Franklin Templeton turns toward private investing as mutual-fund business shrinks

The 77-year-old asset manager made its name marketing mutual funds for individual investors. Thanks to a recent spate of acquisitions, it now manages more than $260 billion in so-called alternative assets such as private credit.

In just the past five years, Franklin acquired private-credit manager Benefit Street Partners; private real-estate investment firm Clarion Partners—as part of a deal for asset manager Legg Mason; Lexington Partners, a major player in the business of buying stakes in private-equity funds; and European credit manager Alcentra. Alternatives accounted for 18% of assets and 25% of management fees as of the end of last year.

The firm needs to pivot.

The actively managed funds that were the bread and butter of Franklin and other traditional asset managers underperformed the broader market during the recovery from the 2008-09 financial crisis and began to lose favor with investors who gravitated instead toward cheaper index and exchange-traded funds that passively track the market.

Now Franklin Resources, as the publicly traded parent is known, is grappling with a steady stream of outflows from its legacy mutual-fund business. Its market capitalization has shrunk to about $13 billion from $35 billion a decade ago. Its shares were down more than 13% so far this year as of Friday, compared with a 7.4% gain for the S&P 500.

Traditional asset managers such as Franklin have long coveted private equity’s rapid growth and rich fee streams, but until recently, private-markets firms had little reason to sell to Franklin or its ilk.

That has started to change. Slowing inflows from institutions have pushed private-markets firms to tap individual investors, a market that is theoretically vast but that takes major investment, scale and a known brand to access. Hooking up with traditional asset managers, whose primary client base is retail, offers a potential solution.

“We have a 75-year history of serving retail investors," says Adam Spector, head of global distribution at Franklin. “To be successful, you need world-class investment expertise, massive investment in distribution and the commitment to long-range training and education that doesn’t have an immediate financial payoff."

Major strategy shifts such as this are hard to pull off and Franklin has a big hole to dig out of. What’s more, mergers among asset managers are notoriously tricky because of the potential for a culture clash that could result in the departure of investment professionals and clients.

“If these traditionals can maintain the cultures and the strong track record that these firms had before they acquired them, they’ll be successful," said Craig Siegenthaler, an analyst at Bank of America who covers asset managers. “If you have a period where key talent leaves, there could be a problem."

The biggest private-equity firms such as Blackstone, Apollo Global Management and KKR, whose shares have vastly outperformed those of the traditional managers, have spent big to build their own connections to individual investors. They have hired hundreds to pitch their private-wealth products to financial advisers and launched their own “universities" aimed at training advisers, and have been spending more on marketing and advertising.

The challenge is getting their real-estate fund to become one of the few preferred offerings for the private-wealth advisers at a place such as Morgan Stanley or their private-credit product to become the favored option for an independent financial adviser.

Franklin isn’t alone among traditional asset managers in using dealmaking to push into private markets. T. Rowe Price bought private-credit manager Oak Hill Advisors in 2021 and in October launched a credit fund aimed at individual investors. BlackRock agreed in January to buy Global Infrastructure Partners for $12.5 billion. While it hasn’t detailed plans to offer GIP products to individual investors, analysts see that as inevitable.

There have been 36 sizable deals for private-markets managers since 2021, according to data from investment bank Evercore. In just under a third of those, the buyer has been a traditional asset manager.

About 80% of the deals have been either in credit, secondary fund stakes or infrastructure, which are seen as growth sectors and well-suited for retail, said Saul D. Goodman, Evercore’s global head of alternative asset management, who has advised on a number of recent deals.

But few have been more acquisitive than Franklin, which now regularly gets inbound calls from firms looking to sell, Spector says. Franklin promises firms it acquires independence, capital to help them seed new strategies and funds, back-office support and a public currency to give their owners liquidity.

Founded in New York in 1947 by Rupert H. Johnson Sr., the company has been something of a serial acquirer since it went public in 1971. It bought investment firm Winfield & Co. in 1973, L.F. Rothschild Fund Management in 1988 and Templeton, Galbraith & Hansberger in 1992, among other deals.

Now based in San Mateo, Calif., Franklin manages about $1.6 trillion in assets. It has been run by Rupert’s granddaughter, Jenny Johnson, since 2020. The Johnson family and other insiders own roughly 40% of its stock.

Franklin has a sales force of more than 350 people who regularly meet with financial advisers and talk to them about their clients’ needs. If an adviser has a question about private-markets offerings from Clarion or Benefit Street, a member of a 50-person group of alternative-asset specialists weighs in.

In one sign that Franklin is having some success with the strategy, Lexington Partners in January said it closed its flagship fund at $22.7 billion, up from $14 billion for its 2020 predecessor, making it one of the biggest funds of its kind ever raised. About 20% of the capital in the new fund came from wealthy individuals, Franklin said.

Write to Miriam Gottfried at Miriam.Gottfried@wsj.com