JENNIFER Johnson, Franklin Templeton (FT) president and chief executive, is convinced that the appetite for private-market investments is here to stay. This, she says, is partly reflected in a growing trend among companies to stay private longer, as well as net inflows.
“We think the trend towards private markets is not reversing. Until recently, you could argue that private equity (PE) is fuelled by a zero-interest rate environment. But the reality is companies don’t want to be public anymore.
“There is a lot of pressure on public companies which need to report earnings quarterly. At a time of great technological disruption, you need to be investing. But, as a public company, those investments may not pay off for seven to 10 years in a material way.’’
FT is listed under holding company Franklin Resources on the New York Stock Exchange. The group’s total assets under management (AUM) was US$1.42 trillion as at end-August.
A series of acquisitions has substantially boosted its AUM in alternative assets over the past few years. At the end of its fiscal year in 2022, AUM in alternative assets had burgeoned from US$15 billion five years ago, to US$260 billion.
The group is also benefiting from net inflows into alternatives. In the third quarter, net inflows into alternatives came to US$4 billion, compared with US$2.5 billion in multi-asset funds. There were net outflows from equity and fixed income.
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Johnson said that FT has sought to fill product gaps and enhance distribution through acquisitions. It continues to be open to acquiring domestic asset management capabilities. “We’re always open and looking; we like to own local wealth management because 80 per cent of flows in any one country tend to go to the domestic fixed income and equity markets. As a global manager, if you don’t have those capabilities you’re left out of those flows.”
It is also open to acquiring capabilities in the liquid private infrastructure space. Earlier this year, it announced the acquisition of Putnam Investments, which has capabilities in target date and stable value funds.
Through acquisitions, FT’s client base has shifted. Five years ago, clients were 73 per cent retail and 24 per cent institutional. At the end of FY2022, institutions had the larger share of 52 per cent of clients, against 47 per cent retail.
According to Johnson, the group is seeking to educate investors about alternative assets in their portfolios. It has created a team of 30 specialists who will work with financial advisers globally. “The next step is to have the right products, which should have some amount of liquidity. It’s going to come down to the advisers really knowing their clients, to understand whether the client is able to withstand the illiquidity.”
Johnson, who was recently in Singapore, pointed out that companies are choosing to stay private longer. In 2000, a company on average would go public after three years of operation, she added. “In 2019, it was eight to nine years. By 2022, it was 14 to 15 years.”
According to McKinsey, the number of publicly listed companies in the US peaked at nearly 6,000 in the 1990s. The number dropped from 5,500 US-listed companies in 2000 to 4,000 in 2020. McKinsey noted that initial public offers in the US are getting larger, and this “signals that some of the early value capture right now is by private investors”.
Private credit came into its own after the 2008 financial crisis, when higher capital requirements for banks crimped the ability to lend, and rock-bottom interest rates raised investors’ appetite for yield. In recent months, interest in private credit has risen despite higher rates, as the regional banking crisis in the US has once again made banks more risk-averse.
FT completed the acquisition of Legg Mason in 2020, which significantly expanded its capabilities in core fixed income, equities and alternatives. With the acquisition, real estate manager Clarion Partners became a FT subsidiary. Separately, other acquisitions in the alternatives space included Benefit Street Partners and Alcentra in private credit, and Lexington Partners in secondary PE.
Johnson said: “There is a great opportunity in private credit. At the moment you can get yield on investment grade bonds at 5.7 per cent, and high-yield bonds at 9 per cent. Private credit is giving 11.5 to 12.5 per cent; they’re equity-like returns in a debt instrument.”
PE currently grapples with funding challenges, but Johnson said that secondary PE is fulfilling a need among institutions who may want to reduce their exposure. “Private equity was fuelled by the ability to borrow cheaply and invest. That’s not our space. We have secondary PE (via Lexington Partners). We may go to a big state pension or sovereign wealth fund who feels they are over-exposed in that category. Plus, they’re getting capital calls, so they need to readjust their portfolios.”
On the emerging markets, she added that the region’s demographic trends – large populations and a growing middle class – are positive factors. The restructuring of supply chains, in the form of “friendshoring’’ or “near-shoring’’ will benefit the region, including India, Vietnam and Indonesia.
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