The Betrayal Of An Entrepreneur By City PR Agency Instinctif Partners
Post originally published at LinkedIn.com
Instinctif Partners issued worthless investment instruments to buy my business whilst simultaneously extracting over £1m in (very real) cash and profits from it. This is the story of how I lost everything that I had worked for thanks to a morally and ethically dubious investment scheme.
At the age of 24 I started an agency at my kitchen table. It was always a ‘build to sell’ strategy and in 2013 at the age of 29 I was delighted to sell my fast-growing agency to Instinctif Partners in a deal that was based on the promise of future performance-based earn-out payments which by the end of 2016 would be worth over £1m.
Instinctif Partners had recently taken on investment from private equity firm Vitruvian Partners and the deal, although modest in its EBIT multiple, seemed legitimate at the time.
Instinctif Partners quickly did well from the deal. Between 2013 and the end of 2016 the firm extracted over £1m in cash conversion and net profits from the ‘Film & Motion’ division that my agency became within Instinctif Partners. The problem? It turned out that the promises of future payment that Instinctif Partners made to me were actually worthless.
Whilst extracting over £1m in cash and profits from my acquired agency, Instinctif Partners issued me with earn out payments in the form of loan notes. I was issued £186,887 on 1st April 2015, £315,603 on 1st July 2015 and £482,100 on 1st July 2016. These £984,590 of loan notes had a compounding coupon of 10% interest — also payable as loan notes.
Did Instinctif Partners Knowingly Issue Worthless Promises?
Yet just two years after Instinctif Partners issued its final loan note to me of £482,100, I would be told by its management that these loan notes had nil value. Not that they were worth a little less, or that repayment might be delayed. But that they were worth zero.
It has been widely reported that Vitruvian Partners started seeking a buyer for Instinctif Partners in 2017 at a value of £40m. Documents in my possession show that at that time Instinctif Partners also had approximately £85m of loan notes in issue. I also believe, but have no documentary proof, that the firm carried at least £5m in bank debt.
To complete a sale, these £85m of loan notes would first need to be discharged. It therefore follows that in 2017 it would have been abundantly clear to the Board of Instinctif Partners that any loan notes in issue would be worth, in a best case, less than 50% of their value. Yet just one year earlier the same Board issued me with £482k in new loan notes in payment for my business — which they continued to profit handsomely from.
How could the management team not have known that they were issuing financial instruments that were worth, at best, just half of their face value at the time of issue?
The net result of all of this is that the wildly successful business that I had spent my best years of blood, sweat and tears building from my kitchen table was effectively taken from me for almost nothing. At first, I was totally broken by this. I was hit so hard in terms of my life plans and my momentum for constantly growing and thriving as an entrepreneur that it took a good while for me to get back up again. There were some very dark days indeed.
So why share this story now? I come from a very underprivileged background. Building a successful business had taken more sacrifice than anyone could ever have imagined. And when you come from an impoverished background, you learn to take punches, get back up again and then take the fight back the those who have wronged you. It has taken me a few years just to get my life back in order such that I am in any kind of position to share this story. And frankly, I was embarrassed and ashamed about what happened.
I have also always believed that integrity matters and that when a business behaves dishonestly and without integrity it is important to call it out for what it is. I believe that I have a duty to dispossess those involved of any illusion that what occurred was ethically legitimate business activity. I share my story so that others do not fall victim to underhand tactics in the future.
Instinctif Partners Taking Responsibility?
In 2020 I engaged with an investigative reporter at The Times who spent months going through documents. COVID slowed down investigations, but in April 2021 the reporter approached the management of Instinctif Partners to ask for comment on his findings.
One may have hoped that a City PR agency which seeks to build its reputation on trust might take some responsibility for ethically dubious events in its very recent past. The response received from the recently appointed CEO was curt to say the least:
“The comments from Mike relate to several years ago, since when the management and ownership of the business have completely changed. The business was successfully refinanced in September 2019, and the transaction reflected the financial performance of the business up to that date. Since then the business has consistently grown both revenue and profits, while acting towards clients, employees and shareholders with integrity and transparency.”
Aside from the material inaccuracy of suggesting that events occurred “several” years ago (the pain and fallout also remain very real for me today), I would suggest that this surprisingly unsophisticated response speaks to the underlying culpability of Instinctif Partners. It is a textbook response from a PR playbook: to seek to deflect rather than to defend, because the respondent cannot be caught out trying to defend the indefensible.
This was the final catalyst for me sharing my story in full. Optimistically I hope that clients and employees of Instinctif Partners might exert pressure on the its current management to right a wrong. I hope that we still live in a world where stories have power.
A Dubious Financial Scheme?
Before going any further, it is worth taking a moment to define what a Ponzi scheme is. A Ponzi scheme is where a person or firm issues investment instruments which promise a future return, in the knowledge that there is no realistic prospect of paying that return, except by using new funds taken from other people on the same promise of future returns.
To this day I have no idea where the £1m of cash and profits that Instinctif Partners extracted from my acquired business went between 2013 and 2016. Was the cash paid to the private equity owners as a return on their investment? Was it consumed by the then-CEO’s salary?
Moreover I struggle to believe that when Instinctif Partners issued me with an earn out loan note of £482k in 2016, the management did not already know that there was no prospect whatsoever of ever paying the face value of that loan note, let alone any prior issuance, especially given that by 2017 it was abundantly clear that the loan notes were worth little.
In 2018 Instinctif Partners confirmed that all loan notes were worth nothing and obliged me to accept a tiny payoff upon threat of otherwise receiving nothing at all. A gag clause was also included in early contracts to prevent me from speaking out, but thankfully by the time of signing a deal in 2019 the law had changed to disallow such gag clauses. Whoever changed that law deserves credit as otherwise, such behaviours would go unreported.
How did this happen? Was it a Ponzi scheme? I believe that the management of Instinctif believed that they were simply engaged in ‘clever’ financial engineering. I believe that it is important today to dispossess them of that illusion and call it out for what it really was.
But I will leave to you as the reader to make your own conclusions. The facts that follow are 100% true to the best of my knowledge and recollection, and everything that I reference herein in terms of numbers is supported by email chains and legal documentation…
An Entrepreneurial Journey That Started At My Kitchen Table
I was employed as a Partner and latterly as a Managing Partner at Instinctif Partners between 2013 and 2018. The term “Partner” at Instinctif Partners is used much the same way as at John Lewis — it comes with prestige, but not necessarily any equity. A “Managing Partner” has a little more responsibility, but is still far removed from any executive management.
I got there at a young age because when in my early twenties, I had launched a corporate filmmaking agency, which traded as ‘NewMedium’ and also as ‘IR Squared’. It was a highly calculated enterprise that anticipated the oncoming boom in content and video in the world of PR and communications. It was evident to me that most large communications and PR agencies did not recognise the future size of the ‘content’ opportunity and what it would mean for their clients, and so they would need to ‘buy in’ this capability in the future.
My agency was in every respect a ‘build to sell’ enterprise. It was launched alone at my kitchen table and pursued at the cost of great personal sacrifice. During the early years of the agency I accrued large debts, went through periods of being unable to afford to eat and even had to sell my house. But I knew the intrinsic future value of what I was building and chose to make the sacrifices of an entrepreneur. By 2012 the boutique agency was profitable and ideally positioned for immediate growth that was already entirely visible. I was aged 29.
The False Validation Of A Private Equity Partner
My agency had many clients in common with Instinctif Partners (then named College Group) and after reassuring talks with then-CEO Richard Nichols, in which the backing of Vitruvian Partners was cited as giving credibility to the acquirer, as well as the notion of an ‘equity event’ for Instinctif to occur within three years, I agreed to sell my company in a novel way based on future earnings, with ‘loan notes’ issued as earn out payments.
During 2013 I had already been approached by third party investors who were valuing my (then small) business at just under £1m. But I had no plans to sell at that stage. I knew that the business was, entirely by my design, on the cusp of entirely visible and highly profitable bottom-line growth. I was persuaded by Richard Nichols to entertain, and then to accept, an offer for its acquisition by College Group (as Instinctif Partners then was).
College Group had seemingly raised a lot of money from private equity firm Vitruvian Partners, and had big growth plans, so it seemed ’sound’ as an acquirer. The Group would not allow me to do any due diligence into their accounts, which Mr Nichols said was a “red flag” for the Group. But Nichols put a lot of face time into ‘selling’ me into the notion that the entire Group was growing fast organically and through M&A, and that it was heading for a major “equity event” which within 3 years would pay out the value of the loan notes.
Such was the optimism about this ‘equity event’, that a provision was made within my earn out agreement for what would happen if the ‘equity event’ occurred even sooner.
Issuing Worthless Financial Instruments As Payment?
Since my business was small but with lots of visible future upside, I agreed to sell for a nominal sum of £1, but with a 3-year earn out deal, each year accruing some modest amounts of cash and shares, plus a lot of loan notes with a 10% p.a. coupon. The aggregate earnings multiple of the deal was extremely modest — less than 3 x cumulative EBIT.
My attraction was the option to leverage the Instinctif Partners footprint and client base to grow even more quickly, such that the EBIT would be far higher than if my agency instead remained independent and took investment at the £1m valuation being offered by other investors. With the added prospect of an exit through an ‘equity event’ realising the value of the promised loan notes within three years, I cautiously accepted the modest deal.
Fast forward, and over the course of the next 3 years my business delivered over £1m in profits into Instinctif Partners, as well as paying a share toward Group overheads, and providing, by design, extremely high levels of cash conversion. Instinctif Partners extracted almost all of this profit and cash at the end of each year, and issued me with its ‘loan notes’.
The Early Warning Signs — And My Resignation
Soon after the acquisition of my agency, I joined Instinct Partners as a Partner alongside the amazing team that I had built. Seeing the management of Instinctif Partners from the inside, I soon became very concerned about the validity of the promises made to me. I increasingly got the sense that something did not ‘add up’ and that I’d been kept in the dark.
The management team of Instinctif Partners were primarily accountants with no understanding of the market, trends or opportunities. They had a propensity for using creative accounting to ‘buy’ growth and seemed unable to deliver any organic EBIT growth.
By the time of my last year as a Managing Partner my concern was so great that I took my foot off the business growth accelerator of the ‘Film & Motion’ division that my business had become within Instinctif. The EBIT of ‘Film & Motion’ fell from a handsome c.£500k the year before to a more modest break even. I had the sinking feeling that my former business was being milked for its very real profits and cash in return for worthless earn out payments.
In 2018 CEO Richard Nichols first informed me that my loan notes would likely be worth a fraction of their face value. Filled with dread, I duly resigned after making a deal that would allow me to retain the loan notes that had been issued to pay for my company. I am sad to say that the remains of what had once been one of the most dynamic and fast-growing profit centres of the entire global agency was subsequently run into the ground.
Fast forward to the summer of 2019, and new CEO of Instinctif Partners, Tim Linacre, informed me that the majority of the Group was to be sold to Lloyds Development Capital. I was informed that the magnitude of bank debt and loan notes that had been issued were very far in excess of the current enterprise value of the Group. My loan notes were worthless.
I was also informed that I had been unwittingly issued with ‘sub ordinated’ loan notes, which fell behind ‘preference’ loan notes that the Private Equity investors and Senior Directors of the company had issued to themselves. I never knew that these ‘preference’ notes existed. The loan notes issued to me by Instinctif Partners had already been revealed to be self-evidently almost worthless at the time of issue when they had an assumed parity with all others in issue. The fact that they were subordinate confirmed that the loan notes which Instinctif had been issuing to me to pay for my company were always worthless.
The Agony Of Hobson’s Choice
I certainly would not ever have sold my business to Instinctif Partners knowing that the much-lauded ‘investment’ of Vitruvian Partners was made as preference loan notes and not as equity. Clearly no entrepreneur would sell a business at a low EBIT multiple on future earnings and in return for paper, if that paper did not have parity with what was already in issue. In retrospect, I realize that I had lost the business which I had built from the outset.
Under duress I was offered a “discretionary” payment of c.£140k if I agreed to discharge Instinctif Partners from any further liability or obligations in regard to my shares and loan notes in order to enable the 2019 deal with LDC.
Insult was also piled further on top of injury. An entrepreneur would typically expect to be paid as capital and to enjoy the 10% tax rate of Entrepreneurs Tax Relief as a reward for risk taking. Instead, I was told that the “discretionary payment” of c.£140k would be paid as a PAYE bonus, and that tax would be deducted from it at 40%. I was also told that I would be held liable to pay the employers NI in relation to this ‘bonus’ myself!
If I did not accept, I was told that I would get nothing at all, and my loan notes would be “carried over” as part of a deal with Lloyds Development Capital, and cancelled at nil value.
Losing Everything That I Had Built
The reality of the toil and sacrifice of starting a business at 24 is something that I will never be able to fully explain. As a result, I had all of my eggs in one basket. The business that I had built was my primary and only major asset. Subsequently the promises of payment for the acquisition of that business by Instinctif Partners became my primary and only asset.
The emotional and psychological impact of having done everything ‘right’ and built a high-growth and profitable business during my twenties and early thirties, only for it to be taken from me in such an underhand manner, was severe. At times there seemed to be no escape.
Under threat of receiving nothing if I did not accept the Hobson’s choice that was presented to me, I had no choice but to accept the deal, despite knowing that I had been subject to what I considered to be immoral, untrustworthy and legally questionable dealings. The business that I spent 10 years working on had been effectively ‘taken’ from me by Instinctif Partners, along with over £1m extracted in cash and profits from it between 2013 and the end of 2016.
In the end, after PAYE tax and employers NI were deducted, I received c.£90k in payment. I was also left £50k out of pocket, since in good faith I had paid £50k in capital gains tax in 2013 in recognition of the promised future value of the acquisition of my company.
Cheated From Start To End And Milked For EBIT and Cash?
From the outset I was deliberately kept in the dark about the finances of Instinctif Partners. The Board of Instinctif Partners continued to issue subordinated loan notes to me in payment for my company for long after it would have been entirely clear that the amount of debt and rolled-up loan notes already in the Group meant that the loan notes being issued to me as payment could and would never be redeemable at anything near their face value. The subordinate nature of the loan notes being issued was shrouded in secrecy.
In my view the Board of Instinctif Partners could and should have made me aware that the paper being used to pay for buying my business was most likely worthless, and/or that the agency could not meet its’ earn out obligations. There is clear legal precedent that if an acquirer cannot pay the earn out consideration on an acquisition, a business should be returned to its proprietor. But I believe that Instinctif Partners needed to retain me and my business within the Group in order to extract much-needed cash and profits from it.
For context, in 2015 my business contributed c.15% of the entire net profit of Instinctif Partners worldwide. Was Instinctif Partners hiding its true financial position by ‘buying’ real cash profits from businesses like mine in return for issuing worthless paper shares and loan notes? I suspect, but I cannot prove, that be a forensic analysis of the financial and management accounts of Instinctif Partners would show this to be the case.
Instinctif Partners’ Numbers Never Added Up
In a 2019 email from a member of the Instinctif Partners’ management team, it was confirmed that the Group had c.£83m worth of loan notes in issue, as well as bank debts of over c.£6m. By contrast the company had no assets aside from c.£20m of ‘intangibles’ that it had valued its brand at on its balance sheet. In its very best years Instinctif achieved less than £6m of profit, and most years severely struggled to achieve profits of £3m or £4m.
No other transaction in the PR industry would suggest that the value of Instinctif Partners could ever be anywhere near enough to pay its c.£89m of debts. In 2014, 2015 and 2016 the compound value of the loan notes already in issue must have already exceeded any reasonable future enterprise value for the Group. Yet Instinctif had continued to issue new loan notes to me long after it would have been very clear to the Board that these loan notes could not and would not ever be repaid at anything near the face value being claimed.
There are also other ethically dubious items that still give me cause for concern. Every year Instinctif Partners would reduce its tax bill by charging the ‘theoretical’ interest accrued on outstanding loan notes against profit, saving a fortune in corporation ta. Yet this loan note interest was later written off entirely and never actually paid out!
A Sea Change In The UK Public Relations Sector?
The agency world since the collapse of Bell Pottinger is supposed to have changed. Yet Instinctif Partners was able to act with impunity as it contrived to relieve a young entrepreneur of his business in what I regard to be a self-evidently underhand manner. Instinctif Partners was able to use its inequitable power to force an entirely unfair outcome onto me that is complete anathema to the notion doing business in good faith.
In June 2020 I attempted to engage the Public Relations and Communications Association, the world’s largest PR industry body, in helping me to address the inequitable balance of power that had compelled me to submit to the machinations of Instinctif Partners.
I was informed in an email response that the PRCA: “can warn, admonish, reprimand, suspend or terminate membership…but we do not have any resolution capabilities especially when it comes to financial matters”. In short, the Public Relations industry body was entirely powerless to compel its member to behave ethically or to take responsibility for its actions.
Does Instinctif Partners Have A Future?
In my opinion changing a management team and “refinancing” should not release the company from its moral and ethical obligations. The setback to my life was significant and pervasive, yet Instinctif Partners continues to trade as the same going concern, with the same premises and using the same brand, which ironically seeks to trade on a reputation of trust.
In an age where truth, transparency and integrity are so important to the PR sector, if they are to move forward, firms like Instinctif Partners must take responsibility for their past actions. And in a sector whose industry body is powerless, it falls to clients to ensure that the agencies they hire are doing business with transparency, honesty and integrity.