E226: How Franklin Templeton Built a $1.6 Trillion Business Through Partnerships

Today, across private markets, we have about 260 billion in assets under management.

And if you look back at the GFC, which we really think changed that content between public and private markets very significantly, there were three main structural drivers that have created this exceptional growth in private markets relative to public.

Today, it's a three and a half trillion dollar asset class, and some projections suggest we're going to 30.

We do have some concerns about that large part of the marketplace where we're starting to see price compression, we're starting to see concession on terms, we're starting to see weakness in documentation and so forth.

Those are things that we're really, really concerned about and focused on.

We think venture is very, very ripe for disruption, very different model going forward than historically.

You got to move away from this transactional mindset.

You have to have a mindset of being an entrepreneur.

You have to have a mindset of curiosity.

You have to have a mindset of empathy.

We're not focused on like the short-term gain, right?

We're much more focused on how do we aspire to get into that long-term sort of winner circle of partnership that we think clients are increasingly asking us to do.

John, I've been excited to chat.

Welcome to the How Invest podcast.

David, thanks so much for having me here.

Looking forward to our conversation.

So Franklin Templeton today sits at 1.6 trillion with a T in terms of assets.

Tell me about where your private portfolio sits today.

Yeah, happy to do that, David.

I mean, look, today across private markets, we have about 260 billion in assets under management.

And, you know, look, those are figures.

But what I really want to sort of talk about is, you know, Franklin as an organization has evolved quite a bit over the last five or six years.

And that is in terms of our capabilities really across the board, including private markets, where we're really excited about the opportunities there.

But I think two things have remained remarkably consistent about our firm in the 75 plus years we've been in existence.

Number one is a hyper-focus on where we see the most compelling investment opportunities.

And we'll can talk a little bit more about what we're seeing across private markets in different asset classes.

And secondly, it's the notion of what is driving innovation and change in the marketplace, how is it impacting our clients, and how do we best serve them as trusted partners for the different opportunities and risks that we see on the horizon.

So, today you're at 1.6 trillion, 260 billion is in privates.

Why pursue privates and what's the strategic rationale behind that?

Yep.

Happy to cover it.

And maybe just take a step back, right?

If you look back at the GFC, right, which we really think changed that dichotomy between public and private markets very significantly,

there were three main structural drivers that have created this exceptional growth in private markets relative to public over essentially an unfettered 12, 15 year period.

And it was essentially the change in a regulatory dynamic.

So the advent of Dodd-Frank and Sarbanes-Oxley really changed the dynamic and, in fact, the pressures and costs of being a public company relative to being a private company.

I think the second piece was institutional investors, in particular, began to see really a compelling need to find diversifying, enhanced returns in their portfolios relative to what they'd experienced during the GFC.

And this led them more increasingly to look after how do they incorporate more alternatives and private market strategies into their portfolios.

And I think the third pillar, the third piece of the sort of equation that drove this structural growth in private markets was this notion of capital formation needs and companies that were out there that perhaps in the past only looked to the public markets began to find increasingly more solutions to suit their particular needs within private markets.

So think about private credit, private equity, et cetera.

And the kind of analogy I use is that machinery really began to work, right?

Capital market formation became much more efficient in the private markets fell to the public.

So when we looked at this and know, going back to my statement around looking for the best opportunities across the board, particularly in private markets, you know, we really saw an opportunity to tap into that secular growth trend.

And don't think of it from the standpoint of

we're looking to just bring on assets and increase our share price.

At the end of the day, we looked at it and said, where do we see the most compelling opportunities?

So, we think about private credit as an asset class, and we rewind five or six years.

It was coming this notion of, oh, is it becoming too crowded or banks starting to come back in?

Today, it's a $3.5 trillion asset class, and some projections suggest we're going to 30, right?

So we seek significant growth and opportunity as private credit is solving for these needs.

Another area I maybe point to, David, is secondaries in the private equity marketplace.

If you look at the market capitalization of private equity broadly, some estimates suggest we're pushing 8, 9, 10 trillion in capitalization.

And yet the secondaries market has been really rather small in the context of the overall overall structure.

Last year, we transacted a record high of $160 billion in secondaries volume.

This year, we're projected to transact, as of the middle of this year, a little over $100 billion, over $200 billion.

And we saw this as a huge opportunity to step in and begin to provide solutions as the market dynamic was changing, particularly post-2022.

So it's strategic on one hand in that we do see private markets as sort of this, you know, structural trend that will continue to proliferate and grow and be that area of opportunity for clients and investors.

But it's very curated, right?

We're not sitting here saying, look, we want to just acquire assets and do it for the sake of, hey, that's good for us as shareholders.

We're really thinking about where are those fast rivers of opportunity that we want to deploy capital on behalf of our clients.

Sounds like a joke.

There's a first tertiary fund.

So it's a secondaries fund that's buying secondaries and secondaries.

There's a $315 million fund raised for that purpose.

I use a very very simple analogy, right?

If you think about a public equity investor and you analogize that to what's happened in private equity, it's like you only do IPOs in public equity.

It makes no sense, right?

So we're starting to see that the private markets from a secondary lens is becoming very compelling from an opportunity standpoint on an absolute basis in terms of return potential.

Secondly, on a risk-adjusted basis,

you can buy seasoned assets that you have visibility into what their ultimate value.

You can underwrite them with a high degree of certainty.

And thirdly, it's also creating the opportunity to become much more diversified and have a line of sight much more quickly into liquidity and distributions, which, as we know, in 2022 has

changed rather dramatically with the lack of exits and IPOs and so forth.

So from the standpoint of an investor, what we are seeing is whereas private equity secondaries perhaps a few years ago was considered sort of PE 101, today we're increasingly advocating and seeing investors embrace this as much more foundational in portfolios.

So you're right.

And we think we're going to see a much more proliferation, further stratification of the secondaries market as these portfolios continue to mature and the asset class grows.

Aaron Ross Powell, and you've been an alternatives for several decades.

You've seen this post-GFC run up.

At the risk of being too reductionary, is that because interest rates were low and institutional investors had to invest into private assets in order to get to their distribution?

Are there more factors?

And double-click on why since 2008 there's been this risk on in terms of alternative assets in institutional portfolios.

Yeah, David, it's a great observation.

And I'd say,

you know, you're pointing to like why did it, you know, my sort of second pillar in my

kind of structural drivers of growth of private markets, you know, why did institutions begin to really dial up their exposure, right?

If you look at it today, an average institutional investor has somewhere north of 20, sometimes 25, 30, or even greater percent allocation into alternatives in private markets.

And I think in many ways, it was experienced during the GFC where

investors were exposed to the incredible volatility.

in the marketplace and the significant drawdown we saw in the aftermath of that.

And when they looked across their portfolios, where were the areas that they had those bright spots and they weren't alternatives, right?

So it was a notion of we had an expectation.

We forget back then that that we thought the markets were going to continue to be extremely choppy, challenging, fraught with dislocation and risk.

And in reality, what did happen, right?

We saw an exceptional period of a grind down in rates and a cost of capital.

And essentially, I described that period post-GFC.

We had a 12 or so year period that was like a zero gravity environment.

Nothing went wrong.

You threw capital in any problems and you solved for it.

And I do think in some ways it was that experience of that 2008 moment of, okay, how do we sort of take advantage and buffer the volatility of the portfolio?

But then you're right, increasingly as rates ground lower, areas like private credit did become very, very compelling.

We forget 2015, 16, 17, when rates were at all time lows, investors were keen to find income, enhanced income.

They were looking for ways to generate that return in their portfolios.

Private credit was a natural avenue to do that.

And it was really coupled by the blossoming of the private equity asset class as well, right?

The sponsor-focused direct lending space had explosive growth at that period of time.

So, yes, I think in some ways the interest rate factor, the need to find excess returns, enhanced income opportunities, drove in some way that growth to be sure.

But there are other factors, right?

Thinking about how do you generate growth in a portfolio?

How do you think about diversifying your portfolio further?

Cliff Asness from AQR, a previous guest, coined this term volatility laundering, which is basically even though you don't see your marks going up and down in the private assets, they are actually much more volatile than they appear to be.

What do you think about that?

And do you even think that matters to the end investor?

Yeah, it's a good observation.

I think that could be partly true.

And

I think it really ties back to

the notion of why invest in private markets overall.

And I think we have to remind ourselves that this is a long-term orientation, right?

Capital is locked up.

You're accessing this with the objective and the rationale of, you know, patient capital can take advantage of these longer-term opportunities and deliver that excess return.

Cliff's observation is true from the standpoint of, you know, sometimes you have investors that are paying attention to, you know, that quarterly mark and so forth.

And, you know, what does that really mean day in, day out?

I mean, it's an important factor, right?

You want to be tracking how your investments, how your portfolio is doing.

But I don't think it's entirely true from the standpoint of tying it back to the original premise and undertaking the investment, which is going back to my point, taking advantage of that long-term return.

And certainly, look,

when 2022 happened, it introduced a lot of that volatility into the marketplace because really, I'd say two main factors came into play.

One was the significant and sudden elevated cost of capital, right?

You talked about interest rates in your earlier question.

That really changed rather dramatically post-2022 with the Fed tightening cycle.

And the second one was we had a little bit of a different operating environment and

a different exit and liquidity environment.

And those dimensions playing into private market portfolios are naturally going to introduce some level of volatility, re-underwriting, reappraising of assets and valuations.

And I do think some of those assets were probably mismarked going into that period of time.

So again, I'd say it's really important for investors to be focused on what are the long-term objectives, what is that excess and substantial return objective that I'm looking for, and not get fooled by the idea that you get a quarterly valuation and maybe that presupposes that you have a lack of volatility in your portfolio.

I think it's really important to understand a market backdrop, what's going on in the world that might impact those valuations.

And of course, from our standpoint, you know, we're really firm believers in having a robust methodology that does impute, at least in our view, very valid valuations.

So we're very focused on that across the board.

I have an unusual analogy, but follow me here.

If you look at evolutionary biology and how dinosaurs

developed the ability to fly, they originally started as this peacocking mechanism to show health factors.

And over time, as the wings got bigger, they started to actually have a functional use and that they could fly.

I think a similar thing happened in private markets.

First, they had to chase these

higher returns in the private markets.

And then, as soon as they realized that, they started to really dig down and realize that there is alpha there and that they should have been doing this all along, but they needed this kind of mechanism to

kind of this push in that direction to try something new.

So, I think it's something that originally developed out of this need, and now it's kind of the rational thing to do.

Yeah, I like that analogy, David.

I want to use that.

Look, if you rewind the clock, you know, 25, 30 years and look at the capitalization of private equity overall and then, you know, who was investing in it, it wasn't really an institutional asset class.

And then some of the sophisticated endowments and foundations began to invest there, right?

Because they saw the opportunity to generate significant return potential.

You know, why do we invest and where is alpha?

You're looking for where there's inefficient usage of capital and where you can step in.

And you're right.

I mean, there is a huge evolution that took place, particularly in that golden age or the zero gravity environment, as I describe it, where institutions increasingly saw that opportunity evolve.

And whether it's in private equity, private credit, real estate, infrastructure, et cetera, on and so forth,

really became increasingly foundational to how they're investing.

You mentioned private credit.

You expect it might significantly increase.

Buyout today doesn't seem to be very attractive at the larger size of the funds.

So where do you see the private markets in five, ten years?

Yep.

Yep.

I think it continues to be an up to the right.

The question is the degree of the angle.

So we're going to see overall growth because those three structural drivers I mentioned are still firmly in place.

When we had the regional banking crisis, I mentioned several years ago, there was this thought of, oh, banks are starting to step back into direct lending.

Clearly, not in the way that they had historically.

They're playing a very different role.

But the regional banking crisis further accelerated this bank disintermediation theme for private credit, which we think is creating huge amounts of opportunities in some parts of the marketplace.

And to your point, there are some areas, and this is a big change post-2022, that we do think are crowded and are not going to represent that excess return or diversifying return potential that investors are thinking about.

So, today we think it's super important to really be focused on strategy selection.

Where do you want to allocate your capital?

I think today we're seeing value retracement.

So, you know, we really think private equity overall got quite overvalued going into 2022.

Some parts of it worse than others.

So, I think about large-cap buyout, as you mentioned.

In the mid-market, we've already seen retracement and valuations, and we start to see very compelling opportunities unfold there.

In the direct lending space, again, similarly, it's just a symbiotic dynamic with the large cap buyout space.

Sponsor-focused direct lending, we do have some concerns about that large part of the marketplace where we're starting to see price compression, we're starting to see concession on terms, we're starting to see weakness in documentation and so forth.

Those are things that we're really, really concerned about and focused on.

So, really important to think about strategy selection, think about venture, right?

And we are looking at it and saying we think venture is very, very ripe for disruption, very different model going forward than historically.

I think the second piece is beyond strategy selection, who are the managers that can, you know, in their history and their experience, deliver the return based upon their own value proposition, whether those are operational value creation strategies and private equity buyout, or is it the folks in private credit that can get access to the best deals because of their differentiated sourcing?

Is it the ones that can really deliver on the terms in documentation that we think are to protect investors on the downside?

And who are the ones that, if we do start to see stress and distress in the system, can deliver value irrespective of an economic cycle?

So we see the growth continue, David, overall, but we think it's a little bit of a different allocation and an underwriting dynamic that institutions are starting to go through.

Better strategy selection, a more focused strategy selection, and a real appreciation for who are the managers that have proven their ability and in the forward-looking market environment will continue to deliver on those returns.

Now a portfolio of 260 billion.

How do you go about building that portfolio?

And how are you able to generate alpha considering it's a quarter of a trillion dollars?

It's a number, right?

We're not the biggest.

We're not the smallest.

But it's really, I'd say, an output of our bottom-up focus on where we think the most compelling opportunities are within private markets.

I mentioned secondaries.

You know, we've built that out through acquisition, Lexington Partners.

We think they're one of the preeminent managers in the space, very, very long-standing history, have built phenomenal partnerships with clients, and importantly, really stuck to their knitting, right, in terms of focusing on the risk return potential.

The market now is growing very significantly in their favor, and we had a view that that was an area we wanted to operate in relative to some of the areas I mentioned that were not that competitive.

competitive or appealing from our standpoint.

And so we've not built out or acquired NetSpace.

Not to say we won't in the future, but today we think the opportunity set is a little bit challenging.

In private credit, we acquired a group called Benefit Street Partners in 2019.

And our view, again, was looking at the marketplace, and you have to sort of put yourself in that mind frame five or six years ago, thinking about distress, dislocation, opportunities, you know, more broadly across the credit spectrum.

And here was a group that has consistently demonstrated that, you know, having an in-house restructuring capability, think about dynamic protection, really kind of keeping yourself out of trouble was an area that we wanted wanted to focus in on.

In real estate, we have acquired a manager called Clarion Partners.

What's appealing about them?

Very long-term thematic approach.

Where are the demographic trends?

Where are the supply-demand imbalances?

And they were very prescient in taking their efforts and focusing on a sector known as industrial assets, right?

And did very, very well building out that exposure.

Today, they're very focused on the demographic trends that are suggesting some of these alternative sectors are quite interesting.

So, think of specialty housing, senior living, student accommodation, the broader multifamily opportunity that we're seeing structurally undersupplied for the coming several years.

So, to your point, David, this is not about like we just want to have a sort of supermarket of things.

We want to be very focused on, you know, where do we see those key opportunities in private markets?

And that's where we want to either acquire or build.

Reminds me of my conversation, CIO of Calster's.

They have 350 billion, similar size in the private arena.

And they're not able to just go into any asset class and pick the manager.

They need cyclical trends behind that entire asset class in order for it to make sense.

In many ways, they are moving the asset class itself.

So there needs to be this alpha that's in there before they even enter.

No doubt.

We're starting to see as these exposures have grown significantly, asset owners overall growing.

There's an element of this consolidation wave, right?

And people see consolidation or hear it and think of managers in the industry, but asset owners today across the board are looking at their books, they're looking at their portfolios, they're looking at their manager roster, and they're saying, who can we do more with, right?

We have this long tail of relationships, and many of them are simply providing.

parts which may or may not fit our assembly line.

And so as they think about this, they're increasingly looking to groups that can bring them true partnership.

And I mentioned this at the beginning, like one of the areas that we're really focused on is client partnership.

How do we become, you see this all over our website, the trusted partner, right?

They're looking for groups that can not just bring a product, right, or a thing that essentially may or may not fit their mandate.

They're looking for groups that can really understand

their objectives, their constraints, what are the particular issues that they're trying to solve for.

And having the broad set of capabilities and insights like we do globally, we think puts puts us in a very interesting light in that respect.

We create a huge amount of alignment around that objective.

And so this broader consolidation trend, as you mentioned in your example, is really starting to accelerate.

And it's something that we're quite excited about.

We're really leaning into as an organization.

And we think is, again, going to reshape a little bit where we think private markets is going.

I've never heard an LP that didn't say they wanted to partner with GPs and partner with the asset managers.

What does it mean specifically for Franklin to go out and be a good partner?

You're spot on.

I always say strategic partnerships mean everything and nothing at all, right?

It's about what does that really entail as an organization?

And you'll hear us here talk a lot about holistic client engagement.

You'll hear us talking about our investment in talent.

So people that can really sort of think about you know, sitting on the same side of the table as the investor that they're talking to, right?

Really being empathetic and understanding,

probing with the questions that we think will hopefully get us to a point where we have a meeting of the minds of how we could potentially work together.

So it's a philosophical starting point around really leaning into that.

I think the second one, David, is, you know, not starting with a widget, right?

It's about let's take a look at where those insight opportunities are to partner and then let's harness the resources that we have and curate what we're bringing to you.

I always say to a client, you know, our job is essentially to represent you to Franklin Templeton

versus Vice.

I think you've done a phenomenal job with the Lexington Partners acquisition, so much so that most people don't know that it was acquired.

And you've really, the reason it's so important is you've kept together the team, you've kept together the incentives.

Maybe you could double-click on the secret sauce.

How do you align the partners that you buy?

And how do you make sure that they're properly incentivized to grow grow the franchise versus just kind of, you know, calling in the nine to five and going about and kind of semi-retiring?

Spot on.

It's a,

you know, our acquisition and integration strategy is critical.

We refer to our

groups that we've acquired are specialist investment managers.

And the objective is to say, okay, you know,

we've talked about this consolidation trend.

We've talked about focus on, you know, particular opportunity sets that we're really compelled by.

But then the devil's into details, like how do you bring this together so that the equation, hopefully for our investors is one plus one equals three.

And it results in a model that is actually very simple conceptually, but quite complicated to execute.

What do I mean?

At the end of the day, what we want

is the investment teams who are integrated to be hyper-focused on exactly what they've been doing, keep that culture that made them very successful investors and hopefully enhance it in different ways, provide them broader access to information insights, allow them to invest in technology, allow them to invest in retaining the talent that might otherwise leave in a very different acquisition framework.

And then hopefully on the other side of it is take away from them the things that are non-core or non-essential to their businesses, right?

So think about real estate.

We just consolidated 11 offices in Manhattan here in New York City down to two, most of us moving here to one Madison.

And so having us all under one roof, it's obviously very helpful from the standpoint of idea sharing and synergies and so forth.

But it's one of those things where, if you're out there as a boutique, I think it's increasingly becoming challenging to deal with all the operational side of things.

So hopefully it's about getting the investment process, keeping it intact, but then enhancing it in ways that we think the organization can bring there.

And then essentially taking away some of the non-essential, non-core things to their businesses, so client engagement and so forth, helping them with things like that.

So at the end of the day, we think that creates a better outcome for investors, right?

Because it takes away that notion of organizational risk, like what happens when someone's acquired by maybe a different group that has a different acquisition strategy.

We're known to really be symbiotic and synergistic with the groups that we require.

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Curious on this point because you guys have grown to 1.6 trillion.

And any organization that grows has to deal with this big company entropy.

By default, the company is going to start to hurt kind of culture, hurt the ability to make acquisitions, to be agile.

What are some principles across the organizations they use in order to fight this entropy?

Yeah, absolutely, David.

I think,

you know,

it's hard, right?

It's hard when you grow to really kind of foster and continue to instill what made an organization successful.

I think one of the things that's very different about Franklin Templeton and certainly was appealing in my decision to come over here several years ago was, you know, we are a generationally led company.

So third generation Jenny Johnson, our leadership stepping into that role,

very much aligned, right?

So you think of us as a public company, but our insider ownership is rather significant.

And having that generational leadership and succession that's occurred here creates a very different perspective for an organization.

It's about long-termism, right?

It's thinking not about the next eight minutes, but it's thinking about the next eight years.

And I think that perspective you hear really across the organization about, you know, how do we think long term?

Where do we really see the big cyclical shifts?

I'll give you an example.

Our build out in digital assets has been rather extraordinary, right?

Technology, if you think about AI, blockchain, digital assets, crypto, et cetera, is rapidly disrupting and forcing innovation across the board.

When Jenny stepped into the CEO role, she has a tech background.

She ran our operations.

She had a view that this was going to be very impactful and something that was going to force us to adapt how we do business and began to invest in exploring that, right?

And took a long-term view.

And it wasn't about let's create a product or solution.

Let's think about what the impacts are to our business, to our clients.

And today, fast forward five, six years on, we have a 60-person team that is not just investing and building investment products, they're building in the space, right?

And I think that is something that is really deeply rooted in our organization, is thinking of the long-term potential and being willing to sort of step in and invest in a way that maybe doesn't have that immediate gratification of returns.

It's about thinking, hey, what is the implication for business?

Let's really focus in on here.

Let's invest.

Let's think about where this might take us in the future.

We've talked a bit on the GP side about the benefits of partnering with Franklin to Hampleton.

Obviously, people could see the the AUM and the synergies.

On the LP side, what's the pitch to LPs and what are the benefits in general for LPs that sign on to a platform versus just single best-in-class asset manager?

Yeah.

And look, I would say,

you know, LPs are today, and this is through more of a private markets lens, are thinking more about,

you know, we had this exceptional growth, this secular growth in our private market portfolios.

And today, we look at it and we're not really sure it's a portfolio, right?

It might be a collection of investments.

And I'll give you an example, you know, the advent of sponsor-to-sponsor transactions is very bad for LPs, right?

Because it crystallizes their economics in fund A and it resets them in fund B.

And that can happen, you know, two or three times.

So the overall trend, we're actually seeing our clients much more open and understanding that there is a broader consolidation way of occurring and looking towards managers that can, you know, importantly have the solutions, but I think even more importantly, going back to your question around how do we orientate ourselves, have that philosophy of, you know, holistic engagement, really trying to understand the problems and, you know, bring more of the insights and solutions across the board.

So, you know, I think from the standpoint of, you know, what are the pressures on that kind of smaller or niche middle market.

And I think it's really two main things.

I think one, from the investment standpoint,

having a broad array of capabilities makes you far more relevant to

companies that are seeking investment.

It opens up the aperture significantly and makes a very wide funnel.

And everybody talks about sourcing figures, you know, they throw out thousands of this or that.

I don't think it's the case.

The important thing is you want to be able to see the market, but then you want to be able to go out and proactively access the opportunities that you're most compelled by.

And that really, from an investment standpoint, is what a broad capability set like ours does.

I think the second piece ties a little bit into your previous question on our integration and acquisition strategy, which is to say, being a firm in the middle market, even managing $10 or $20 billion, which is not a small amount of capital, is still hard from an operational standpoint, right?

The burdens of...

client engagement, compliance, regulatory, investing in technology, right?

We have a whole effort dedicated around AI and how we can leverage it as a tool to make us better across our entire organization.

I think that's very hard to do at that size.

And I do think LPs are probing further into those areas to try to understand who are the groups that we think are at risk of disruption in a variety of different means, and who are the groups that we think are really thinking very proactively about how to get in front of these trends.

To double-click on what you're saying, a lot of LPs tell me that they're consolidating their managers.

It's one of the biggest themes in asset management in general is that they're putting more money behind fewer managers.

What do you think is driving that?

Yeah,

it's some of the trends that you just mentioned, which is

they're looking at their portfolios that were built, again, going back to that zero gravity environment, call it 2009 to 2020, and you know, became a collection or assimilation of

private market investments.

If you think about an allocator during that period of time, many of them said, okay, we're going to target 10% to private equity, and they struggled to get to that target, right, because the velocity of capital was so quick, money going in, money coming back out.

Today, that's changed.

It's changed from the standpoint of liquidity is not so prevalent in the marketplace.

And as we know, the advent of the denominator effect caused some very wonky portfolio distortions and some client categories much worse than others.

Investors today are now really, really focused on, okay, you can make a a great investment, but if it's a paper return, so what, right?

How do you think about where's the liquidity avenue here?

How do you think about what's going to drive the return to get to where I need it to be?

I also think it's more about the complexity that we do see in the investment environment today.

I think it's harder than it's ever been to generate excess returns.

I was looking at the S ⁇ P 500 returns today.

And, you know, everyone talks about the Magnificent 7.

Well, over half of the S ⁇ P are positive year to date.

Some of of the best performing stocks, I think, would surprise people.

It's a very difficult environment to really put together a comprehensive portfolio and think about, okay, you know, how does that meet my different operational perspectives?

And I think this gets to the heart of your question, which is it's about really kind of working with groups that can understand you as an organization.

Again, what are your constraints?

What are your objectives?

What are your governance hurdles?

What are the areas that you want to focus in on?

And then who can help you in that journey?

That's a very, very different dynamic than we saw in that kind of golden era where it was just about product and getting as much as you could on the board.

Completely different environment.

Maybe you could double-click a little bit more on that.

Why do lower interest rates drive this more diversification across manager?

Was that just a mistake, or was it a sign of the time, more risk on?

And why was it more okay and more fashionable to go broader?

Yep.

Yeah, I think it's a couple of things.

I think number one,

a lot of it, like I kind of grew up in the hedge fund world in the mid-2000s.

And, you know, a lot of it was about like, how do you sort of, you know, if you're if you're sitting there, and I spent time on the investment side as well, if you're sitting there, you know, stock picking, right?

If you're sitting there picking managers, you want to prove your metal, right?

And so there's an element of like, how do you kind of like, you know, pick the best in class, find that diamond in a rough?

And that environment probably really did exist for a good portion of that period of time.

I think the more prevalent piece was the analogy I use, which is, okay, you've decided to make a 10% allocation.

You know, how do you get there?

Right.

And the velocity of capital was so quick.

So it really sort of forced, I think, allocators to, you know, build out as much as they could.

And, you know, thinking back right to the sort of 2010, 2012 period, you know, you didn't necessarily have these mega-size funds that you've seen over the last couple of years.

We'll see how that turns out.

But, you know, you mentioned earlier a big West Coast public plan putting a sizable amount of capital work, very hard to do.

So I think interest rates were

probably part of that, right?

Like rates grinding lower certainly makes hitting that return hurdle harder in traditional asset classes.

I think there were some interesting charts that I've seen that in that period of time, you know, to get to like an 8% return using fixed income instruments, you had to really go all over the place and way out in the risk spectrum.

Certainly, private markets solved for that portion of it, but I also think it was a dynamic of people trying to get to that target allocation.

There were certainly a lot of unknowns.

And also, this notion of like, you know, finding that diamond in a rough, which I think was available and probably is available in some areas in ways, shapes, and forms today.

But again, as I mentioned, a very different kind of dynamic and manager selection going forward.

You referenced it earlier: digital assets.

Why does it make sense?

It seems like a small market today.

Why does it make sense for a $1 trillion manager to be involved in digital assets today, 2016?

It's a point well taken, David.

Look at private equity, right?

If you rewind 25 or 30 years, this was a sub-trillion-dollar asset class, right?

These were families, individuals,

a handful of institutions investing.

And today, look at it, right?

It's a foundational asset class.

It's the biggest asset class in private markets.

And not to say that

we believe digital assets will become that over time, but we certainly do believe that there are some structural trends that sit behind that that suggests way more significant growth and opportunities.

So that's sort of point one.

I think point two

is we look at it and say there is a tremendous amount of disruption.

and innovation that comes off the back of this to our industry and broadly speaking, many industries across the board.

So we better be proactive and focused on what are those implications to our businesses, to our clients, and then thinking about, you know, where are the different opportunities that exist today.

So you think of crypto broadly,

in some ways, shapes, or form, we think that some of the cryptos offer a liquid venture type of opportunity.

We talked about, you know, we're not just investing, we're also building, right?

So we've run node validators on different chains.

We've also been investing in seed and pre-seed stage companies within a digital asset landscape.

Many of that tied to our theme around financial innovation.

Again,

we do think it's an asset class that will grow.

We do think it presents really great opportunities.

But even more importantly, as an organization, we've made a firm commitment to invest there with our global team of 60 people and all the thought leadership and focus and education that we've been providing to the marketplace around it.

So we're convicted that we think this is over time going to present a really great opportunity for investors.

If I'm doing my math right, you have roughly 1.3 plus trillion in retail investors, 260 billion in institutional.

How do you build an organization that caters to both?

And what are the trade-offs of focusing on two parts of the market?

Actually, the figures are a little bit, we're roughly 50-50 retail-institutional.

A lot of that, you're right, has been through the growth and acquisition of some of our private market strategies, as well as some of traditional institutional strategies.

But there are

certainly both synergies and trade-offs.

Synergies from the standpoint, if you think about our legacy being very, very deeply rooted in the wealth and retail channels,

huge amount of innovation that goes back to our heritage and providing access to institutional caliber mutual funds.

We have a really strong footprint.

in wealth and retail.

And as you think about this notion of the growth of private markets into the retail and wealth channels, we think we're really well positioned for that.

There's many synergies because we understand those clients very well.

And I think that's really critical and applies sort of across the board.

The other synergy is when you think about bringing products and strategies into that marketplace, we will not compromise on the investment solution, right?

And not to cast aspersions, but we see, you know, some offerings out there that we think are, you know, maybe not the best solution for those potential clients.

Double click on that.

You can name names, but I'm guessing you're not going to name names.

What are some practices and what are some form factors that you think are being pushed on the retail market that you don't love?

Yeah, look, I think there are some groups out there that are conducting an asset grab.

And

there's a broader kind of opening.

We've seen the regulatory door open up.

We've seen increasingly headlines kind of capture this move of retail.

into alternatives and the suggestion that it's not going to be zero anymore.

It'll be something much bigger than that.

When you bring product and solutions to that marketplace, it's really important from our standpoint to understand what are the long-term objectives of this investor?

Like why do they want to access this opportunity set?

And then how does a potential solution fit in it from a strategy standpoint?

And then importantly, how do you structure that in a way that needs to meet their certain expectations?

So for example, liquidity, right?

A lot of these things are launched as tender or interval funds, funds, which suggests that there is some measure of liquidity available to investors.

Now, you can offer that out, and then maybe you never need to test it.

That's not our approach, right?

We really think about liquidity as an important factor that's playing into what that investor's needs are.

So, if they are asking for liquidity, we want to make sure that it's aligned to generating that liquidity, whether it's on a quarterly or annual or so-forth basis.

I think, secondly, you know, you see a lot of portfolios that when you dig in in are not necessarily why you would access this strategy or an asset class to begin with.

Why do investors, so think about retirement, right, 401k?

And we think this is a really interesting avenue and probably the most appropriate place for these long-term strategies to reside over time.

You know, you want that long-term return, right?

You're locking up your capital.

You're accepting a certain degree of illiquidity in order to tap into that.

Why would you bring a solution that is, you know, fraught with liquid solutions or investments that aren't really designed to meet that objective?

And so I think there's a bit of a mismatch in the market today that we are concerned about.

And we're trying to hopefully, through our

partnerships here at Franklin, help educate advisors, the different groups that we're working with, to make sure that they're really well informed around those concepts.

Alternatives, as an entire asset class, Franklin and other players has almost its own brand.

So if one fund does something that hurts the brand of alternatives, it hurts everybody, even though you're also competing at the same time.

So, it seems like liquidity or the lack thereof and education around how liquidity works in alternatives is one of the key roadblocks to making sure that retail adopts this asset class and is successful over time.

How do you educate retail investors around this issue of liquidity?

Yep.

So, in the wealth and retail channel, you know, we've built out a whole dedicated specialized team focused exactly on that.

So folks who have deep-rooted alternatives background, we have within our institute a gentleman by the name of Tony Davido who focuses entirely on providing education, particularly to wealth advisors.

I mean, look, David, it's critical about, you know, kind of

you know, peeling back the onion here, right?

Because I think what a lot of the phenomenon that we've seen in this channel is, you know, sometimes the advisors feel like, okay, everybody else is doing alternatives.

I have to do it, right?

And, you know, having very little experience and getting to a point where, you know, you maybe have five or six or seven percent allocation across your client portfolios is daunting, right?

And we really have to help those advisors bridge that gap.

So we do, we publish a lot.

We focus on thought leadership.

We have different forums where we go out and help to educate.

We hopefully can provide them with what we think are best in class solutions and we really keep those two things apart, right?

Education versus product solutions, because we think it's important to have that objectivity around what sits within our institute.

So, you know, it's no, there's no silver bullet here.

You know, this is not easy and we understand that.

So the idea is, as an organization, we've heavily invested in building out that relationship management capability to have the experts in the field to hopefully help bridge that gap over time.

I see a similar phenomenon in retail that happens that we discuss after the global financial crisis in alternatives in that traditionally RIAs and the intermediaries between the retail capital and the investment, they tried to stay, they wanted to stay away from alternatives.

All things being equal, it's kind of a pain in the ass.

You have to do all this education.

But now they're forced into having to invest in the sector.

They're losing clients because somebody else is telling them about the alternatives that they could offer them.

So I think this has kind of went from a

vitamin to a painkiller to use a startup analogy in that now every

RIA is sitting down and thinking, what is our alternative strategy?

We could no longer afford not to have a strategy.

Yeah, 100%.

And again, I think, you know, we're excited about that.

You know, we're very proud of the different offerings that we brought to market.

We're very proud of the education.

Our insight and thought leadership, we think is stair step.

We certainly get that feedback from many of the institutions I speak with daily.

They really want to hear what we're seeing, what we're thinking.

They want to learn about what are the different peer groups and trends that we're seeing in the marketplace.

But you're right, there's an overall prevalent pressure from the industry.

But again, I go back to the end user, the end client, right, to be able to access that long-term return potential when you have that long-term investment horizon is phenomenal.

It just needs to be done the right way.

And we're hoping, we're certainly projecting that, that we think there are good ways and great opportunities that go behind it.

You've had a prolific career being at institutions, not only Franklin, but also BlackRock, Partners Group, Barclays.

What advice would you give yourself going back now 30 years ago, just graduating from law school?

What one piece of advice would have helped you accelerate your career or helped you avoid costly mistakes?

Well, having a benefit of hindsight, and certainly my investment portfolio probably looks a little better or different, I should say.

I'd say I've always had a curiosity around businesses and markets, and I think that has served me quite well.

I'd say I would have loved to, you know, perhaps spend even more time on the investment side, right, to really gain further depth and understanding.

But, you know, the draw for me was really, I'd say, working with clients.

I really love the opportunity to sit down and

have that empathy, kind of hear what's,

you know, hear what's keeping them up at night, right?

And hear kind of what the things that, you know, they're thinking about in the future.

I'd say going back to early in my career, I wish I was more empathetic earlier on in my career.

I think at the time, going back to the mid-2000s, as I said, there was a very different kind of.

client orientation.

It was much more about, here's a solution, like it or not, move on, right?

And I think going back to that, that sort of, you know, earlier period in my career, I think having that sort of, you let me really understand what's going on across the table for me and what are the particular things that are interesting to them, I would have liked to have invested in that more earlier on my career.

Reflecting back, how do you know when to be patient in your career or when to really push that involved?

Today,

patience is critical.

You know, I think the notion of, you know, being able to force an issue, I think

I don't know that it ever worked, right?

I think the idea of like the salesy kind of relationship manager, I hear it day in, day out, is not appealing to institutional investors today.

So the idea is, in my opinion, to be able to build the credibility and trust with a client or prospect

and

have essentially the license to challenge them.

And I've certainly, I think, done this with many folks that I work with over my years, to challenge them when you think maybe they're missing something or they might have a wrong assumption on something.

And if you've taken the time to really invest in building that relationship, you get that right.

And it's very different, I think, than saying, you know, here's a thing, this is what you need to do

because I said so, right?

I think that's out the window.

So

importantly, you got to sort of build that rapport and relationship up front in order to get the license, I think, to be able to have essentially a peer-to-peer seat at the table relationship.

And I think once you get there,

investors really appreciate it.

You know, they don't want to, you know, be sold something.

They want to understand why it is I should work with you, right?

What it is that you can do to help me.

And I really love that.

I think that's a great way to sort of encapsulate what the client-manager relationship should look like.

David, I think what's important to know is as an organization, we're deeply focused on where we think are the most compelling investment opportunities and where we think we can bring insights and solutions to our clients, prospects, and consulting firms.

I think the second one, and this is really very important, is we do want to aspire to be that trusted partner.

We want to be the first phone call when they are wrangling with an issue and they're unable to maybe get to a solution or they want to bounce an idea or they have a particular challenge.

And increasingly, as we've grown our presence, as we've built out our capabilities, we're seeing that become the case.

So we're really here for our clients at the end of the day, and we want the institutional marketplace and investors broadly to really understand that.

Tell me the trade-offs of being a trusted partner.

What is the cost?

And everybody wants to be a trusted partner.

What is the short-term cost to have that long-term relationship?

Give me an example.

Yeah, 100%.

You got to move away from this transactional mindset.

And as an organization, if you look at how we've reoriented our organization, the talent that we brought in, how we've built out our different capabilities, it's very much focused towards exactly that phenomenon.

As I said earlier, strategic partnerships mean everything and nothing at all.

So you have to have a mindset of being an entrepreneur.

You have to have a mindset of curiosity.

You have to have a mindset of empathy.

So the trade-off is,

we're not focused on like the short-term gain, right?

We're much more focused on how do we aspire to get into that long-term sort of winner circle of partnership that we think clients are increasingly asking us to do.

It's a little bit of

that sort of interim trade-off, I think, in one sense,

that maybe, you know, from a shareholder perspective, I don't know, may or may not be appealing.

But I also think from the standpoint of investing in the talent, like that takes time, right?

And it takes time for people to really get to know the organization and cultivate and develop those relationships.

And so we're willing, again, I think as an organization to make that investment because we do think that that is a better outcome for our clients.

Yeah, I think this short-termism versus long-termism in the public markets is not quite to the efficient level.

I think we'll see in the years to come this recalibration between long-term patient capital getting an alpha for long-term organizations and short-termism being more transactionalized and commoditized.

I think we'll see that play out over time as data comes in from the results.

John, thanks so much for jumping on podcast and look forward to continuing this conversation live.

Likewise, David, thanks so much for having me.

Thanks for listening to my conversation.

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