Asset manager Franklin Templeton is buying private equity investment specialist Lexington Partners for $1.75bn, in the latest example of a mainstream manager expanding its alternative assets business.
The acquisition will build Franklin’s presence in private equity secondary funds and co-investments, which are designed to offer liquidity to investors in private equity deals with long lock-ups.
It follows a string of recent acquisitions to build its scale in alternatives by the New York-based group, best known for its stock and bond mutual fund products. These have included the purchase of private credit manager Benefit Street Partners, real estate investor Clarion Partners and hedge fund K2 Advisors.
“The acquisition will further diversify our alternative asset management business to include alternative equity, the largest segment of the market,” said Franklin chief executive Jenny Johnson in a statement on Monday.
The addition of Lexington Partners, with $34bn in fee-paying assets under management, will bring Franklin’s assets in alternatives close to $200bn, or about 13 per cent of its overall $1.5tn in assets under management.
The deal comes just days after mutual fund firm T Rowe Price agreed the $4.2bn acquisition of credit manager Oak Hill Advisors, its largest-ever deal. Incoming T Rowe Price chief executive Rob Sharps has highlighted alternatives as a strategic focus as he takes the reins of the firm in January.
Both deals illustrate how mainstream asset managers are pushing into the $7.4tn private capital industry, which is expected to nearly double by 2025, according to analysts at Morgan Stanley.
The trend of consolidation in asset management is also continuing, with 160 asset management deals globally in 2021 worth $25.3bn, in addition to Franklin Templeton and T Rowe Price, according to Dealogic.
Shareholders have responded positively to the dealmaking. Franklin Templeton shares rose as much as 14.7 per cent in early trading on Monday. T Rowe Price’s stock rose over 5 per cent when it announced the Oak Hill Advisors acquisition last Thursday.
Franklin’s acquisition will include $1bn paid in cash to Lexington and additional payments of $750m over the next three years. Lexington will operate under its current name with no changes to management. Employees will be granted a 25 per cent stake in the firm and $338m in performance-based cash retention awards.
“This transaction provides for long-term continuity and stability for our investors, management team and employees,” said Wilson Warren, president of Lexington and an employee since it was founded in 1994.
Lexington, which is currently investing a $14bn flagship secondary fund and two separate vehicles designed for the middle market and co-investments, is estimated to generate revenue of $350m.
UBS estimates that Franklin is paying a multiple of nearly 12 times estimated earnings for 2022 before interest, taxes, depreciation, and amortisation. The acquisition is forecast to immediately add to Franklin’s adjusted diluted earnings per share when it closes, expected in the second quarter of 2022.
Franklin Templeton’s highest-profile acquisition came in February
2020 when it agreed to buy rival Legg Mason for $6.5bn including debt.
Both firms had suffered investor outflows the previous year and the
deal was an example of active managers teaming up to fight
competition from passive funds, which charge lower fees for tracking
the performance of an index.
Additional reporting by Chris Flood in London
