Franklin Templeton Bolsters Alts Business With $1.75 Billion Lexington Buy

In a move to shore up its alternative asset capabilities, investment management firm Franklin Templeton has agreed to pay $1.75 billion to acquire Lexington Partners, a manager of secondary private equity and co-investment funds. Franklin Templeton said the acquisition will complement its real estate, private credit, and hedge fund strategies as investors increasingly allocate capital to alternative assets.

“This acquisition will position us to capitalize on the highly sought-after secondary private equity market,” Jenny Johnson, president and CEO of Franklin Templeton, said in a statement.

Founded in 1994, Lexington has 35 partners and principals, and assets under management (AUM) of $34 billion. It says it has raised more than $55 billion in aggregate commitments from over 1,000 institutional investors. The firm is currently investing from its $14 billion flagship global secondary fund, its $2.7 billion middle market secondary fund, and its $3.2 billion co-investment vehicle. Lexington also invests in private investment funds during their initial formation.

Lexington has eight offices, located in New York; Boston; Menlo Park, California; London; Hong Kong; Santiago, Chile; São Paulo; and Luxembourg. Once the deal closes, which is expected to occur by the end of the second quarter of 2022, Franklin Templeton said it will have alternative AUM of approximately $200 billion.

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Under the terms of the deal, $1 billion of the $1.75 billion price tag will be paid at the closing of the deal, and additional payments totaling $750 million will be made over the next three years. Lexington will operate as a specialist investment manager within Franklin Templeton, and its current management team will maintain their roles post-transaction. Lexington’s partners and employees will also be granted a 25% ownership stake in Lexington, vesting over five years, and $338 million in performance-based cash retention awards to be paid out over approximately five years.

“This transaction provides for long-term continuity and stability for our investors, management team, and employees,” Wil Warren, president of Lexington, said in a statement.

Warren, who is also co-chair of Lexington’s secondary investment committee, has been with the firm for 27 years, managing its investment operations and overseeing the secondary and co-investment funds. Prior to joining Lexington in 1994, Warren was an associate at Landmark Partners, and before that he was an analyst in investment management at LaSalle Partners.

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Tags: Alts, Franklin Templeton Investments, Hedge Fund, Jenny Johnson, Lexington Partners, Private Credit, Private Equity, Real Estate, Specialist Investment Manager, Wil Warren

At the Green Horizon Summit at COP26—aka the 26th United Nations (UN) Climate Change Conference of the Parties—BlackRock CEO Larry Fink told the press that “if we are not working with the hydrocarbon companies together, we will never get to net-zero.” Currently, about half the world’s emissions come from oil and gas companies, according to the nonprofit CDP.

And the oil and gas industries have contributed significantly to the scientific literature on climate change. ExxonMobil scientists were among the first to discover that the oil industry was contributing to climate change through the emission of greenhouse gasses back in 1977.

The company launched further research into the issue shortly after that report, developing a deep understanding of the issue long before the public was fully aware of the situation. However, despite extensive data from the company’s own scientists, ExxonMobil CEO Lee Raymond frequently made statements questioning the basic science of climate change. Raymond also actively advocated against decreasing emissions at the World Petroleum Congress in 1997. Given this track record, this leaves many in the energy sector wondering if the major hydrocarbon companies can be trusted.

But speaking at the panel in Glasgow, Fink was adamant that collaboration would work, arguing that decreasing oil and gas production in Western countries would only lead to Gulf countries increasing their production, leaving global emissions in the same position, if not worse than they were previously. “The key for our hydrocarbon companies is that they need to move to a more decarbonized business model,” he said.

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Fink said it was essential for private hydrocarbon companies and the public sector to collaborate to innovate new technologies that will ultimately help solve climate change, declaring that “capitalism works with good public policy.”

Fink’s strategy of working with, and not against, these companies is common among institutional investors. The New York State Common Retirement Fund and the New York State Teachers’ Retirement System (NYSTRS) are among the largest investors in fossil fuels in the United States. The funds have approximately $428 million and $296 million invested in ExxonMobil, respectively.

However, the $226 billion New York State Common Retirement Fund has pledged to transition its investment portfolio to reach net-zero greenhouse gas emissions by 2040. And New York state legislators introduced a bill earlier this year that would require the state teachers’ retirement system to divest from fossil fuels.

Fink said he would continue pushing both the private and the public sectors to invest in green technology. “To get through a decarbonized world that is fair and just, we’re going to need to have some incredible breakthroughs in technology that we don’t have yet,” he said.