Franklin CEO Johnson Warns on Risks of Data Center Obsolescence

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(Bloomberg) — Franklin Templeton Chief Executive Officer Jenny Johnson said she’s monitoring the data-center trade because of the risk that new technology could make assumptions around computing and energy needs out of date.  

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“Any time you’re planning for 20 years based on today’s technology, with the pace with which we see innovation happening, that can be risky,” Johnson said in an interview with Bloomberg Television on Thursday. Emerging areas like photonic computing, which uses light waves for speedy data processing and requires far less energy, are worth watching, she said. 

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Johnson joins the likes of Oaktree Capital Management co-founder Howard Marks in warning about the obsolescence risk from long-term AI investments like data centers. Still, the emerging asset class is positive for the economy at the moment because of the huge capital expenditures involved, she said.

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Amid concerns about investors pulling money from private credit funds, Johnson said retirement accounts are the “best place” for private credit and equity, given the illiquidity of such investments.

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Illiquidity Premium

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“You cannot get your money for 10 years so you need to be able to withstand the illiquidity,” Johnson said in the interview. “On the other hand, a 1% additional return can mean 20% more just over a 20-year period in your retirement.”

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Private market investments promise higher yields in exchange for illiquidity, with investors sacrificing being able to trade in and out of positions easily for the potential of higher returns.

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The US has been looking to make it easier for asset managers to pool private investments and cryptocurrency into 401(k) retirement accounts. A recent proposal from the Trump administration would give companies offering such investments in these plans greater legal protection.

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“The problem is this is a highly litigious space,” Johnson said, acknowledging it would be difficult to place such assets in retirement vehicles at scale. Fees also pose an issue, given managers generally charge higher for private investments.

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Private credit funds have suffered from large outflows in recent months amid rising concerns that many are overly exposed to software companies that may be upended by artificial intelligence and credit quality broadly. Retail investors in particular have raced to pull out cash, prompting some vehicles to cap redemption requests. 

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“It drives me nuts when I hear people acting like private credit is more liquid than you think,” Johnson said. “It’s not.”

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The CEO added that private equity investors are frustrated by the length of time that fund managers have been holding on to investments and said there’s a need for “more liquidity exits.” 

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She backed efforts by the Securities & Exchange Commission to make being a public company more attractive, but said more reforms need to happen without being specific. The SEC’s proposed measures include the introduction of semi-annual reporting.

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However, big companies that opt for an initial public offering should have to wait “a little bit” before they are added to indexes, she said. Her comments come after S&P Dow Jones Indices launched a consultation that may accelerate the entry of mega cap companies into indexes such as the S&P 500. 

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—With assistance from Isabella Farr.

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