The rise of artificial intelligence is posing a long-term threat to enterprise software companies, according to Jenny Johnson, CEO of Franklin Templeton, one of the world’s largest asset managers. Johnson’s warning, shared with the Financial Times, adds to a growing chorus of investor concern about the disruptive potential of AI and its impact on the technology sector, which has been a key driver of market growth over the past decade.
Johnson, who leads the $1.7 trillion asset manager, expressed skepticism about the long-term viability of traditional enterprise software models in a world increasingly capable of automated coding. She revealed she spent a weekend in February experimenting with Anthropic’s Claude 3 Opus model, specifically its coding capabilities, and questioned whether existing software companies could maintain their dominance. “We see a legitimate concern [when] you look at the capabilities with coding with, say, a Claude and what Anthropic’s done…and you really have to question if enterprise software companies can thrive,” she said, according to the FT report.
While acknowledging that these companies are currently profitable, Johnson believes they are “oversold in the short run” but face a fundamental challenge to their business model. This assessment comes as the private investment industry experiences a downturn, with shares of buyout firms and private credit lenders – many of which have heavily invested in software businesses – declining in value. The shift reflects broader anxieties about the future of tech valuations in an era of rapid AI advancement.
Pressure Mounts on Private Equity and Credit Lenders
The softening public markets are intensifying pressure on private equity firms, which are facing difficulties in exiting investments in aging portfolio companies. Some firms are now considering delaying planned asset sales, potentially impacting their ability to realize long-awaited performance fees. Simultaneously, private credit lenders, who have financed many of these acquisitions, are bracing for potential challenges as portfolio companies struggle to refinance their debts in the coming years, according to the FT.
Johnson pointed to a growing trend within the private equity world: the use of continuation vehicles. These allow investment groups to sell a business they own to a separate fund they manage, a move often seen as a sign of difficulty in returning capital to investors. “It will be interesting to spot whether [alternative asset managers] can maintain the same growth that they’ve had historically,” Johnson stated. She too noted a reluctance among institutional investors – including sovereign wealth funds and pension funds – to significantly increase their allocations to private markets.
Franklin Templeton’s Expansion into Private Markets
Franklin Templeton itself has been actively expanding its presence in private markets in recent years, mirroring a broader industry trend as investors seek higher returns outside of traditional public equities and fixed income. Over the past seven years, the firm has acquired several specialist investment firms, including Benefit Street Partners, Alcentra, Apera, Lexington Partners, and Clarion, according to the FT. This expansion reflects a strategic shift away from legacy mutual funds and towards lower-fee passive investment options.
Last year, Franklin Templeton appointed Daniel Gamba as co-president, tasked with leading the firm’s marketing and sales efforts and accelerating the growth of its private funds business. Gamba’s role also includes addressing investor redemptions from the company’s traditional funds, which have been impacted by a scandal at its Western Asset Management fixed-income division.
Western Asset Management Scandal and Leadership Changes
In 2024, the U.S. Securities and Exchange Commission charged Western Asset Management’s former co-chief investment officer with criminal fraud, alleging that he cherry-picked favorable trades for certain clients. This scandal has resulted in nearly $150 billion in outflows from the unit, highlighting the reputational and financial risks facing the firm. Jennifer Morrow Johnson, Franklin Templeton’s president and CEO, and granddaughter of the company’s founder, Rupert H. Johnson Sr., inherited a complex situation requiring both strategic growth and careful risk management. According to Wikipedia, Johnson ranked 61st in Forbes’ 2023 list of the World’s 100 Most Powerful Women.
Restructuring and New Appointments
To address these challenges, Gamba recently restructured Franklin Templeton’s corporate sales teams, merging its Middle East and Africa unit with its Europe, Latin America, and Canada group. Matthew Harrison was elevated to lead the combined division. Lyenda Delp, a veteran of BlackRock and Goldman Sachs, was appointed to head sales to insurers, a key segment for Franklin Templeton. Tariq Ahmad, who previously led the company’s Asian business, is leaving the firm, and Gamba will oversee the region on an interim basis while a replacement is sought.
The concerns raised by Johnson and the broader market trends suggest a period of reassessment for the enterprise software sector and the private investment firms that have heavily backed it. The accelerating pace of AI development is forcing investors to re-evaluate valuations and consider the long-term implications for business models reliant on traditional software solutions. The next key indicator to watch will be the performance of private equity firms as they navigate a more challenging fundraising environment and seek to exit existing investments in the coming quarters.
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