Franklin Resources buys prominent hedge fund firm K2

BOSTON, Sept 19 Wed Sep 19, 2012 9:56am EDT

BOSTON, Sept 19 (Reuters) - Mutual fund giant Franklin Resources said on Wednesday it will buy a majority stake in K2 Associates, one of the biggest so-called funds of hedge funds, to beef up its offerings of alternative investments.

Franklin, which oversees roughly $731 billion in assets, will pay an undisclosed amount for the bulk of K2, which manages $9.3 billion. K2 will use the proceeds to buy back a stake in itself from TA Associates and to retire all of its debt obligations, the companies said in a news release.

Many bulge-bracket investment companies have been seeking to buy hedge fund firms, as alternative investments are drawing interest as a means to smooth long-term returns.

Three months ago, private equity company Kohlberg Kravis Roberts bought fund-of-hedge-funds manager Prisma Capital Partners.

The Franklin deal, which is expected to close at the end of the calendar fourth quarter of 2012, will give the San Mateo, California-based company the right to start buying the rest of Stamford, Connecticut-based K2 beginning in 2016.

K2, founded by David Saunders and William Douglass III in 1994, is one of the best-known independent hedge funds of funds and was able to grow assets after the financial crisis, which hurt many competitors. With offices around the world, the firm employs 115 people who select hedge funds for large public and corporate pension funds as well as university endowments.

K2's investment approach is not expected to change because of the deal, both firms said.

For Franklin, which has a taste for buying smaller, experienced, management companies, the deal will allow it to offer its wealthy investors more access to some popular hedge funds.

"This new relationship with K2 is an important step in our overall plan to expand Franklin Templeton's alternative strategies and solutions platform," Greg Johnson, CEO of Franklin Templeton Investments, said.

For K2, the deal ends months of flirting with potential buyers. More than a year ago, speculation mounted that K2 was getting ready to sell itself and talk that Carlyle Group was interested spread through the $2 trillion hedge fund industry.

Named for the Himalayan mountain K2, the hedge fund firm has been a stalwart in a quickly consolidating industry. Its founders have deep roots, with Saunders having worked as a trader for industry icon Julian Robertson and Douglass having worked at Donaldson Lufkin and Jenrette.

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