, but Palamon and management decided they could “see our way to quite an easy doubling of EBITDA between now and exit in just a few years by doing another round of consolidation in what is now a hugely benign consolidation environment”.

Towry found that many of the smaller firms already struggling under the weight of compliance costs were keen to be acquired by a larger company that was already compliant. From Towry’s perspective, acquiring businesses at reasonable prices brought the benefits of multiple expansion and synergies. In addition, since the initial two acquisitions, which were equity funded by Palamon, all subsequent acquisitions had been funded by balance sheet cash and debt, which further drove value.

Towry completed several acquisitions over the following few years. Its last was the take-private of London-listed Ashcourt Rowan in 2015.

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With the final piece of the puzzle in place, after 13 years it was time to sell. Thanks to its “scarcity value” as the only independently-owned platform of its size, the business attracted interest from financial and strategic buyers alike. Last month, Permira-backed Tilney BestInvest agreed to acquire Towry in a deal valuing the business at £600 million and generating a 13x return for Palamon.