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I'm here today with Jenny Johnson. I'm so happy to spend some time with her again. I got to meet her in person and speak with her at an event a year or so ago. Absolutely fascinating person named by Forbes as one of the top 100 most powerful women in the world and the leader of $1.7 trillion Franklin Templeton. Welcome to the show, Jenny.
Peter, thanks for having me. It's great to be here.
So famously, your grandfather started Franklin Templeton and you have worked all these different roles to work your way to the CEO chair. I think that's one of the things that makes you very unique as a CEO. I'm sure no one really gets anything past you because you can always respond and go, 'No, I know exactly how that's done.'
Including the mail room in my summer jobs.
Starting from the mail room. I love it. So walk us through the journey from their very first, maybe even internship there to the CEO's seat, kind of what that looked like.
Sure. So my grandfather did start the business, although I have to say that my father is really the one who grew it. He took it over and it had two and a half million dollars in assets and $10,000 in revenue. So he was a big part of really growing it. You know, like I said, I literally started out in the mail room in summer jobs, but once I graduated from school, I worked somewhere else and then came in the business. And I was always interested in, for whatever reason, the operations and the technology area much more so than the investment side. So, actually early in my career, I did that. We actually owned a bank at one point and I ran the credit card department and the auto financing business. And some people say, 'Jenny, you know more about auto financing than you'll ever know about investments' because I knew every detail in that job. And then, this is how old I am, I was assigned our e-business unit and anything that touched the internet was under me. So, as you could imagine, over time, you were just basically gobbling up every part of the company. And that kind of led me into taking over technology. And so for a while I ran those two things and then eventually the investment teams reported into me and then distribution reported into me. So I literally have been responsible for every part of the business.
That's incredible. What do you think your main takeaways along the way have been? Like what was a clicking moment for you or a time where you realized you were going to do this and the main lessons you got that I think that you may think make you a better leader today?
Yes. So I mean the funny thing was for whatever reason I always felt like I wanted to be in this business. So that was not a surprise to me. The things that I look back today as a CEO that I would say have been actually the best job preparation for this job would probably surprise people. The technology obviously won. So that, you know, in today where AI, blockchain are literally revolutionizing industries, to have comfort and experience in technologies is hugely valuable. So that's a little more obvious but actually when I ran the autoloan business, I always say, you know, being a CEO whether you're a CEO of 1.7 trillion or a much smaller business, it's kind of the same problems it just has a lot more zeros. So I have to say that surprised me how much that prepared me for this job. You know, understanding how to deploy capital, understanding really what your job is as a CEO is to get the right team and the people in place and get them, you know, motivated in the right direction. And so that's the same whether you're big or small. When I ran technology, the thing that is really valuable today in particular is, you know, a lot of people will say that the technologist's biggest issue is data and data integration which is clearly a big challenge but it's really change management with people. And I can tell you stories where I felt like people were incented to use new technology and they just getting them over the hurdle of having to learn something new and change was really hard. And I think that's going to be the number one issue businesses face today in trying to leverage AI to transform their business. And the problem is the pace in which AI is moving. I think if you don't, if you're not one of the leaders and get it right early, you're actually going to be left behind because it's going to be difficult to be a quick follower in the space because of how quickly the tech is moving. So, you know, it was like different parts of the business. Interesting lesson I learned on kind of leadership. I remember a guy worked for me and he was really good technically. And he would drive, you know, a project to get it finished, but he was a terrible team player. And I remember being really hesitant to let him go because I was worried about losing this particular expertise. But in the end, what I started to realize is people almost worked against him more than they worked for the project or the company to be successful. And that's why that lesson around putting together the right team and the culture is so important. And so, you know, I have tons of anecdotes through kind of my career which were the aha moments that I think have helped me and helped informed me as a CEO today.
Those are two things that I see all the time too. You look at AI, it is happening so fast now. It's touching every part of our business and I think people are excited about the efficiencies and the accuracy, the speed with which this is going to work. It's going to eliminate or make easier or faster or better but they just as soon as they figure one thing out something else is coming. And it used to be like, 'Oh, I learned how to use this CRM or I learned how to use this software and I'm going to use it for the next I don't know 8 to 20 years and then it might change.' And now very reasonably could change inside a year very subtly multiple times because the advancements are coming so quick and the cost of entry so low you can justify investing a few million dollars in something that will make everybody 10% more efficient knowing full well it's going to be irrelevant two years later. And I think people are just preemptively exhausted and excited at the idea of all of it.
Well, and one of the things we're trying to do is like, you know, for me, I won't say you, I'm old, you know, I have to really focus on learning how to use these tools and I force myself to do it. You hire a new college grad, they're kind of grown up with these tools like they're not even going to think about it. You know, just the way even today my kids will move around a computer or an iPhone and I consider myself reasonably technical but I'll be like, 'Wait, how did you just do that?' Right? And so, you know, this new, making sure that your organization constantly has kind of new college grads in there who are leveraging the latest as just part of how they do work. I think it's going to be important because we're going to need to have them help train the people who have more experience that are sitting in the firm to think differently.
You know, it's interesting because the AI teams we have working on things, they're so concerned about that. They think that the way all of this is going to be approached is to assume that the user can no longer keep up and that it will all just be verbal prompts like, 'Go ahead and submit this to this person to do this' and it's just going to take care of all the technical stuff because it can't count on anybody to keep up with it. So, it's just going to be fascinating to see where all this goes. You know, I also relate to the other point you made, Jenny, about like having the right people on the bus. And you know, there's, you kind of see it in professional sports where there's a player that's got a bad attitude, is bad in the locker room, but it's just a great player and the team just can't part ways. But man, I feel like in my career 100% of the time when you finally say, 'You know what, this is a weed in the garden and we just got to take it out and let the chips fall where they may.' You look back and go, 'Wow, that was, you know, everything's still running and people are happier and maybe I should have done this a long time ago.'
That's good. I always use, you're using the sports analogy, you know, the dream team. Remember, we put together the greatest players in basketball to go win the Olympics and they lost, right? Because they weren't a team. They were great players in their individual position, but they couldn't play together as a team. And you know, as a CEO, your job is to field the best team. And they got to be competent and skilled, but they also got to work together and complement each other.
Yeah, you're exactly right. You know, speaking of complementing each other, we were looking at portfolios. It wasn't that long ago a portfolio was all stocks and bonds, and that's what Franklin Templeton was built on. You've started to move in a complementary, a new direction of adding more to the table. I mean, we are always using public and private markets and debt and asset ownership and so on. And it's interesting to see the speed and the leadership with which you all have moved in this space. You've really not just said, 'Oh, we're going to have private markets.' You're really embracing it and pulling the firm forward that way. What is it? What has driven this? When did it start? Where do you see things going?
Well, interesting. I mean, you know, I think we have to look back and say, well, how did all this private market stuff start? And I think a lot of it started post the GFC, the financial crisis, because number one, the regulators almost globally changed the capital requirements around banks because they were worried about the systemic risk of banks. Well, the minute you did that, banks started to preserve their capital to just lend to their best customers, which meant there were a huge number of good credits out there that couldn't get a loan. And so that kind of created the proliferation. You know, people in the fixed income market was like, 'You know what, there's an opportunity here.' So I think that created private credit. And then with respect to equities, and you know, Paul Atkins, our current SEC chair, talks a lot about it. You know, that there are reasons companies are choosing not to go public or they're waiting a really long time to go public because a lot of the requirements of being a public company are really onerous. And so, you know, when you see half the number of public companies out there today as we're at its peak, and you know, this just massive opportunity in the early growth years that is captured only in the private markets. You know, if you're an investor, you're missing just, I think it's something like 87% of the companies in the US that earn more than 100 million of revenue are private. So if you can't invest in that space and you're an adviser and you can't offer your clients at least options to invest in that space, you're really limiting the universe of investment opportunities. So we looked at it and said, 'Look, our job is to create really like a massive capabilities almost like an advisor or a pension CIO is a chef walking in. We want to have the best stock kitchen of all these different capabilities that either we can put together for you in a meal or you can, you know, buy the ingredients.' And in order to do that well you had to be in the private market space. So today we have about 270 billion or maybe 280 billion in private market assets. It's a third of our operating income. I mean it's significant. And you know, we cover, we do in the private equity we're more in secondaries PE with Lexington Partners but we have then private credit we have about 100 billion in private credit, about 80 billion in real estate with Clarion Partners and then we have some venture and the venture interestingly we got into because our growth equity team that which is based in Silicon Valley a decade ago actually more than a decade ago we're like, 'Man, we're losing all those IPO kickers because we don't do, you know, we need to be in late stage venture because that's the growth year that we used to get the IPOs. We have the ability to put some of these in a mutual fund. We should start to do it.' And then we had clients come to us and say, 'We see the deals you're in. Can you put together a fund?' So, it was really I think Peter, I always say like it was actually the same problem my grandfather was solving when he launched a mutual fund business, which was back then only wealthy people could afford to be in the equity markets because it was too expensive to buy one stock. And oh, by the way, it wasn't diversified, so it's massive risk. And somebody came up with the idea, why don't we pull people's money? They can have essentially fractional ownership, but have a diversified portfolio, you know, professionally managed. And it allowed the democratization of the equity markets. And so now it's really about the democratization of the private markets because, you know, we're a country that we try to make sure it's fair that people have equal opportunity and access. And so we just felt like that was an important part of additional product capability that we have.
How do you feel about that? So a lot of, we obviously more and more private equity, private credit funds becoming more accessible to people not just at huge amounts or 5 million but down to 1 million, the Trump administration passing rules to make it even more accessible to others looking at putting it in 401ks. Then you have critics on the other side that say, 'Hey, these are inappropriate investments for people that don't have a lot of wealth and these people are going to get taken advantage of and pay high fees.' And what as you look at those two sides of the argument, how do you see it?
So I'm going to say that first thing is, you know, these are illiquid. Okay? Like we should not confuse ourselves. I was jokingly saying to an adviser at one point, I was like, 'What you should say to your client is you shouldn't be in this product. You're not going to be able to get your money for 10 years, even if it's a perpetual that allows 5% out a quarter,' just to make sure they understand like these things really are illiquid. On the other hand, you say to the client, 'But I want to be clear on what you're potentially missing. If you over a 20-year period earn just 1% additional return, say on your fixed income, which private credit should give you probably even on the investment grade at least one and a half percent. And you know, as you go down the risk spectrum, it should be even a higher spread, but just 1% over 20 years. At the end of 20 years, your portfolio will be 20% bigger. At 40 years, so if it's a retirement fund, you're at 45% more at the end. That's significant.' So it's about how do you give them access to this? So that's kind of one piece which is making sure people understand it's illiquid and if you can't withstand the illiquidity this is not the place for you to be. However, I think that the industry is starting to get very creative like what we did in our mutual funds. You can be in our growth equity fund and get 6-7% exposure to private market venture, late stage venture in an incredibly liquid fund but we can't go much even though the regulation you go up to 15% like depending on the fund we're kind of comfortable around seven, you know, and so you get some of that exposure so I think that's important and again it's about all of those opportunities those early years especially when you're having the technological innovation that's happening today that if we don't find vehicles to give people access to it, you're leaving out a huge percentage of the country from being able to earn those returns. And then one last thing I'd say is I don't think the industry talks enough about market beta risk. Everybody refers to market beta. But when you have heavy concentration in a handful of stocks, that is much riskier than when you have a very diverse concentration, right? And you know, the day that Tesla entered the S&P 500, it became riskier when you measure it in things like volatility. So, it shouldn't just be assumed that it isn't risky. There's times where you look at even the public equity markets and say, 'Wow, that actually is pretty risky.' And if there is a sentiment change and people use it as their ATM, it's going to oversell. And so being in a private market asset that doesn't have that risk of people being able to grab one that suddenly fear is in there so you can preserve the value of those assets is in itself an opportunity. So, you know, again, like we are big believers that you want a professional. They're looking at your individual needs and positioning and building that portfolio because they understand what your needs are. But I really feel strongly that people should have access. They need some amount of exposure.
And a lot of headlines now about performance and embedded risk that nobody can see, you know, particularly around private credit, but even private equity today. How do you see all of that? What's a typical American to think of all of that? They've got private equity, private credit in their portfolio or they're considering it.
So, I'll say a couple things. I mean, look, I'm pretty bullish even despite what is going on in the Middle East. Pretty bullish still in the market. I think AI is a massive tailwind. We thought that tariffs would slow things down, but if you actually look at it, the consumer continues to spend and be pretty strong. We're an economy that's very much consumer-driven. So, you know, it depends a little bit where you are in the world, but you know, in the US in particular, we're pretty, we're energy independent. So we're fairly isolated from a lot of these things. And I think that there are a lot of tailwinds that indicate we still have a very strong economy. So, let me put that backdrop. I can tell you that our private credit team, they go in and they do direct lending to middle market companies and they consistently have seen these companies that are outperforming their projections. Our real estate team, I didn't know this, but if you, you know, are a landlord in a mall, oftentimes the lease requires the tenant to give you their sales every month. So, you actually get to see same sales, right? That's pretty interesting. It still looks pretty strong. So, you know, I think first of all that as long as the economy remains resilient, we're not going to see a lot of credit, a lot of problems in the debt space. Now let me address the big issue in private credit which is enterprise software. As I mentioned I ran it, I ran technology and when I said change management is significant, it really is. I mean most large financial institutions today run a big old mainframe probably with, and it's a monopoly that IBM has. So you pay a fortune for it. It's very clunky but it's so infiltrated into your entire architecture of your IT department. You don't rip it out. So this whole thing around enterprise software. Yes, I do think that AI is going to, enterprise is going to impact big enterprise software companies. Having said that, the existing companies who are paying the bills today aren't going to go rip out their Salesforce or their Workday or anything like that anytime soon. The issue is much more around new small companies. Will they license with Salesforce or will they say, 'Let me see if I can get Claude to build this myself.' And as they grow, they keep adding to that. That means that the multiples in the equity market of these companies are going to be, you know, under pressure because it's going to be difficult to get the same growth. But I'm definitely not worried about it on, as long as you underwrote good cash flowing software companies. I am not worried about it in the private credit space at this point. And most of the problems that we've had have been idiosyncratic with very specific things. So there was fraud. Fraud is fraud, right? You know, somebody resells the same collateral, that's pure fraud. The issues around the big BDCs, that was kind of enterprise software and it became as much a confidence issue, and much more of a confidence issue than it was the reality. It wasn't like they were suddenly seeing any big defaults in their portfolios. Again, they had to sell illiquid assets and that put them under pressure, but the credit's still good there. So, you know, I'm still bullish on it. And again now the spreads have widened even more. So that one and a half percent could look like two, two and a quarter differential from your traditional fixed income. That's a pretty good add to your portfolio.
Yeah, it's interesting. I spoke with Robert Smith, the CEO of Vista which has more enterprise software than anybody else and he agrees I think top to bottom with everything that you said. I agree on private equity. I mean the world's gone private. I mean, half the companies that used to be public are, well, half the public companies are gone. You know, it's the stock market's been cut in half. More companies staying private. We're going to see trillion dollar valuation IPOs out of Anthropic and OpenAI and SpaceX. I mean, these companies, you used to go public at 80 million or 150 million, it's a totally completely different world. You either have to completely ignore it or use private equity to get into it. And I view private credit as not that different than public bonds. Different risk, different profiles, different if you're lending to subscription based software, high yield in the public markets, you got crushed and if you did it with private credit, you got just, how it generally works. The one thing that I think that I disagree with you and Robert Smith on is I think companies like Salesforce are like, they're dead. I have a client that is very high up at a publicly traded company, 14,000 employees that now have an AI team building an alternative to Salesforce. And I think companies like they used to just be like, 'Hey, we're going to pay this every single month for forever and it's too much of a hassle for our employees to leave and it's too expensive to create an alternative.' Well, if it's not expensive to create an alternative and I can make it actually easier on my employees, I can now justify the switch. I think that is coming like a hurricane but I think it'll be very targeted to very, but you know, who knows.
So, I agree with you on part of that which would be, so like we did a project I think it's called our intelligence hub with Microsoft and Microsoft gave us free resources because it's about two years ago because they were so excited because we weren't just using one LLM model to build something we actually built a platform that was, it was solving a very simple problem. How do you ensure that your salespeople are meeting with the right clients and having the best conversation? Right? That's very simple. It's actually a very difficult technical solution. So, as the team described it to me, they said, 'Well, Jenny, we're going to have these agents and they're going to sit there on this platform that's going to interface and it's going to go grab from the CRM system, you know, some information and insights, going to go from the product system. It'll go externally the product. Maybe the client's given us some insights on that advisor. Maybe it'll go to social media so you can talk to the advisor about his favorite team or whatever that is.' You just made your enterprise software a database. Now that enterprise software feeds a bunch of subsystems, right? That is never standalone. And to pull it out gets really difficult. But when I'm renewing my contract, my conversation is more around, okay, you're basically a database for me. So, let's now talk about what your fees are and whether I'm willing because at this number, I'm going to go build it myself. If you can get down to here, I can live with it without having to do the change. And so, I just...
Yeah, I think we get to the same place. Justified compression of multiples.
