Walter Scott and his seven steps to £500m

ASK the average educated Scot what the name Walter Scott means, and you may be told about the novelist. You will most certainly not hear about Dr Walter Grant Scott, to give him his full due, or the fund management company of which he is 70 per cent owner, Walter Scott & Partners. Yet he is one of Scotland's most successful businessmen and, among the few who do know him, one of the most admired.

This week, however, his name suddenly became the hottest gossip in Edinburgh when the company he started in 1983 was bought by Mellon, a big American fund management company, for the kind of money that makes a win on the Lotto look like sweetie money. Could be anything from 250m to 500m, chattered the gossips. Scott, however, said nothing. Given that there are only two other shareholders in the firm, it's a lot to keep quiet about.

The news must have got a hundred investment managers day-dreaming whether they could do the same and get just as rich. Well, here's a few lessons to help you get started.

First, real big-time success can come late. Scott's company, it is fair to say, has only boomed recently. At the end of 2002, it had just 1.5 billion under management. A year later, that had risen to 4.02bn and by end 2004 it was 7.8bn. By the end of last year, it was up to 12.6bn and in the first quarter of this year it rose to 14.3bn. Managing director and 20 per cent owner Alan McFarlane says the growth has consistently come one-third from new business, one-third new business from existing clients, and one third from the market performance of shares held.

Second lesson: never under-estimate your own ability or value. Scott started his business career with Ivory & Sime in 1972. "He headed their pension fund business along with Giles Weaver," says an observer who knows him well. "They built it up and it was very successful. But a number of his colleagues looked down on the pension fund business because of the lower fees. I think he was in charge of about half the firm's money, but he had very little influence. I think that's why he decided to set up on his own."

Another who knows him well says: "He runs a quality operation. He's the first to admit he is not the cheapest, but he doesn't market himself as the cheapest. You pay him well and you get top service and top investments."

Third lesson: if an opportunity presents itself, take it. Scott's own version of his present company's origin is that three companies from London and two from Edinburgh with funds to manage approached him and Ian Clark, a partner, and asked if they would sell themselves to them as an embryonic investment firm. Scott said later: "The figures they were talking made me feel that if they could buy us for that sort of money, it was worth trying ourselves. It was, I suppose, risky and we could have been looking for new jobs in six months, but it worked."

Fourth lesson: you don't have to invent a new business model, you can tweak an existing one. Much of what Scott learned from the legendary Jimmy Gammell at Ivory & Sime was put into practice in the new business. It has an old-fashioned-sounding focus on equity in companies that consistently create value and wealth. Research is concentrated not on producing forecasts of growth, but on understanding why companies grow.

Prospects are debated at weekly meetings and only when everyone agrees is a stock added to the portfolio, which is never more than 50-60 companies. These are held for long-term growth - short-term fluctuations are ignored. "Its quite a quirky model," says one admirer. "It doesn't suit many of the UK pension funds, but in the US there are enough big funds who are quite happy to have some of their money with an unusual manager."

Fifth lesson: you don't have to employ squads of public relations advisers and have your picture in the papers to be a big success. Scott is often labelled "reclusive" or "secretive" and even as a kind of Howard Hughes character. In fact, he just likes to keep his life private and his picture out of the newspapers. That does not stop him socialising: he is well-known to pretty much everyone in the financial community. One describes him as "actually rather flamboyant - he has private planes and a few Ferraris in the garage." The jet is available for company use.

Sixth lesson: though you can be shy of the media, cut an absolute dash with customers. "He is tall, rather an imposing man, and does create quite a strong impression when you meet him," says one. Scott doesn't mind clichs when he is trying to win new American custom: he and his colleagues happily wear kilts to business meetings. In Britain, that would be regarded as oddball, but in the US, it goes down a storm.

Seventh lesson: recruit the brightest, not the obvious. Scott trained as a nuclear physicist, but thought reactor-tending would not yield the income he desired. His team of 60 includes some in his own mould - a former Scottish international rugby player, an opera singer, and a cook-turned-marine biologist.

At 59, Scott will have been worrying how to exit to retirement with his capital and leave a company that will continue to thrive. The sale to Mellon, which will tie him in for a few years and leave management in his hands, has achieved that in spectacular fashion. Respect!

• Comments, criticism and helpful suggestions to: pjones@scotsman.com