Even BlackRock is fleeing public markets

By Shuli Ren

Acquisition is in BlackRock Inc.’s genes. Over the years, it has managed to grow and stay relevant through prescient big-ticket purchases. The world’s largest asset manager started as a fixed income shop, then got into equities followed by exchange-traded funds just as the US stock market and the concept of passive investing took off. So when the firm is busy writing billion-dollar checks again, one must ask if another seismic shift is taking shape in the money management world.

This time, Chairman Larry Fink has set his eyes on private investments. BlackRock has agreed to buy private credit specialist HPS Investment Partners for roughly $12 billion, less than a year after agreeing to purchase alternative asset manager Global Infrastructure Partners for $12.5 billion, and private markets data provider Preqin for $3.2 billion.

HPS is not coming cheap. It was looking to go public and has a few suitors circling. Boutique alternative managers like HPS also command higher valuations. Ares Management Corp., for instance, trades at around 35 times forward earnings, versus BlackRock’s 22 times.

This deal is perhaps BlackRock’s clearest admission yet that public markets are losing their shine. Dominance in stocks and bonds alone can no longer guarantee its success as a one-stop shop for investors and financial advisers. Alternative assets, especially private credit, are here to stay.

So-called model portfolios, a compilation of ready-made packages of ETFs and other funds that are then sold to family offices and financial consultants, have been a boon to the iShares brand, which BlackRock purchased from Barclays Plc as part of a $13.5 billion deal in 2009. As the number of ETFs balloons, making it difficult for anyone to sort through thousands of funds, smaller wealth managers have been outsourcing portfolio construction to investment platforms such as BlackRock and Vanguard.

As of 2022, a majority of iShares-branded ETF inflows came from those managed models. But increasingly, mini-millionaires — broadly describing those earning between $150,000 and $250,000 a year and steadily accumulating wealth — want private assets in their portfolios, inevitably capping iShares’ organic growth.

You can’t blame the wealthy. In many ways, public markets are becoming boring. In the US, the number of listed companies has fallen by half, to around 4,000, from a 1996 peak, while unicorns, or startups with at least a billion-dollar valuation, ballooned to 760.

Companies are choosing to stay private for longer, not wanting to deal with onerous reporting rules, but also because alternative financing channels, from venture capital to direct lending, are easily available. So while iShares is churning out hundreds of ETFs, they don’t feel all 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 the uncertainty around the US fiscal deficit, inflation, and the Federal Reserve’s interest-rate path might check inflows into iShares bond ETFs. At the same time, the explosive rise of private credit has eroded the lure of corporate bonds. High-yield spreads average only around 2.6%, the lowest since the Global Financial Crisis. By comparison, you can still expect 5 percentage points above benchmark rates for middle market direct lending loans.

For BlackRock, the clock is ticking. Alternative managers are already jostling to launch products aimed at retail investors and their financial advisers. Apollo Global Management Inc. and State Street Corp. are joining forces to introduce a new breed of private credit ETF, thus tiptoeing into BlackRock’s bread-and-butter business. KKR & Co. and Capital Group will also debut two funds that invest in both public and private credit early next year, catering to mini-millionaires.

If the HPS deal goes through, BlackRock can expect to manage almost $600 billion in alternative assets, which is small for the $11.5 trillion money manager. But it’s a good start.