Asset management is a funny business. By funny, we mean an unending, bloody, Mad Max-style battle to avoid
death irrelevance in an industry where even $1tn of assets is not what it once was (BTW; RIP Tina Turner)
The prevailing view is that to thrive, you either need massive, vast, humongous scale, or a commanding position in a hot niche (above all in private capital). Ideally you want both. Which is why there’s been a spasm of consolidation among asset managers in recent years, and asset management companies snapping up smaller boutique players in areas like private debt or ESG.
But no one has been more aggressive about expanding through serial acquisitions than Franklin Resources, the family-run investment company that not so long ago looked doomed to a lucrative but steady slide into irrelevance: too big to be acquired, too profitable to die, but too feeble to actually bother the industry big beasts.
It’s fair to say Franklin is rolling the dice to avoid that fate. Here’s the latest gambit of Jenny Johnson, the fourth Johnson to run a firm named as a homage to Benjamin Franklin:
Franklin Templeton has agreed to buy rival Putnam Investments for more than $1bn as the California-based asset manager continues its expansion into alternative products and retirement plans.
Franklin will pay Putnam’s owner, Great-West Lifeco, $925mn in cash and shares up front and up to $375mn more over the next seven years if revenue targets are reached. The deal gives the Canadian insurer a 6.2 per cent stake in Franklin.
The Putnam purchase is just the latest in a massive buying spree by Franklin which has boosted its overall assets under management from $717bn five years ago to almost $1.6tn once the most recent deal closes. The deals include:
Putnam Investments. 2023. Cost: $925mn. AUM acquired: $136bn.
Alcentra. 2022. Cost: $350mn. AUM acquired: $38bn.
Lexington Partners. 2021 Cost: $1.75bn. AUM acquired: $34bn.
O’Shaughnessy Asset Management. 2021. Terms not disclosed. AUM acquired: $6.4b.
Legg Mason. 2020. Cost: $6.5bn, AUM acquired: $803bn.
AdvisorEngine. 2020. Terms not disclosed. Advisors with $600bn of assets use its platform.
Benefit Street Partners. 2018. Cost: $683mn. AUM acquired: $25bn.
Alphaville suspects Franklin is the fastest-growing asset manager on the planet, and it’s all driven by acquisitions – net investor flows have actually been severely negative for almost a decade.
The core business throws off plenty of cash, so as long as the Johnson family remains committed to running it it makes sense to plough it back into the business, in the form of new projects and acquisitions.
The overall balance of stuff they’re buying also looks decent, even if most of it is hardly prime (Alcentra had been shopped around for ages, and Putnam was originally bought by Great-West for $3.4bn back in 2007). Analysts seem . . . okay with the Putnam deal, which will give Franklin more scale in retirement and insurance. Here’s Jefferies’ Dan Fannon:
Acquisition of Putnam Investments – BEN announced the purchase of Putnam Investments from Great-West Lifeco (TSX: GWO), a subsidiary of Power Corporation Canada (TSX: POW), for $825M in stock at close and an additional $100M in cash to be paid 180 days after closing. The transaction is expected to close in 4Q23. BEN will issue 33.3M shares of stock to fund the deal (based upon 5/30 share price). There is an additional contingent payment of up to $375M payable in cash for years 3-7 following closing that will be tied to growth of the strategic partnership. The maximum consideration payable will be hit if partnership revenue grows +30% of Putnam current annual revenue of approx. $500M. Great-West will remain a long term shareholder with 26.2M shares (4.9% ownership) being subject to a 5-year lock up and another 7.1M shares (1.3% ownership) subject to 180 day lock up. With a modest assumption of deal-related D&A, we estimate the purchase price to be a mid-single-digits EBITDA multiple.
Financial Impact – The deal is expected to add total run-rate adj operating income of approx. $150M after the first year of closing, consistent with a ~30% operating margin and inclusive of approx. $150M of expected cost synergies (25% realized in the first year). The transaction will increase AUM by approx. +$136B as of 4/30 with an average fee rate of 36bps (vs BEN’s F2Q23 fee rate of 39bps) and current annual net fee revenue of ~$500M. There is expected to be $55-75M of non-recurring integration charges. The deal is anticipated to be modestly accretive to adjusted EPS by the end of the first year after closing, any incremental share repurchases beyond those to offset employee stock grants will accelerate this timeline. The transaction will also provide a cash tax benefit with an expected net present value in excess of $100M.
Strategic Partnership with Power and Great-West – Power holds a controlling interest in both Great-West and IGM Financial with a collective AUM/AUA of ~$2.1T. The partnership will have an initial $25B asset allocation from Great West that will be funded within 12 months of closing at a mid teens effective fee rate (2/3rds in core/core plus strategies) with the potential to meaningfully grow over time. The transaction materially increases BEN’s defined contribution AUM by +$90B as well as expands BEN’s insurance AUM to approx. $150B. Power’s asset management, wealth management and insurance channels all represent incremental growth opportunities for BEN’s suite of products and capabilities.
But digesting all this is going to massively tricky. Integrating just Legg Mason would be a herculean task for any investment company (some wags often observe that Franklin still seems to be integrating Templeton, the UK investment group it bought in 1992).
It boggles the mind to think of how they’re going to get a handle on all the businesses, get them growing and nurturing the core Franklin franchise back to health. Investors seem sceptical that this is going to work out well. Here’s $BEN’s share price over the past decade:
However, we’re gluttons for acquisition sprees like this: inevitably, they yield some tasty stories of glorious triumph or (more usually) abject failure. So go Franklin!
— Franklin Templeton: an old-school stockpicker tries to reinvent itself