August 13, 2019

Breakingviews: BlackRock private-equity pivot grinds away in beta

by Breakingviews.

BlackRock’s private pivot is grinding away in beta. Boss Larry Fink aims to disrupt the world’s largest asset manager before others do by expanding into private equity-style investing. But he has struggled to raise a new long-term fund, and its first investment – a $625 million stake in Sports Illustrated-to-shoes owner Authentic Brands – is a tad dull. His ambitions demand a bigger splash.

With $6.8 trillion in assets, BlackRock has unmatched scale. Yet two-thirds of the total is in low-cost index and exchange-traded funds. Investment tools like these are wreaking havoc across the industry, and Fink’s outfit isn’t immune.

Investors in the 12 months ended in June pulled $341 billion out of actively managed U.S. mutual funds and poured $530 billion into tracker funds and ETFs, according to Morningstar. That helps explain why the average mutual fund fee declined 6% last year, to 0.48% of assets, the research firm reckons. BlackRock is one of those winning the part of the battle – it pulled in a whopping $151 billion in new money from investors in the second quarter. But it came at a cost, contributing to earnings falling by 7%.

Hence the desire to expand into higher-margin private investments. Buyout specialist Blackstone’s distributable earnings were 70% of BlackRock’s profit in the latest quarter even though it manages less than a tenth as many assets.

Pulling off the pivot to private isn’t easy. BlackRock doesn’t have much of a track record, and its Long Term Private Capital fund is a perpetual vehicle that makes no promise to exit deals and return cash to investors. The firm, which began raising money over a year ago with a $10 billion target, said in April it had raised just $2.8 billion.

Authentic Brands has rolled up more than 50 labels including shoe vendor Nine West and teen fashion retailer Aeropostale. It also licenses celebrity brands from Marilyn Monroe to Shaquille O’Neal, the former basketball star who’s also an investor. It effectively offers exposure to consumers with few of the woes of brick-and-mortar retailing.

BlackRock will be joining existing investors including private equity firms Leonard Green & Partners and General Atlantic, but it’s not clear what the firm adds besides Fink’s professed long-term approach. His investors face a long wait to discover whether the new approach will pay off.

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