Consulting » PROFILE: The FD with two brains

There are many great boardroom partnerships in business – Lords Hanson and White spring immediately to mind. Often these will be between an FD and his or her chief executive, with one half driving the innovative, entrepreneurial side and the other keeping a firm hand on the tiller.

But at Marylebone Warwick Balfour Group (MWB), Andrew Blurton and Jagtar Singh are partners of a different sort – they are both FDs. ‘We work desperately closely together,’ says Blurton, who had previously run the finances at Ex-Lands Properties before the merger with MWB in 1997. ‘We sit opposite each other, and the door is open wide,’ agrees Singh, who was at MWB during its days as a private company, also before the merger. ‘He starts a sentence, I finish it.’

The natural reaction to coming across a joint-FD pairing like Blurton and Singh is to try and find a way of characterising the difference between the two, to establish just how the relationship works. At first – perhaps because they’re both FDs and work hand-in-glove – it seems hard to tease out the demarcations. ‘We do overlap quite a lot,’ says Singh, ‘the finance function is plugged together. Any deal, therefore, requires both myself and Andrew to be involved at different levels, and with different angles.’

Analysing their contrasting roles on any given deal – and because MWB is in the property management business there seem to be a large number of them – is one way of approaching the relationship, but Blurton eventually boils it down to its raw essence: ‘In its smallest sense, it’s debt and it’s equity.’

When it comes down to that simple equation, the picture becomes clearer. Blurton, an accountant who went into corporate finance in the City and floated a property company on the USM, is the equity element. ‘My area covers the City position for the group,’ he explains. ‘So it covers production of [investor relations and results] documents; presentations to City analysts; presentations to institutional shareholders and the like.’

Singh, an investment management and finance specialist formerly at Hill Samuel, puts this evolution of the role into a historical context. ‘There’s no doubt about it that when we looked at Ex-Lands in terms of the merger, we needed to have the expertise in statutory requirements from somebody in Ex-Lands, and we still do,’ he points out. ‘We really needed to have an ongoing commitment, and Andrew is very well respected in the City; it was not my forte.’

The merger between Ex-Lands and MWB took place in the summer of 1997. At the time, both companies had assets in the £30m range, and for both parties, getting a mix of entrepreneurial strengths and access to equity markets was essential. ‘Prior to June 1997, I used to do a lot of debt finance as well,’ Blurton notes. ‘But that was a vehicle which had net assets of £30m, much, much smaller than here. We’ve got net assets of about £135m, and gross assets, including assets under management, of about £960m. So we’re a totally different vehicle now.’

In other words, the job became much bigger. Having said that, in many companies, there would still have been a ‘rationalisation’ of one FD – either Blurton, the City man, would have appointed a top-notch debt expert, or Singh would have brought in an equity and investor relations guru. But, say the FDs, that just didn’t seem necessary.

‘If you were a betting man, you would have said that only one person would have come out of it,’ Blurton recalls. ‘But we needed to balance the teams. With Robert and Graham Bourne, two of the Ex-Lands executives, leaving, there was precious little carrying on from the executive team of the company. And we found, alarmingly quickly, that in this position of finance director, we were doing so much, that there was easily a role for both of us. The type of deals we were in, equity participation from the City and also debt financing, and then running the machine internally, was at least 23 hours a day for each of us.’

Singh has a strong track record in arranging debt financing, and that remains a key part of the strategic mix at MWB. He’s also been with chief executive Richard Balfour-Lynn for many years and understands the needs of the business. ‘We were a private company,’ he stresses. ‘Myself and Richard had seen a couple of recessions, been through it all, and we were all the stronger for that. But we were not public animals, plc-type animals at that time.’

The company actually tries not to refer to itself as a property group at all: ‘There are rules and regulations,’ says Blurton. ‘If more than 50% of your assets are in property, you’re a property company. But we use property, it tends to be the vehicle. The bricks and mortar are the envelope under which our business is conducted.’

That means the FD duo are happy to reject notions that MWB will just buy up commercial sites and wait around for the rent review while they keep their fingers crossed for an increase in the value of the building. It also means that the company tries to use equity, imaginative debt financing and joint ventures to develop not just assets under management, but revenue streams and good cash flows.

The team are particularly proud of their leisure funds – in all, the company raised over £600m for three funds to be used buying leisure-related properties such as cinema complexes and bars – which also highlight the different roles each FD plays.

‘The whole board got involved to get the institutions educated, and then to move forward to talking to funders,’ explains Singh. ‘That required a substantial amount of financial structuring in terms of funding, hedging, going to the market, and that’s all dealt with in-house by the leisure fund management team. We really wanted to be quite entrepreneurial about our structuring of these deals.’

Singh cites the purchase of O2, a bar and restaurant complex, as an example of this structure. ‘That was the first deal, from a senior debt point of view, where the bank that lent the money to us to acquire the site did not take a charge on the property,’ he says. ‘They went one step higher and used the fact that we are a limited partnership to take a view on charging us interest directly rather than at the property level. So if we then wanted to sell any part of our limited partnership interest, we were free to do so.’

Blurton delivers his verdict on the latest leisure fund more succinctly: ‘That’s £88m-worth of equity, and with the debt that Jag’s put in place, that’s £250m’ – he pauses to correct himself, looking for a term that presents the figure better – ‘a quarter-of-a-billion pounds-worth of spending power. That’s worth having in a market like this.’ (Where Singh, the debt scientist, can be detailed and verbose, Blurton – the City meeter and greeter – tends to find soundbites.)

But the leisure funds are just part of the story. A quick trawl through the cuttings file in the week after the interview with the duo throws up MWB as a serious contender against the likes of George Soros- and Nomura-backed vehicles for the BBC’s property management and redevelopment outsourcing deal; and it’s just spent £50m to buy a redeveloped department store in Croydon.

MWB is also in the race to buy Liberty, the up-market West End store. Blurton, with City nous, knows not to discuss a potential takeover with members of the press, but does make a tiny concession: ‘One would just say, what is Liberty?’ Rumours suggest MWB would like to buy the site, then turn most of it into high-value office space. The brand could be sold off separately to retailers.

This is typical of the MWB style. ‘If it’s just one avenue, that may be good business, that may be one part we can actually create value from, and that’s fine,’ says Singh. ‘But if we see that there are other bits, other divisions of our group that can be locked in and be of assistance, that’s ideal. That’s why we do try to look at it from a much wider perspective.’

Two major developments reflect this outlook perfectly: the MWB serviced office business; and the company’s investment in Internet incubator Illuminator.

The serviced office business, MWB Business Exchange, has 27 locations around the country, managing 600,000 square feet of office space with full facilities. Blurton’s previous property company also did serviced offices, but, he says, the market has matured incredibly. ‘In those days, it was taking an office and if you couldn’t let it conventionally, you let it in a different way as a business centre. Now the type of tenant we’re letting to in a business centre is a multinational or a corporation with people who want six months of space.’

This means that, these days, serviced offices tend to require more investment (MWB has pumped £20m into the business), but the results are worthwhile. In 1998, the value of the serviced offices was £12m, and they generated income worth £4.4m. In the 1999 annual report, the figures are up to asset value of £41m and income of over £8m.

‘We’re trying to look ahead, and we actually have a good balance of assets as well,’ Singh points out. ‘We’re not focused on straight residential, straight industrial, straight commercial – we have a good balance. We have a very mature serviced office centre which is income, it’s an earning stream for us, and a very high margin one. The payback period is very quick.’

Illuminator, the Internet incubator, might at first glance seem to be what is becoming quite common amongst property groups at the moment: an attempt to deploy capital into areas that offer higher growth potential. But Blurton is scathing about companies which take that sort of action unthinkingly. ‘It’s even more blunt than simply re-deploying funds out of hardcore property: frankly, the property sector, if you look at it, for years hasn’t been particularly entrepreneurial. In the 1980s, you could buy a property, you’ve got some inflation, you could play with some costs here and there, and you produce a profit. It was a no-brainer, actually, terribly easy to do nothing – and that was a terrible message that the property sector delivered.

‘We’re not like some property companies which are not doing so well on property so looks a good idea,’ he continues. ‘Perversely, for a few weeks, their share price goes up and then collapses because everyone realises that they’re not doing what they’re good at. For us, Illuminator, and the start-up companies that Illuminator is managing, are clients of ours within Business Exchange. BE provides services, IT, Net access, so companies can move straight in there.’

Singh emphasises that it’s the drive for earnings and cash flow, rather than just capital growth, that differentiates MWB. ‘We are developing these new areas, which are like off shoots from serviced offices,’ he says. ‘Then we apply economic measurements to assess whether you’d want to go into those sectors or not. It’s natural for us to look at these different sprouting shoots, evaluate them and then see from a group perspective, does it work? It’s horses for courses.’

Naturally, both FDs stress that the company is reliant on a board, and a management team below that, which is expert in the field, and that everybody works towards shared goals. MWB recently bought the Howard Hotel from the Barclay brothers in an off-market deal worth £38m (‘plus stamp duty’), a deal that came about thanks to fellow director Joe Shashou’s contacts, and those of his team, in the commercial property market.

In fact, the deal was structured such that the third party operator, SwissHotel, guarantees a level of return to MWB. ‘The traditional market asks, why do you need to have a minimum guaranteed income?’ Singh says. ‘We say, we’re going to financially structure this deal on better terms than the market. So the upside to us is that there’s good financial structuring; the upside of the normal property deal on the hotel plus we’re not capped on the income upside.’

These sort of deals have engendered a significant level of trust within the investment community for MWB’s management. ‘We try to keep institutions, banks, joint venture partners, analysts, anybody we think would be interested, informed,’ Singh stresses. ‘It’s not a knee-jerk reaction of moving from one thing to another. They can see this gradual process, and because they get this information flow, it makes life much easier. Andrew talks to the institutions, I talk to the financing institutions, it’s great – it gets networked out, so our direction isn’t a surprise. We’re very hot on making sure people understand what we’re trying to do.’

The FDs like the board – which meets every Tuesday – to be lively, and they feel that having double the financial power round the table helps. ‘We’re very keen that when we say something to a joint venture partner, an institution, a financing partner, we’re 100% sure that it’s correct. Credibility has gone a long way towards our development,’ Singh points out. That means thrashing out even minor points of interest in the meetings.

And despite the fact that MWB is self-consciously a finance-driven entity, it also means the FDs can back each other up when it comes to reining in overly expansive plans from other members of the board. ‘There will be an entrepreneurial flair at the top which wants to go off and do something,’ admits Blurton, ‘and Jag might say, ‘Well, I can’t debt finance that 90%, and we’ll have to put a whole lot of equity in.’ And I’ll say, ‘We’ve got to think about the response of the City.’ So we’ll be coming from the same angle.’

Would they recommend a joint FD to other companies? ‘It’s not the hours in the day, although I don’t know how we’d ever handle it if there was only one of us,’ says Blurton. ‘It’s the skill sets that one brings to bear on a transaction when you run a company like this which is financially driven. It’s not a question of whether it’s a nice building and lovely bricks and mortar; it’s the whole way that you handle it from a financial perspective, and that needs more than most people have got in one brain.’

‘You can’t expect one FD to actually be a specialist in all things, and have their finger on the pulse on everything,’ concludes Singh. ‘To get the best out of an FD, you need to make sure that he has the ability and the capacity to focus on the issues for you, and all too often, large companies find that they struggle to get 100% out of their FD.’

Return to the Financial Director website