Mutual fund managers are seeking to counter a wave of client defections by betting big on alternative assets.
In less than a week, two of the largest U.S. asset managers have announced acquisitions to expand into the booming businesses of private equity and credit.
Franklin Resources Inc. said it will buy Lexington Partners, a private equity fund manager, for $1.75 billion, a move that will result in it overseeing $200 billion in alternative assets. T. Rowe Price Group Inc.’s $4.2 billion purchase last week of Oak Hill Advisors, a private credit specialist, was the most significant for the firm in two decades.
“This is a stunner of a deal that really brings home the enormous value locked up in private equity firms,” said Antoine Drean, chairman and founder of private equity advisory firm Triago, referring to Franklin Templeton’s acquisition.
Both companies, largely managers of active funds, suffered billions of dollars in outflows in their last quarters. Meanwhile, giant competitors including Vanguard Group and BlackRock Inc. have aggressively pushed into low-cost vehicles including exchange-traded funds, which has allowed them to increase assets under management.
In purchasing Lexington, Franklin Templeton gets a leading player in the secondary private equity and co-investment market, the San Mateo, California-based firm said in a statement. Secondaries transactions have gained favor in private equity as institutional investors seek to offload stakes earlier in funds that can be locked up for a decade or more.
“We now have top tier specialist investment managers in all of the key alternative investment categories,” Franklin Templeton Chief Executive Officer Jenny Johnson said on a conference call with analysts.
The volume of secondaries transactions through the third quarter of this year has reached $79 billion, and is on pace to reach a record $113 billion by the end of the year, according to Triago. Lexington raised $14 billion for its ninth secondaries fund in 2020 and has raised $55 billion in aggregate capital.
T. Rowe was lured to the expanding private credit market, which has doubled in size over the past few years to about $1 trillion as banks stepped back from offering traditional credit to small and mid-sized firms.
Meanwhile in their last quarters, Franklin Templeton reported $9.9 billion in long-term net outflows, while T. Rowe had $6.4 billion in net outflows.
Franklin Templeton reported that assets under management fell 1% in the last quarter to $1.53 trillion. The company reported fiscal fourth-quarter adjusted earnings per share of $1.26, beating Wall Street’s consensus of 86 cents.
The transaction is expected close in the second fiscal quarter of 2022.