The secondaries world at large was caught under the chin this week when the news broke that not KKR, not EQT, not Blue Owl Capital but Franklin Templeton Investments had agreed to acquire 100 percent of Lexington Partners, putting an end to months of speculation and rumour that had come across the Secondaries Investor desk.

The $1.55 trillion asset manager will pay $1.75 billion to acquire the secondaries pioneer: $1 billion at closing and $750 million over the next three years. The deal, which is expected to close before next June, values Lexington at roughly $2.6 billion according to Secondaries Investor and market source estimates and will leave operating autonomy with the management team.

The deal appears to have created strong alignment. Lexington’s partners and employees will be able to retain 25 percent of the company, vesting over five years. Employees will own 80 percent of the carry on a forward basis and 100 percent of past carry. There will also be a $338 million pool of capital for performance-based awards, payable from the second to the fifth year after the transaction closes.

Franklin Templeton has been building out its product offering in alternatives over the last several years to plug into its vast high-net-worth and retail distribution network. In 2018, it acquired credit manager Benefit Street, and in 2020, real estate manager Clarion Capital Partners. Subsidiaries K2 and Franklin Ventures represent hedge funds and venture capital. With its latest purchase, Franklin Templeton is likely to expand into credit and real estate secondaries via Lexington, the latter’s president Wil Warren said on a conference call on Monday.

There are multiple reasons why large asset managers find adding secondaries capabilities via an acquisition appealing. Some, like Franklin Templeton, will be attracted to the steady fee stream from secondaries portfolios. Others may be drawn to broadening their suite of offerings, including secondaries, ahead of a public listing.

Whatever the motivations, one thing is clear: snapping up a secondaries firm is a quickfire way to build up alternatives AUM – something asset managers are clambering over each other to do (we hear this wasn’t Franklin Templeton’s first stab at acquiring a secondaries firm). When the acquisition closes next year, the San Mateo-headquartered firm expects it will command $200 billion in alternatives AUM – no small feat at a time when listed firms are scrambling to increase both overall AUM and exposure to alternatives.

“The race to grow AUM – all asset managers have this in their objective,” says Thomas Liaudet, partner at advisory firm Campbell Lutyens. “Now, it’s not so much about whether you can grow it, it’s about whether you can grow it faster than your competitors.”

By acquiring secondaries firms, large asset managers have found a way to do just that.