Franklin Templeton will acquire a majority stake in K2 Advisors, a hedge funds-of-funds manager with $9.3 billion under management for mostly institutional investors.
The move is Franklin Templeton Investments’ first into hedge funds of funds, a strategy that is needed to expand its spectrum of alternative investments as well as to round out the firm’s multiasset-class solutions business, said Bill Weeks, a Franklin Templeton spokesman, in an interview. The firm offers single and multistrategy hedge funds, but Mr. Weeks would not say how much it has under management in them.
Terms of the deal and the size of the K2 stake Franklin Templeton is acquiring are not being disclosed, Mr. Weeks said.
K2 Advisors will use the proceeds of the sale to purchase all of the firm’s equity that has been held by private equity manager TA Associates since 2007. This will retire all of K2’s debt obligations to TA Associates. Members of K2’s senior management team will not sell any of their interests in the company now and they will not receive any upfront cash under the deal.
Roger B. Kafker, managing director and head of TA Associates’ financial services business, did not return a call seeking details about the size of the K2 stake the private equity manager holds.
David C. Saunders and William A. Douglass III, K2’s co-founders and managing partners, have entered into long-term employment contracts and will continue to manage K2. Neither Mr. Saunders nor Mr. Douglass was available for interviews. William Yun, executive vice president of Franklin Templeton Alternative Strategies, the unit that K2 Advisors will join, also was not available.
The deal is expected to close in the fourth quarter. Over time, Franklin Templeton will acquire the remaining equity of K2, beginning in 2016, to achieve 100% ownership.
Rumors that K2 Advisors and a number of other prominent hedge funds of funds were looking for buyers started to bubble up toward the end of 2010.
Before Wednesday’s announcement, Mr. Saunders consistently denied the firm was seeking a buyer to help the firm retire its debt obligations to TA Associates.
In the news release from Franklin Templeton, Mr. 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.”
Some sources were surprised that Franklin Templeton, well-known for its mutual fund management business, stepped up to acquire the hedge funds-of-funds manager. K2’s AUM has declined from a peak of $10.7 billion at the end of 2010, partially the result of terminations by a number of institutional investors.
The K2-Franklin Templeton deal is “interesting (because) one of the largest mutual fund companies is buying one of the largest hedge funds of funds … It appears as though the big (mutual) fund companies are getting prepared for the movement of smaller investors into alternatives,” said Bradley H. Alford, chief investment officer, president and principal of Alpha Capital Management, in an e-mail.
“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, in the release.
Franklin Templeton Alternative Strategies offers global asset allocation and multiasset-class solutions strategies; emerging markets private equity, mezzanine finance and infrastructure capabilities from its Darby Private Equity unit; global REIT, private multimanager real estate and real asset capabilities of Franklin Templeton Real Asset Advisors; and commodities, managed futures and hedge fund replication strategies through Pelagos Capital Management, in which Franklin Templeton has a 20% ownership stake.