How an acquisition invigorated an asset management leader

Jenny Johnson, president and CEO of Franklin Templeton, explains how the firm’s acquisition of Legg Mason positions it for the next phase of growth.

Jenny Johnson grew up in the investment management business, rising through the ranks of Franklin Templeton (a firm founded by her grandfather) for 32 years before taking over from her brother as president and CEO in early 2020. Within days, she announced the biggest transaction in the company’s history: the acquisition of Baltimore-based competitor Legg Mason.

The $4.5 billion transaction roughly doubled Franklin Templeton’s assets under management (AUM) to $1.5 trillion and made it the sixth-largest independent investment manager in the world. The merger brings to Franklin Templeton additional expertise in core fixed income, equities, and alternatives, and expands its multi-asset investment solutions. McKinsey’s Robert Byrne spoke with Johnson recently about the challenges of blending cultures in a merger of equals, the disruptions coming to the asset management industry, and the need to democratize access to high-return investment opportunities. An edited version of their conversation follows.

Robert Byrne: This acquisition seems like a baptism by fire for you as a new CEO. A few weeks after you took over and announced the acquisition, the pandemic hit. What was it like to go through so many experiences at the same time?

Jenny Johnson: We were all very excited about the Legg Mason announcement and what it meant for our respective companies, and of course thousands of employees, clients, and shareholders. For me personally, it served as big news to start off my tenure as CEO, but it was definitely a team effort. I had the benefit of still having the former CEO of Franklin Templeton as executive chairman and our CFO had experience with many transactions.

We had been working on the Legg Mason transaction for about eight months and I was very involved. It was part of a multiyear strategic plan where we identified key growth accelerators for our business. And when the pandemic hit, we never looked back. For us it was a growth story, from filling product gaps to providing client diversification to acquiring new capabilities. In some situations, a CEO may face pressure from investors who look for short-term gains versus taking a long-term perspective, but we had the benefit of having long-term shareholders. I was more confident than ever about our future.

Robert Byrne: The merger closed earlier than many expected. How did you manage the integration?

Jenny Johnson: The integration was about laying out and communicating very clear goals, and we’re proud of the progress we have made toward achieving them. One of the merger’s goals was to infuse talent into the firm, and getting people to be open to that was really important.

When you are picking talent for new roles, you want to be able to do that in person and I was fortunate to have arranged a two-week trip to visit all of Legg Mason’s investment boutiques that ended right before the lockdowns in March 2020. That made a huge difference because even that limited interaction helped build trust and move things along in the integration. In an acquisition, everybody is nervous about their future roles. As you get further up in the organization, there is only one seat for certain functions and in an acquisition of two equally sized firms, there are two candidates for many roles. In some cases, we didn’t go with a Franklin Templeton candidate, and those were tough conversations.

Robert Byrne: Your father, former longtime CEO of Franklin Templeton, had said that Franklin does what’s right for the client and the business takes care of itself. How did that philosophy inform your approach to client retention?

Jenny Johnson: The clients’ primary concern was that the merger would be a distraction for us, so it was important for us to keep them informed about the progress. Early on, we developed a more adaptable regional distribution model, which pushed decision making and resources closer to our clients to be more responsive to their needs. We also invested significant time training our sales teams on the expanded range of capabilities. Once our clients were comfortable with the decisions we were making, they started to ask, “What else is available? Tell me how this is good for me.” We are seeing the benefits of cross-selling.

Naturally, we expected there would be some growing pains. We had to change the relationship managers for some clients, which is always hard for people. Half the financial advisers have a new wholesaler supporting them and it will take time for those relationships to be established.

Robert Byrne: How will you define and measure the merger’s success as you continue the integration?

Jenny Johnson: It’s many of the traditional measurements in the industry: Are we growing the business? Do we see positive net flows? Are our solutions teams sought after as advisers? And we are seeing positive developments, with organic growth in a number of key areas. With the recent announcement of the acquisition of Lexington Partners, we now have top-tier specialist investment managers in all the key alternative categories. When we close the Lexington transaction next year, we expect our alternative assets under management to approach $200 billion. We also recently announced plans to acquire O’Shaughnessy Asset Management, which will complement our existing strengths in separately managed accounts [SMAs] and customized solutions with the power of custom indexing.

These plus the Legg Mason acquisition have greatly expanded our ability to create new solutions—now it’s like being a chef walking into the best-stocked kitchen. Another area that’s exciting, but will take time to unlock, is the diverse expertise that specialist investment managers can learn from each other.

Robert Byrne: You opted to not fully integrate Legg Mason’s independent boutiques, aiming rather to create what you have described as a “cross-fertilization.” What impact does this decision have on the culture of the merged entity?

Jenny Johnson: Some of the Legg Mason investment teams are quite independent, and are fully functioning businesses with their own lawyers, CFOs, and other functions. As a global organization we can be helpful but rather than imposing this help on them, we let them opt in. Our philosophy has always been that the investment management teams are completely independent and the chief investment officer determines the investment process. At the same time, we have provided incentives to leaders of the investment teams to also focus on the success of the broader organization. A transaction gives you the flexibility to implement that, which would have been hard otherwise.

Remember that we were essentially buying nine cultures that we did not fully understand: the investment side had eight teams with unique cultures, plus the parent company. Investment bankers will tell you why a transaction is a great strategic fit and has a great price, but they will never talk about culture. Yet, in our experience, deals succeed or fail based on whether the cultures mesh.

Robert Byrne: Let’s turn to broader industry trends. The impact of blockchain and the arrival of digital assets have long been topics of speculation. How disruptive will these changes be?

Jenny Johnson: Blockchain is the biggest disruption I have seen in my 30 years in this industry. Take, for instance, tokenization: an individual can build ownership rules into code that allow them to transfer illiquid assets much more easily. You can fractionalize ownership and then provide additional services through nonfungible token [NFT] validation. To put this concept into a real-world example, the Empire State Building could be sold to a million different people and those investors wouldn’t need to do an ownership transfer; it’s all there in that token.

This phenomenon will unlock and democratize assets in a way we have never seen. It will be fundamental to bringing alternative investments to the retail space, which needs to happen. The illiquidity premium has been so significant that it’s dangerous for us as a society to only allow wealthy people to benefit from those returns. But it’s a running-with-scissors scenario: NFTs are great tools but, boy, if used incorrectly, smaller investors could potentially get hurt.

The other concept I find fascinating is decentralized finance [DeFi]. Today, if I want to create a new company, I pitch it to friends, family, and venture capitalists and they become my equity providers before I launch the product. DeFi instead gives equity to the customers who help you build the business. When you become a user of my code, I can pay you in tokens that become valuable over time. This will change the traditional equity model, but we are only scratching the surface. It’s like when you got a smartphone and thought it was cool but did not appreciate its full capabilities. Now, you probably use it more than your computer.

Robert Byrne: Do you see asset managers being in the vanguard of bringing these innovations to the masses?

Jenny Johnson: Well, I don’t know how many are paying attention. Franklin Templeton already has a money market fund built on blockchain. Many people think this is further off, but overnight it could coalesce. Is that two years from now? I don’t know, but once it starts, it will take off.

Robert Byrne: Where do you see pockets of demand for alternative investments and will the distribution model change?

Jenny Johnson: Our clients deserve the broadest range of investment choice, and expanding into alternatives helps to provide all clients with access to performance and return drivers that differ from more traditional investments. For an asset manager, alternatives also provide for the potential of higher margins.

My team and I recently discussed some of the more complex issues that we as a manufacturer face in order to get private-market products to the hands of retail investors—whether through their financial professional or even inside a 401(k) plan. How do you value a private company daily? What about liquidity? Seventy-five years ago, Franklin got into mutual funds because back then the little guy didn’t have access to the market. Mutual funds were hard to explain and took a long time to be embraced. It was 30-plus years before Franklin raised the first billion dollars, so firms have to be patient and committed.

Fast forward to today and we’re seeing the same concept play out with alternatives. There is a massive amount of money available to keep companies private longer. Let’s face it: when you go public, the scrutiny soars, so many companies prefer to wait. If that growth trajectory is not available to the retail investor, that will be a huge problem.

Robert Byrne: There has been an awakening in the past few years about corporations’ responsibility to society. Do you think the focus on purpose, stakeholder capitalism, and environmental, social, and corporate governance [ESG] issues will persist, and what impact does that have for your industry?

Jenny Johnson: A leading publication did a CEO survey a year ago asking, “Is stakeholder capitalism new and here to stay?” And I was one of the few who said no. I said that because stakeholder capitalism has always existed. Good companies have always paid attention to their clients, their community, and their employees, who are your biggest assets. All those stakeholders have to be in the minds of successful leaders—it’s certainly how my father ran the business. We are just doing a better job of articulating it today.

ESG and sustainable investing are also here to stay, and it’s to the advantage of active managers because ESG data is hard to get, it’s not consistent, and there is a lot of window dressing. I think we will see a shift to investment products that truly dig in to measure ESG performance. Clients will be asking, “How did I do in my returns and what impact did I have?” I have five kids and I see it with them: they are willing to be uncomfortable to save the environment. My daughter will not use a plastic water bottle; she will forgo water if that’s the only option. This generation will demand that their managers go thoroughly through the data and measure the impact. People will smell it if you’re not genuine.

Robert Byrne: Do you expect M&A to play a role in bringing some of the shifts you have been describing to the mainstream marketplace?

Jenny Johnson: First and foremost, I believe the next decade will not be dominated by passive investment management like the last decade was. Passive tends to do well in a momentum market, but we cannot sustain the current level of central bank intervention and when that stops, there will be more differentiation in returns, which is where active management does better.

I also think data will be more and more important. Anybody making active decisions, whether at a macro or individual-company level, will be looking for nontraditional sources of data to gain an edge. That data is expensive because in data analysis there are far more dead ends than positive signals you can act on. Active asset managers will have to be as good as Google is at understanding how to get insights from data. Scale allows you to share those costs across a broader asset base and that will be one element that pushes M&A. Additionally, distribution partners worry about risk management, compliance, and technology investment. Investment companies will want to make sure that their partners are investing in those critical areas because if one of them sinks, it splashes back on them. That is another factor that will drive M&A.

Robert Byrne: You are now 20 months into your role as CEO. Is there anything you know now that you wish you knew when you started?

Jenny Johnson: Being willing to move people out of roles can be hard but very important. In basketball, if you have the point guard playing the center position, that person will not be effective, even if he or she is the greatest point guard ever. You need the right people in the right seats and a team that trusts each other.

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