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Wednesday, September 19, 2012

Franklin Resources Buys a Hedger

Reported by Sean Hanna, Editor in Chief

The West Coast Johnsons are getting a little deeper into the alternatives world, putting themselves on the map in Connecticut's hedge fund corrider. This morning they took the wraps off a deal that brings K2 Advisors Holdings into the Franklin Resources [profile] family.

The purchase brings the San Mateo-based mutual fund giant the capabilities of a dedicated hedge fund shop founded by William Douglass III and David Saunders in 1994. K2 now employs 115 people in the U.S., U.K., Japan, Australia and Hong Kong, and claims approximately $9.3 billion in assets AUM as of August 31, 2012. K2, which was founded by William Douglass III and David Saunders in 1994, is headquartered in Stamford, Connecticut.

Franklin will purchase a "majority stake" in K2 Advisors for an undisclosed sum. It plans to acquire the remainder of K2 starting in 2016. Those purchases will run over several years, according to Franklin's officials.

Franklin is essentially replacing TA Associates as a minority shareholder in the hedge fund shop, leaving the stake held by K2's principals in place for now. K2 officials said that they will use the proceeds from Franklin to purchase all of the equity currently held by TA Associates and to retire all of K2's debt obligations. K2 current management is retaining its entire stake in the advisor.

Greg Johnson, CEO of Franklin Templeton Investments, explained that the deal is part of an "overall plan to expand Franklin Templeton's alternative strategies and solutions platform." EVP William Yun added that Franklin is responding to a shift by institutional investors of their portfolios towards hedge funds and funds of hedge funds.

He pointed to K2's "success in creating alternative investment solutions" as a driver of the deal. According to a Reuters report K2 executives had been in talks with the Carlyle Group over a period of months.

Meanwhile, Barron's points to an analyst report published by Sterne Agee analysts Jason Weyeneth, and Charles Warren that says the deal could boost Franklin's per share earnings by one to two percent in 2013.

Company Press Release

Franklin Templeton Announces Agreement to Acquire Majority Stake in Fund of Hedge Funds Specialist K2 Advisors

Strategic Relationship Bolsters Company's Alternatives and Solutions Platform

SAN MATEO, CA -- (Sep 19, 2012) - Franklin Resources, Inc. ( NYSE : BEN ), which operates as Franklin Templeton Investments, today announced that it has agreed to acquire a majority stake in K2 Advisors Holdings LLC ("K2"), a leading, independent fund of hedge funds manager. This acquisition will enhance Franklin Templeton's alternative investments and multi-asset solutions platforms. The proceeds of this acquisition by Franklin Templeton will be used by K2 to purchase all of the equity currently held by TA Associates and to retire all of K2's debt obligations. The current management of K2 will not sell any of its interests at this time and will receive no up-front consideration in this transaction. Beginning in 2016, Franklin Templeton will acquire the remainder of K2 over a multi-year period. The transaction is subject to certain conditions including regulatory approval and is expected to close in the calendar fourth quarter of 2012.

K2, co-founded in 1994 by William A. Douglass III and David C. Saunders, is a world-class fund of hedge funds solutions provider with strong risk management, manager selection and asset allocation capabilities. The group has a proven multi-team investment process and manager evaluation expertise that has resulted in over 18 years of strong growth and performance that ranks among the leaders in the industry.

Douglass and Saunders, K2's founding managing directors, have entered into long-term employment arrangements in connection with the transaction and will continue to manage the business. No changes are planned for the K2 investment management processes.

K2 has a global presence with 115 employees in the U.S., U.K., Japan, Australia and Hong Kong, and approximately US$9.3 billion in assets under management as of August 31, 2012.

"One of the ways that we have built Franklin Templeton's global business is by making strategic investments in smaller, highly experienced asset management companies whose expertise complements Franklin Templeton's global offerings and meets our world-class standards," said Greg Johnson, CEO of Franklin Templeton Investments. "This new relationship with K2 is an important step in our overall plan to expand Franklin Templeton's alternative strategies and solutions platform."

William Yun, CFA, executive vice president, Franklin Templeton Alternative Strategies, said, "The continued development of our alternatives platform has been a core strategic initiative for Franklin Templeton, and to that end we've focused on creating new investment strategies and broadening our distribution capabilities across multiple channels. K2 will be an important addition to those capabilities, particularly as institutional investors continue to shift allocations towards the hedge fund and fund of hedge funds space and to look for multi-asset solutions providers."

Yun continued, "K2's success in creating alternative investment solutions that enhance overall returns and lower portfolio volatility is closely aligned with our own vision for the alternatives business. K2 integrates a conservative, risk-based philosophy and advanced risk management systems into its investment strategies, and this complements Franklin Templeton's well-established commitment to risk management."

Saunders said, "By joining forces with Franklin Templeton, we are solidifying our position as a leading fund of hedge funds manager in an evolving alternative investment landscape. This has been a management-led effort to seek out the best partner to replace TA. From the outset, we were attracted to Franklin Templeton's established global presence and its extensive resources in distribution, operations and technology. Franklin Templeton's network of portfolio managers, country heads on the ground and real-time information about global markets will be invaluable to K2 in executing our clients' objectives."

Douglass said, "In seeking a partner to replace TA, it was critical to identify a world-class asset manager that shares our culture and core values. Franklin Templeton has a long and successful track-record of partnering with asset management firms and enabling them to operate as standalone businesses that leverage the full resources of the company's diverse platform. Our clients should take great comfort as K2 transitions from a financial sponsorship arrangement to a strategic buyer-of-choice, with management retaining its current equity stake."

Roger Kafker, managing director, TA Associates, said, "Since acquiring our interest in K2, the firm has grown from US$5 billion to US$9 billion while generating strong returns for its investors in challenging markets. K2 has been an excellent partner and we wish the firm well as it enters its next chapter."

About K2 Advisors

K2 was established in 1994 and has focused its business exclusively on the fund of hedge funds business. The Stamford, CT-based company has offices in New York City, London, Tokyo, Hong Kong and Sydney. K2 has built organizational, systems and process competencies over 18 years to support investments in alternative and asymmetric return strategies. In 1994, the firm was launched with a single commingled fund of hedge funds product with six underlying hedge fund investments. Today, K2 oversees aggregated assets of approximately US$9.3 billion, more than 65 percent of which is held in 30+ separate accounts or single investor entities that represent some form of strategic partnership with its clients. For more information, please visit www.k2advisors.com.

About Franklin Templeton Investments

Franklin Templeton Alternative Strategies encompasses:
  • the global asset allocation and solutions capabilities of Franklin Templeton Multi-Asset Strategies;
  • the company's asset management joint ventures in Vietnam and China;
  • the emerging market private equity, mezzanine finance and infrastructure capabilities of Darby Private Equity; the global REIT, private multi-manager real estate and real asset capabilities of Franklin Templeton Real Asset Advisors, and;
  • the commodities, managed futures and hedge fund replication strategies of alternatives specialist Pelagos Capital Management, in which Franklin Templeton also owns a 20 percent stake.

    Morgan Stanley served as financial advisor to Franklin Templeton, and Bank of America Merrill Lynch and Freeman & Co. served as financial advisors to K2.

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