Franklin Templeton, which acquired secondaries giant Lexington Partners last year, is meaningfully increasing its exposure to private markets, with the wealth channel playing a key part in this growth.
As of end-September, the California-based firm’s alternatives assets under management increased by over 13 percent from the prior year, to $255 billion, according to the firm’s fourth quarter and fiscal year 2023 results on Tuesday. Its alternatives AUM represents approximately 19 percent of its $1.37 trillion total AUM and around one-quarter of adjusted revenues excluding performance fees, the firm’s president and chief executive Jenny Johnson said on the call accompanying earnings results.
Alternatives net inflows reached $5.8 billion as of end-September, driven by growth in private market strategies, and were partially offset by outflows in liquid alternative strategies, according to earnings materials. Acquisitions over the past three years – including in credit manager Benefit Street Partners, real estate firm Clarion Partners and Lexington – generated combined total net inflows of nearly $11 billion over fiscal year 2023.
Johnson said on the call that the firm “continues to make strides in alternative assets”. Overall, the firm expects its exposure to alternatives to rise meaningfully over the next two to three years, affiliate title Private Equity International understands.
Key areas of the firm’s alternatives push include acquiring “the best and most differentiated” alternatives managers, building out its wealth segment and establishing partnerships with wealth management firms, according to a source familiar with Franklin Templeton’s alts business.
“Retail and high-net-worth investors remain under-allocated in alternatives relative to institutions,” Johnson noted on the call. “Client interest was strong for alternative strategies on wealth management platforms.”
Franklin Templeton partnered with fintech platform iCapital in 2022 to expand its alternative asset strategies for financial advisers and their clients. Diversification, better returns and volatility management are the top drivers for individual investors adding alternatives to their portfolio.
According to the source, Franklin Templeton’s alts team, FT Alternatives, has been able to open access to these investors through a variety of vehicles, including 40 Act funds, evergreen or perpetual structures, and the traditional drawdown funds that have been used by institutions and the ultra-high-net-worth segment for years.
For FT Alternatives, this means investing a lot of time and effort in the democratisation of alternatives via evergreen structures, the source added, noting that these products are packaged in a way that is more digestible for the individual investor. This is achieved through features such as 1099 tax reporting, intermittent liquidity and lower accreditation requirements, among others.
The investment giant’s acquisition of Lexington has also meant it can bring to the individual investor channel a qualified purchaser drawdown product, the source added, featuring a classic lockup strategy that is also offered to institutions.
FT Alternatives has teams in North and Latin America, EMEA and Asia-Pacific that are already in various stages of delivering alternatives to individual investors in those markets, PEI understands.
The market should expect to see more perpetual and evergreen products from Franklin Templeton in the near future that target not just the US, but also global investors in their home environment, the source said. These products will cater to the structural and tax regimes specific to those markets.
On the results call, Johnson said the firm anticipates over 20 percent of the total capital raised for its latest secondaries fund Lexington Capital Partners X will come from the wealth channel. Since its launch in 2022 through July 2023, LCP X has raised $18.2 billion, according to earnings materials. The fund has a $20 billion hard-cap and is expected to wrap up fundraising by year-end, Secondaries Investor reported.
Adam Spector, executive vice-president and head of global distribution, said on the call that the firm is starting to see greater traction for wealth management alternatives across its offerings.
“We spent the year really building out our capabilities for US wealth management alternatives and we’re now taking that model and using it in Europe in general,” Spector said. “One of the things we’re seeing that’s quite positive in wealth management is the fact that we’re now getting onto calendars six months a year in advance. And once you’re in that flow, we think fundraising really will continue.”
Investor education is a key plank of the firm’s alternatives push. Its online education portal Franklin Templeton Academy launched an alternatives programme in November last year, which is focused on helping advisers understand when, how and why to use alternatives. The learning experience includes in-person and on-site classes, interactive webinars and self-paced e-learning modules, per a statement.
– This report was updated to show Lexington Capital Partners X has a $20 billion hard-cap, not target.