March 25, 2019

Breakingviews: BlackRock sees tech as an antidote to fee pressure

by Breakingviews.

Larry Fink sees technology as an antidote to the fee pressures buffeting BlackRock. The world’s largest investment shop is paying $1.3 billion for eFront, a French provider of alternative-asset management software. It gains heft in a booming private-equity market and bolsters its growing technology business. It’s a smart attempt to counter price wars in stocks and bonds.

BlackRock has $6 trillion in assets, yet scale doesn’t provide immunity from the trends squeezing money managers. The firm’s base fee and securities lending revenue fell 4 percent in the fourth quarter of 2018 compared to the same period a year ago. To keep pace with Vanguard, it recently slashed the fee on its S&P 500 Index fund by two-thirds, to just $1.25 annually for every $10,000 invested, for its largest customers.

BlackRock’s first front in fighting back is technology and providing customized portfolios for investors. Its Aladdin software helps clients construct portfolios, measure and monitor risk, and handle accounting tasks. It’s a big reason why the firm’s technology-services revenue grew 19 percent last year, to $785 million, or 6 percent of the group’s total.

Alternative-asset classes like private equity, credit and infrastructure represent a second front. Private-equity firms globally raised more than $400 billion for the fifth straight year last year from investors seeking higher returns, according to Preqin. Alternatives represent less than 2 percent of BlackRock’s assets, or some $112 billion, but they generated 6 percent of the group’s basic fee income last year. Fink wants to grow the business, beginning with a new perpetual private-equity fund this year.

The French software acquisition should energize both of BlackRock’s growth vectors. It provides performance and risk analysis and administrative services for investors in private equity and other alternatives. By pairing it with Aladdin, BlackRock can offer big institutions analytical tools for both public and private holdings.

It doesn’t come cheap. Fink’s firm is paying nearly four times what European private-equity shop Bridgepoint paid for eFront in 2015, and more than six times the firm’s 2018 revenue of approximately $200 million, a person knowledgeable about the deal told Breakingviews. But it’s better for BlackRock to go on the offensive than to watch its margins erode.

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