Stone beats rock

23 Jan 2014 By Jeffrey Goldfarb

Is it time for BlackRock to revisit its Blackstone heritage? Larry Fink’s investment company manages $4.3 trillion while Steve Schwarzman’s, 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 world’s 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 there’s 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 – using the industry’s widely accepted metric of economic net income – when it reports next week.

That’s partly thanks to a cyclically strong period for selling investments made by the firm’s funds. It also underscores how lucrative private equity can be compared with BlackRock’s 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 couldn’t 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 can’t hope to grow its existing business as quickly as in the past. What’s 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 – BlackRock’s market value is $55 billion and Blackstone’s $38 billion, on a fully diluted basis – but unlikely. Other firms could be more available, though. Brand-name private equity shops that haven’t 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. BlackRock’s 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.


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