Last week, BlackRock cannonballed into the venture debt market with the acquisition of London-based asset manager Kreos — and it might not be the last deal the world’s largest asset manager does this year.
Based on BlackRock’s strategic objectives and financial health, posturing by its executives, and the recent deal for Kreos, analysts are anticipating more acquisitions in the near future. They expect BlackRock will comment more about its M&A ambitions on Wednesday during the company’s investor day.
During BlackRock’s first quarter earnings call in April, chief financial officer Martin Small said the company would “make inorganic investments where we see an opportunity to accelerate growth and support our strategic initiatives... Our acquisition philosophy focuses on extending our product capabilities and our distribution reach.” He noted some examples: eFront to extend Aladdin’s whole portfolio coverage; Aperio to scale direct indexing; and First Reserve to “enrich energy and infrastructure investing at BlackRock for our clients.”
BlackRock has said it wants to continue growing its alternative investments business, which includes private equity and credit, infrastructure, real estate, and hedge funds. The $274 billion alts unit is already one of the biggest in the world — roughly the same size of Carlyle Group — but it is much smaller than KKR, Apollo, and Blackstone, which each manage hundreds of billions more in assets.
Kreos has committed $5.6 billion in capital through more than 750 transactions since it was founded in 1998, and won’t significantly move the needle at BlackRock, which manages a total of $9.09 trillion in assets. But the deal is a “prime example” of BlackRock’s willingness to make small acquisitions that give it a sudden presence in a market, especially a growing market like private credit, according to Michael Brown, managing director of equity research at KBW.
If BlackRock is willing to buy Kreos, the universe of potential asset management acquisition targets — not to mention technology companies — is big, according to Brown. Those deals could come as soon as the coming quarters, he said.
“During 2018 to 2022, BlackRock spent $3.3 billion on bolt-on acquisitions, and we expect the company to continue to use acquisitions as a primary means of expanding its alternatives platform, as well as enhance its technology offerings,” said Greggory Warren, equity strategist at Morningstar.
Outside of private credit, Brown said he could see infrastructure as another area where BlackRock does a deal to bolster its business. BlackRock already oversees $44 billion in equity and debt infrastructure assets for clients.
Any technology company that could improve BlackRock’s existing offerings or give it better distribution, especially to private wealth managers, might also be a target, according to Brown.
Warren noted that only Blackstone, KKR, and Carlyle Group are as broadly diversified by product segment as BlackRock, which is important when going after institutional business.
BlackRock “will, however, need to scale up more by segment to be truly competitive,” Warren said. “And with more than three quarters of industry asset flows in the alternatives market tending to go to funds with more than $1 billion in assets, companies with offerings below that level struggle to consistently get into the conversations when capital is being deployed by institutions, so BlackRock will need to keep that in mind as it looks to grow both organically and inorganically.”
BlackRock seems to acknowledge that.
BlackRock CEO Larry Fink said during the firm’s first quarter earnings call that “to be in the game, we must play the game.” As the firm works with clients and regulators across the globe, “through all that, there is an opportunity for something inorganic and transformational. We’re going to be prepared to do something like that, but I’ll just leave it at that.”
Fink isn’t the only executive thinking about mergers and acquisitions in asset management. On Monday, Morgan Stanley CEO James Gorman said he could see the bank doing deals for asset managers.
