(Bloomberg Opinion) -- Traditional asset management firms don’t have it easy. Squeezed on one side by indexing and on the other by alternative styles, they have seen fees slide and flows dry up.
When the firm is in its third generation of family control, the challenge is particularly pressing. Nobody wants 75 years of legacy to crumble on their watch. So to counter such pressures at Franklin Resources Inc., Chief Executive Officer Jenny Johnson, granddaughter of the founder and scion of the family that owns 42% of the stock, is trying to buy her way out of the rut.
Last week, the firm announced its 10th acquisition in just over four years — the purchase of Boston-based Putnam Investments. The $136 billion of assets that come with this deal take the amount that Franklin has acquired since the beginning of 2019 to over $1 trillion, accounting for two-thirds of its total assets.
Most firms gather assets via sales and marketing — which Franklin could once do with name-brand fund managers such as Mark Mobius and Michael Hasenstab. But acquiring them does have merits. Through its various purchases, Franklin has gained access to a broader range of products and distribution channels. The Putnam deal strengthens its presence in the US retirement market; the 2021 acquisition of O’Shaughnessy Asset Management, with $6.5 billion of assets under management, gave it a foothold in client-tailored indexing.
Like other traditional managers, Franklin has learned the importance of diversification. Until 2014 it was buoyed by a family of successful active fixed income funds. In April 2014, they accounted for over 20% of group assets. But then performance deteriorated and redemptions ramped. Assets in Hasenstab’s Global Bond Fund fell to $5.5 billion today from a peak of $73.1 billion. Never again would the firm be held hostage by the performance of a single strategy.
Acquisitions also promise efficiencies. By itself, Putnam never generated an operating margin higher than 20% but, inside Franklin, the company reckons it can get to 30%. “The scaling of this really unlocks it,” said Paul Mahon, CEO of Great-West Lifeco, which is selling Putnam.
And although not apparent in the case of Putnam, acquisitions also enable traditional managers to penetrate the higher growth areas of passive and alternative asset management. In 2022, Franklin acquired European alternative credit manager Alcentra and secondary private equity firm Lexington Partners, between them bringing in $92 billion of assets. From very little in 2019, alternatives, with their higher fee rate and margin, now account for 18% of the firm’s assets under management at some $258 billion.
But acquisitions don’t come cheap. Franklin has spent $8.2 billion on its buying spree since the beginning of 2019, including the $925 million it is paying for Putnam – equivalent to around two-thirds of its current market capitalization. In addition, it has promised vendors up to $1.5 billion of contingent payments depending on how the businesses it buys go on to perform. And then there’s staff retention payments of $680 million, with another $640 million projected to be paid out through to the end of September 2026.
Nor is it easy integrating firms with different cultures. The industry is rife with deals gone wrong. “It’s easy to buy things; it takes 10 years to see if it’s a good fit,” Jenny’s brother, Executive Chairman Greg Johnson, said earlier this year. “Templeton we bought in 1992, and we’re still working on the merger.”
Fortunately, Franklin has the cash. The company had $5.1 billion of net cash when Jenny Johnson took over and generates around $1.4 billion of free cash flow per year.
In the past, that cash flow was deployed in share buybacks: Between 2014 and 2019 the company retired 20% of its shares. But a shrinking firm doesn’t leave much for future generations and Jenny Johnson, with two nephews working in the firm, changed course. Franklin’s core business continues to atrophy – net fund flows have been negative every year since 2014, as clients have pulled out over $500 billion. But acquisitions have more than offset that. When she hands over the reins, Johnson will leave her successors a bigger Franklin than the one she inherited; it just won’t be the same one.
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To contact the author of this story:
Marc Rubinstein at [email protected]