On Wednesday, Franklin Resources, Inc. (BEN), operating as Franklin Templeton Investments, announced the acquisition of the controlling stake in K2 Advisors Holdings LLC (K2), an independent fund of hedge funds solutions provider. Financial terms of the deal were undisclosed.
The purchase of K2 will assist Franklin Templeton in improving and expanding its alternative investments and multi-asset solutions platforms. Such strategic initiatives would help Franklin in providing world-class investment solutions to its clients and auger well for worldwide expansion.
Terms of the Deal
Starting calendar year 2016, Franklin will buy the remaining stake in K2 over a number of years. Yet, the deal awaits regulatory approval and is anticipated to close in the fourth quarter of calendar year 2012.
K2 will use the proceeds of the transaction to buyout TA Associates, which currently possesses a stake in the company. Moreover, the fund received will help K2 in retiring all its debt obligations. However, currently no interest will be sold by the managers of the company and it will not receive any upfront consideration from Franklin.
K2’s managing directors — William A. Douglass III and David C. Saunders – will retain their positions as per the agreement and will manage the business as no changes are planned for investment management procedures of K2 as of now.
Morgan Stanley (MS) acted as financial advisor to Franklin Templeton, while Bank of America Merrill Lynch, a division of Bank of America Corporation (BAC) and Freeman & Co. served as financial advisors to K2.
As of August 31, K2 operated in the U.S., U.K., Japan, Australia and Hong Kong with 115 staff members, and had about $9.3 billion in assets under management.
Franklin has a history of making smaller strategic acquisitions and buying highly experienced asset management companies. In 2010, Franklin acquired a 20% stake in Pelagos Capital Management.
Benefits of the Acquisition
Franklin aims at focusing on innovative investment strategies and receive access to various channels in order to advance its capabilities. Therefore, K2 will significantly aid in enhancing its services for institutional investors who prefer to invest in the hedge fund and fund of hedge funds space through multi-asset solution providers.
Moreover, K2’s endeavor in creating alternative investment solutions would enhance overall returns and lower portfolio volatility for Franklin. Further, K2 works with advanced risk management systems, which would aid Franklin in maintaining its entrenched commitment to risk management.
On the other side, managers of K2 feel privileged to be part of Franklin, based on the company’s well established global market share and widespread resources in distribution, operations and technology.
Additionally, managers are attracted towards Franklin’s reputation of possessing a constructive relationship with acquired asset management firms and helping them in operating as standalone businesses using the resources of the company's diverse platforms.
Our Viewpoint
Franklin's global footprint is an exceptionally favorable strategic point as its assets under management are well diversified. The company is also poised to benefit from its strong balance sheet. Moreover, the recent acquisition along with other deals completed in 2011 is expected to strengthen its financials. However, the regulatory issues and sluggish economic recovery could mar the AUM growth and increase costs.
Franklin currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the company’s business model and fundamentals, we also maintain a long-term ‘Neutral’ recommendation on the stock.
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