BlackRock may fancy revisiting Blackstone heritage
By Jeffrey Goldfarb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Is it time for BlackRockĀ to revisit its BlackstoneĀ heritage? Larry Finkās investment company manages $4.3 trillion while Steve Schwarzmanās, with only 6 percent of the assets, probably generated the same amount of profit last year. That has to make private equity tempting for BlackRock. It could one day buy a firm like, say, TPG.
BlackRock started life as a 50-50 joint venture after Blackstone recruited Fink 25 years ago and gave him a $5 million credit line, according to a biography of Schwarzman. Fink separated from the buyout firm in 1994 and has helped build BlackRock into the worldās biggest money manager. Blackstone, meanwhile, by the end of last September had accumulated nearly $250 billion to invest in private equity, hedge funds and real estate.
While thereās a huge gap in the amount of assets the two firms manage, their bottom lines look remarkably similar. BlackRock just posted net income of $2.9 billion for last year. If analysts are right, Blackstone will unveil nearly identical profit ā using the industryās widely accepted metric of economic net income -Ā when it reports next week.
Thatās partly thanks to a cyclically strong period for selling investments made by the firmās funds. It also underscores how lucrative private equity can be compared with BlackRockās more traditional and competition-prone fee model.
Fink has tried to get into buyouts before. In 2011, he brought in a high-profile team to invest directly in deals. BlackRock couldnāt generate enough interest, however, and bailed out a couple of years later. The firm now directs about $110 billion of client money to outside so-called alternative investment funds.
The sums must leave a nagging feeling for BlackRock, especially now it is so big that it canāt hope to grow its existing business as quickly as in the past. Whatās more, buyout firms and some hedge funds are starting to chase the same retail investors. Fink might be reluctant to try building another alternatives operation, but he could buy one.
The satisfying idea of a full-circle deal with Blackstone is financially feasible ā BlackRockās market value is $55 billion and Blackstoneās $38 billion, on a fully diluted basis āĀ but unlikely. Other firms could be more available, though. Brand-name private equity shops that havenāt tapped public equity markets, including TPG, Providence Equity and Hellman & Friedman, may soon need to let senior partners cash out.
The numbers could stack up, too. BlackRockās steady earnings allow it to fetch a price-to-earnings valuation multiple of 17, while the lumpier profit profile of buyout shops mean the listed players trade on an average ratio closer to 11. In theory at least, that gives Fink some leeway to pay up for the assets. There would be cultural and tax-related complications in any transaction, of course. At some point, though, the stars should align to give BlackRock a chance to return to its private equity funding roots.