The trend is your friend. Or, in Larry Fink’s case, your primary acquisition tickbox. The chief executive officer of asset management giant BlackRock Inc. has pulled off another large and expensive leap into alternative investments. The $12 billion deal for private credit specialist HPS Investment Partners LLC has been pretty well received — but the risks of Fink’s latest swing-for-fences purchase can’t be ignored.
Private credit has boomed as financial regulation has made life harder for traditional bank lenders. BlackRock has been trying to build its own business in this area, but doing so takes time. HPS, co-founded and led by Goldman Sachs Group Inc. alumnus Scott Kapnick, is one of the few acquisition targets large enough to make a difference to a company of BlackRock’s size. Assets under management in private credit will grow from $89 billion to $220 billion after the buy. Even then, that’s puny compared with BlackRock’s $12 trillion in total managed assets at the end of the third quarter.
Put simply, BlackRock is buying into the secular growth of private markets in general and private credit in particular. Like the world of equity investment, fixed income is also succumbing to what Oliver Wyman LLC Vice Chair Huw van Steenis famously dubbed the “barbell” effect. That’s the bifurcation in investment management between low-fee passive strategies and high-fee alternatives like private equity and hedge funds. In US fixed income, the barbell effect has notably accelerated in the last three years, according to Oliver Wyman research.
The difference in profitability between conventional and alternative fund management explains why BlackRock’s market value isn’t much bigger than, say, buyout firm KKR & Co. despite Fink’s business running considerably more client assets. HPS’s profit margin on the industry standard measure of fee-related earnings (FRE) is a whopping 50%.
More traditionally, the deal is a marriage of a large incumbent player with an entrepreneurial challenger that’s got a hot product itching to find a mainstream audience. HPS may have the expertise in sourcing interesting credit investments, but BlackRock has the bigger relationships with investors who want access to these strategies — from retail and institutional investors to sovereign wealth funds and insurance companies. So BlackRock fills in gaps in its offering (its salesforce must be salivating) while HPS gets distribution it would struggle to replicate by staying solo. Taking an up-front sum, plus more based on performance, must have been an easy choice over an initial public offering.
Finally, this is a neat piece of corporate finance. The purchase price is an expensive 30 times expected FRE for 2025. But Fink is paying entirely in highly valued BlackRock shares. His stock trades at 21 times next 12 months’ earnings, and that’s expensive for a conventional money manager. BlackRock’s share price is up more than 25% this year having recently touched a fresh record.
Of course, an acquisition struck at a high multiple of profit will offer a meager initial payoff. Yet BlackRock projects it can grow HPS’s contribution such that it will deliver an attractive 16% annualized return. That is what investors will want it to achieve. Quite how, and over what time frame this will occur, isn’t clear.
There are two risks to success. The first is that the expansion in private credit disappoints. Global economic growth may fuel demand for credit, and private credit will continue to grow with the pie. A resurgence of leveraged buyouts amid a broader uptick in mergers and acquisitions could further fuel demand for such financing. But the more benign regulatory framework expected under a Donald Trump presidency could see a less unlevel playing field between bank lending and credit funds.
The other possible pitfall is culture. The old M&A cliche survives for a reason. This deal is really two takeovers. BlackRock is buying HPS, but then HPS will effectively take over a notable piece of BlackRock’s existing private markets business. Kapnick will also join the BlackRock board half-in-half-out as an observer, participating in discussions without voting. BlackRock’s similar-sized deal for Global Infrastructure Partners earlier in the year also saw it become the centerpiece of BlackRock’s strategy in infrastructure.
Maybe BlackRock risks looking more like a federation with some powerful individual fiefdoms. But that’s Fink’s challenge — to change the business with the times while somehow holding it all together.
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