American investment manager Franklin Templeton has signed deal to purchase alternative investment manager Lexington Partners for $1.75bn in cash.

The deal is expected to close in the second fiscal quarter of 2022.

Established in 1994, New York-headquartered Lexington manages secondary private equity and co-investment funds.

The firm has raised more than $55bn in aggregate commitments from over 1,000 institutional investors, allocating capital across over 4,500 secondary, co-investment and primary interests.

It is currently investing from its $14bn flagship global secondary fund, its $2.7bn middle market secondary fund and its $3.2bn co-investment vehicle.

Lexington operates from its eight offices in New York, Boston, Menlo Park, London, Hong Kong, Santiago, São Paulo, and Luxembourg. The firm has a current fee-based AuM of $34bn.

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Deal Rationale

The deal will allow Franklin Templeton to expand into private equity and boost its alternative asset capabilities.

Following the closure of the deal, Franklin Templeton’s alternative assets under management (AuM) is estimated to be around $200bn.

It is also said to complement the firm’s existing capabilities in real estate, private credit, and hedge fund strategies.

Franklin Templeton president and CEO Jenny Johnson said: “This acquisition will position us to capitalise on the highly sought after secondary private equity market, an area of growth that complements Franklin Templeton’s existing alternative asset capabilities to meet the growing appetite of our clients for alternative asset management around the globe.”

Transaction terms

Under the agreement, Lexington will operate as a specialist investment manager within Franklin Templeton. The firm will maintain its current management team.

Lexington’s partners and employees will receive a 25% ownership stake in the firm ‘vesting’ more than five years.  They will also receive $338m of performance-based cash retention awards.

Lexington president Wil Warren said that the deal would offer long-term continuity and stability for the firm’s investors, management team and employees.

Warren said: “Furthermore, the transaction has been structured to provide significant ongoing ownership of Lexington by our team, providing continued strong alignment with our limited partners.

“We are very excited to partner with Franklin Templeton to grow and innovate in our market segments, as we have over the past 27 years.”

Last week, T. Rowe Price Group agreed to acquire alternative credit manager Oak Hill Advisors in a bid to foray into the alternative investment markets.