(Bloomberg Opinion) – Acquisition is in BlackRock Inc.'s genes. Over the years, it has managed to grow and stay relevant through big-ticket predictive purchases. The world's largest asset manager started as a fixed-income shop, then got into stocks followed by exchange traded funds just as the US stock market and the concept of passive investing took off. So as the firm gets busy writing billion-dollar checks again, one has to wonder if another seismic shift is taking shape in the world of money management.
This time, chairman Larry Fink has set his sights on private investment. BlackRock has agreed to buy Private equity specialist HPS Investment Partners for about $12 billion, less than a year after agreeing to buy alternative asset manager Global Infrastructure Partners for $12.5 billionand private markets data provider About 3.2 billion dollars.
HPS is not cheap. He was looking to go public and there are several suitors floating around. Alternative boutique managers like HPS also command higher valuations. Ares Management Corp., for example, trades at about 35 times forward earnings, versus BlackRock's 22 times.
This deal is perhaps BlackRock's clearest admission yet that public markets are losing their luster. Dominance in stocks and bonds alone can no longer guarantee its success as a one-stop shop for investors and financial advisors. Alternative assets, especially private credit, are here to stay.
The so-called model portfoliosa compilation of ready-made packages of ETFs and other funds that are then sold to family offices and financial consultants have been a boon for the iShares brand, which BlackRock acquired by Barclays Plc as part of a $13.5 billion deal in 2009. Since the number of ETFs is high, making it difficult for anyone to sort through the thousands of funds, smaller wealth managers have outsourced portfolio construction to platforms investments such as BlackRock and Vanguard.
As of 2022, most iShares brand ETF entries came from those managed models. But increasingly, mini-millionaires — broadly describing those who earn between $150,000 and $250,000 a year and steadily accumulate wealth — want private assets in their portfolios, inevitably limiting iShares' organic growth.
You can't blame the rich. In many ways, public markets are becoming boring. In the US, the number of listed companies has halved, to about 4,000, from a peak in 1996, while unicorns, or startups with at least a billion-dollar valuation, rose to 760.
Companies are choosing to stay private longer, not wanting to deal with onerous reporting rules, but also because alternative funding channels, from venture capital to direct lending, are readily available. So while iShares is churning out hundreds of ETFs, they don't feel that different, especially since one stock—Nvidia Corp. – accounts for about a fifth of the S&P 500's 28% gain this year.
In fixed income, the re-election of Donald Trump and uncertainty around the US fiscal deficit, inflation and the Federal Reserve's interest rate path could control inflows into iShares bond ETFs. At the same time, explosive growth in private credit has eroded the allure of corporate bonds. High-yield spreads average only about 2.6%, the lowest since the global financial crisis. By comparison, you still can expect 5 percentage points above the base rates for direct middle market loans.
For BlackRock, the clock is ticking. Alternative managers are already scrambling to launch products aimed at retail investors and their financial advisors. Apollo Global Management Inc. and State Street Corp. are joining forces for it introduce a new type of private credit ETFthereby entering BlackRock's bread-and-butter business. KKR & Co and Capital Group will also two funds debut that invest in public and private loans early next year, catering to mini-millionaires.
If the HPS deal goes through, BlackRock can expect to manage almost $600 billion alternative assets, which is small for the $11.5 trillion money manager. But it's a good start.
More from Bloomberg Opinion:
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Shuli Ren and (email protected)