XML 33 R16.htm IDEA: XBRL DOCUMENT v3.8.0.1
Consolidated Sponsored Investment Products
12 Months Ended
Sep. 30, 2017
Consolidated Sponsored Investment Products [Abstract]  
Consolidated Sponsored Investment Products
Consolidated Sponsored Investment Products
The Company consolidates SIPs, which consist of both VOEs and VIEs, when it has a controlling financial interest. New accounting guidance adopted on October 1, 2016 modified the consolidation framework for certain investment entities and all limited partnerships. See Note 2 - New Accounting Guidance in these notes to consolidated financial statements.
Consolidated SIPs consist of mutual and other investment funds, limited partnerships and similar structures and CLOs, which are asset-backed financing entities collateralized by a pool of corporate debt securities. The Company consolidated 58 SIPs, none of which are CLOs, as of September 30, 2017 and 40 SIPs, including three CLOs, as of September 30, 2016. Amounts for prior periods have been reclassified to combine amounts previously presented separately as consolidated SIPs and consolidated VIEs.
The balances of consolidated SIPs included in the Company’s consolidated balance sheets were as follows:
(in millions)
 
 
 
 
as of September 30,
 
2017
 
2016
Assets
 
 
 
 
Cash and cash equivalents
 
$
226.4

 
$
236.2

Receivables
 
234.1

 
47.9

Investments, at fair value
 
3,467.4

 
1,513.4

Other assets
 
0.9

 
1.4

Total Assets
 
$
3,928.8

 
$
1,798.9

 
 
 
 
 
Liabilities
 
 
 
 
Accounts payable and accrued expenses
 
$
124.1

 
$
65.2

Debt
 
53.4

 
682.2

Other liabilities
 
8.7

 
8.5

Total liabilities
 
186.2

 
755.9

Redeemable Noncontrolling Interests
 
1,941.9

 
61.1

Stockholders Equity
 
 
 
 
Franklin Resources, Inc.’s interests
 
1,511.8

 
414.1

Nonredeemable noncontrolling interests
 
288.9

 
567.8

Total stockholders’ equity
 
1,800.7

 
981.9

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders Equity
 
$
3,928.8

 
$
1,798.9


The consolidated SIPs did not have a significant impact on net income attributable to the Company in fiscal years 2017, 2016 and 2015.
The Company has no right to the consolidated SIPs’ assets, other than its direct equity investments in them and investment management fees earned from them. The debt holders of the consolidated SIPs have no recourse to the Company’s assets beyond the level of its direct investment, therefore the Company bears no other risks associated with the SIPs’ liabilities.
SIPs are typically consolidated when the Company makes an initial investment in a newly launched investment entity. They are typically deconsolidated when the Company no longer has a controlling financial interest due to redemptions of its investment or increases in third-party investments. The Company’s investments in SIPs subsequent to deconsolidation are accounted for as trading or available-for-sale investment securities, or equity method or cost method investments depending on the structure of the SIP and the Company’s role and level of ownership.
Investments
Investments of consolidated SIPs consisted of the following:
(in millions)
 
 
 
 
as of September 30,
 
2017
 
2016
Investment securities, trading
 
$
3,017.2

 
$
287.8

Other equity securities
 
306.9

 
607.3

Other debt securities
 
143.3

 
618.3

Total
 
$
3,467.4

 
$
1,513.4


Investment securities, trading consist of debt and equity securities that are traded in active markets. Other equity securities consist of equity securities of entities in emerging markets and fund products. Other debt securities consist of debt securities of entities in emerging markets and also included corporate debt securities held by CLOs at September 30, 2016.
Investments in fund products for which fair value was estimated using NAV as a practical expedient were as follows:
(in millions)
 
 
 
 
 
 
as of September 30,
 
Redemption Frequency
 
2017
 
2016
Real estate and private equity funds
 
Nonredeemable
 
$
155.2

 
$
444.2

Hedge funds
 
Monthly, quarterly or triennially
 

 
1.8

Total
 
 
 
$
155.2

 
$
446.0


The investments in real estate and private equity funds are expected to be returned through distributions as a result of liquidations of the funds’ underlying assets over a weighted-average period of 4.4 years and 3.2 years at September 30, 2017 and 2016. The consolidated SIPs’ unfunded commitments to these funds totaled $1.9 million and $74.4 million at September 30, 2017 and 2016, of which the Company was contractually obligated to fund $0.4 million and $2.2 million based on its ownership percentage in the SIPs.

Fair Value Measurements
Assets and liabilities of consolidated SIPs measured at fair value on a recurring basis were as follows: 
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
NAV as a Practical Expedient
 
Total
as of September 30, 2017
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
 
 
Equity securities
 
$
331.4

 
$
128.1

 
$
160.7

 
$
155.2

 
$
775.4

Debt securities
 
1.4

 
2,555.2

 
135.4

 

 
2,692.0

Total Assets Measured at Fair Value
 
$
332.8

 
$
2,683.3

 
$
296.1


$
155.2

 
$
3,467.4

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
$
0.4

 
$
8.3

 
$

 
$

 
$
8.7

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
NAV as a Practical Expedient
 
Total
as of September 30, 2016
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents of CLOs
 
$
146.4

 
$

 
$

 
$

 
$
146.4

Receivables of CLOs
 

 
23.6

 

 

 
23.6

Investments
 
 
 
 
 
 
 
 
 
 
Equity securities
 
155.4

 
0.5

 
160.3

 
446.0

 
762.2

Debt securities
 

 
618.9

 
132.3

 

 
751.2

Total Assets Measured at Fair Value
 
$
301.8

 
$
643.0

 
$
292.6

 
$
446.0

 
$
1,683.4

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
$
0.1

 
$
8.4

 
$

 
$

 
$
8.5


Receivables of CLOs consisted primarily of investment trades pending settlement. The fair value of the assets was obtained from independent third-party broker or dealer quotes.
Other liabilities consist of short positions in debt and equity securities. The fair value of the liabilities is determined based on the fair value of the underlying securities using quoted market prices, or independent third-party broker or dealer price quotes if quoted market prices securities are not available.
There were no transfers between Level 1 and Level 2, or into or out of Level 3, during fiscal years 2017 and 2016.
Changes in Level 3 assets measured at fair value on a recurring basis were as follows: 
 
 
2017
 
2016
(in millions)
 
Equity Securities
 
Debt Securities
 
Total Level 3 Assets
 
Equity Securities
 
Debt Securities
 
Total Level 3 Assets
for the fiscal years ended September 30,
 
 
 
 
Balance at beginning of year
 
$
160.3

 
$
132.3

 
$
292.6

 
$
191.6

 
$
130.2

 
$
321.8

Adoption of new accounting guidance
 
(45.4
)
 
(0.5
)
 
(45.9
)
 

 

 

Realized and unrealized gains (losses) included in investment and other income, net
 
19.2

 
(0.3
)
 
18.9

 
1.2

 
(10.5
)
 
(9.3
)
Purchases
 
30.4

 
24.7

 
55.1

 
1.6

 
26.8

 
28.4

Sales
 
(6.7
)
 
(22.3
)
 
(29.0
)
 
(34.0
)
 
(15.4
)
 
(49.4
)
Settlements
 

 
(0.6
)
 
(0.6
)
 

 

 

Foreign exchange revaluation
 
2.9

 
2.1

 
5.0

 
(0.1
)
 
1.2

 
1.1

Balance at End of Year
 
$
160.7

 
$
135.4

 
$
296.1

 
$
160.3

 
$
132.3

 
$
292.6

Change in unrealized gains (losses) included in net income relating to assets held at end of year
 
$
29.4

 
$
(0.9
)
 
$
28.5

 
$
(1.1
)
 
$
(10.9
)
 
$
(12.0
)
Valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2017
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Equity securities
 
$
101.9

 
Market comparable companies
 
EBITDA multiple
 
5.5–12.3 (9.0)
44.4

 
Discounted cash flow
 
Discount rate
 
5.7%–17.9% (14.3%)
 
14.4

 
Market pricing
 
Price to earnings ratio
 
10.0
 
 
 
 
 
 
 
 
 
Debt securities
 
112.7

 
Discounted cash flow
 
Discount rate
 
5.0%–33.0% (9.5%)
 
 
 
Risk premium
 
0.0%–25.0% (8.4%)
 
22.7

 
Market pricing
 
Private sale pricing
 
$33–$57 ($52) per $100 of par
(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2016
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Equity securities
 
$
113.1

 
Market comparable companies

 
EBITDA multiple
 
5.0–14.2 (10.3)
Discount for lack of marketability
 
25.0%–50.0% (36.6%)
24.3

 
Discounted cash flow
 
Discount rate
 
5.0%–19.0% (13.7%)
22.9

 
Market pricing
 
Price to book value ratio
 
1.8–2.3 (2.0)
 
 
 
 
 
 
 
 
 
Debt securities
 
119.7

 
Discounted cash flow
 
Discount rate
 
6.0%–15.0% (10.4%)
 
 
 
Risk premium
 
0.0%–28.0% (9.7%)
 
 
 
EBITDA multiple
 
5.5
 
12.6

 
Market pricing
 
Private sale pricing
 
$57 per $100 of par
Following are descriptions of the sensitivity of the Level 3 recurring fair value measurements to changes in the significant unobservable inputs presented in the above tables.
For securities using the market comparable companies valuation technique, a significant increase (decrease) in the EBITDA multiple in isolation would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the discount for lack of marketability in isolation would result in a significantly lower (higher) fair value measurement. The discount for lack of marketability used to determine fair value may include other factors such as liquidity or credit risk.
For securities using the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate or risk premium in isolation would result in a significantly lower (higher) fair value measurement. A significant increase (decrease) in the EBITDA multiple in isolation would result in a significantly higher (lower) fair value measurement.
For securities using a market pricing valuation technique, a significant increase (decrease) in the price to earnings ratio, private sale pricing or price to book value ratio would result in a significantly higher (lower) fair value measurement.
Financial instruments of consolidated SIPs that were not measured at fair value were as follows:
(in millions)
 
 
 
2017
 
2016
as of September 30,
 
Fair Value Level
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
226.4

 
$
226.4

 
$
89.8

 
$
89.8

 
 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Debt, excluding CLOs
 
3
 
$
53.4

 
$
53.1

 
$
75.0

 
$
74.6

Debt of CLOs1
 
2 or 3
 

 

 
607.2

 
594.5


_________________
1    Substantially all was Level 2.
Debt
Debt of consolidated SIPs consisted of the following:
 
 
2017
 
2016
(in millions)
 
Amount
 
Weighted-Average
Effective Interest Rate
 
Amount
 
Weighted-Average
Effective Interest Rate
as of September 30,
 
 
 
 
Debt, excluding CLOs
 
$
53.4

 
5.15%
 
$
75.0

 
4.79%
Debt of CLOs
 

 
N/A
 
607.2

 
2.24%
Total
 
$
53.4

 
 
 
$
682.2

 
 

Debt, excluding CLOs had fixed and floating interest rates ranging from 2.84% to 6.75% at September 30, 2017, and from 2.36% to 6.19% at September 30, 2016.
At September 30, 2017, maturities for debt of consolidated SIPs were as follows: 
(in millions)
 
Carrying Amount
for the fiscal years ending September 30,
2018
 
$
5.8

2019
 
47.6

Total
 
$
53.4


Redeemable Noncontrolling Interests
Changes in redeemable noncontrolling interests of consolidated SIPs were as follows:
(in millions)
 
 
 
 
 
 
for the fiscal years ended September 30,
 
2017
 
2016
 
2015
Balance at beginning of year
 
$
61.1

 
$
59.6

 
$
234.8

Adoption of new accounting guidance
 
824.7

 

 

Net income (loss)
 
53.0

 
1.6

 
(6.1
)
Net subscriptions and other
 
884.3

 
79.9

 
149.4

Net consolidations (deconsolidations)
 
118.8

 
(80.0
)
 
(318.5
)
Balance at End of Year
 
$
1,941.9

 
$
61.1

 
$
59.6


Collateralized Loan Obligations
During fiscal years 2017 and 2016, the Company recognized $4.8 million and $6.2 million of net gains related to its own economic interests in consolidated CLOs.