BlackRock: Expanding Into the Fast-Growing Private Assets Space

BlackRock (NYSE: BLK) has a new partnership, creating buzz around the financial services company. In conjunction with Partners Group (OTCMKTS: PGPHF), the company will launch a platform that streamlines the process of investing in private market assets.

This represents a large opportunity for both firms, but I will focus on the deal from the perspective of BlackRock. I’ll analyze the company’s business and the size of the market opportunity. But first, I’ll break down what the platform is and who the customers would be.

BlackRock’s Platform Has Significant Value Propositions

The platform will create a one-stop shop for investing in private markets. BlackRock and Partners Group will do the research to select a diversified portfolio of private investments. Clients will select one out of three choices based on how much risk they want to take.

The platform will likely mainly cater to wealth management companies and financial advisors who want to get their clients invested in private assets. For example, it would make it easier for a small, registered investment advisor (RIA) to get their clients' exposure to these assets.

Investing in private market assets can require extensive research and know-how that many small firms may not have. Outsourcing to the platform could give their clients private asset exposure while knowing they are working with highly trusted players in the space. It would allow them to cut their research costs and focus on more revenue-generating areas like business development.

The desire to invest more in private assets is clear: they often generate higher returns than public assets. Over the past 20 years, the S&P 500 has provided an annualized total return of 10.4%. In comparison, the figure sits at 14.3% for private equity funds, according to BlackRock. The difference is even starker in fixed income. Private credit returned 8.9% annually versus 1.3% for the Bloomberg U.S. Aggregate Bond Index.

Alternative Assets Provide BlackRock More Bang for the Buck

BlackRock is the world’s largest asset management company, with over $10 trillion in assets under management (AUM). The company’s financial statements provide a breakdown of what these assets are invested in. It also signals where there might be the most growth potential.

As of the most recent quarter, the company's "traditional" asset classes made up approximately 97% of its AUM. This includes things like equities, fixed income, multi-asset, and cash management funds. These are primarily in the form of passively or actively managed ETFs and mutual funds.

On the other hand, only 3% of the company’s AUM is in “alternative” asset classes. Private market assets like private equity and hedge funds fall into this category. The company also puts commodity ETFs in the alternatives bucket. However, it is interesting to note that although alternatives only make up 3% of AUM, they accounted for 12% of the company’s AUM-related revenue.

Out of all BlackRock’s asset classes, alternatives is the only one where the revenue percentage it brings in is higher than its percentage of overall AUM. And not only is it higher, it's four times higher. This shows that each dollar in AUM that goes toward alternative assets brings in way more revenue than other asset classes.

This is one reason why the company’s deal with Partners Group could be hugely beneficial. Additionally, with alternatives being such a small percentage of the company’s overall AUM, it likely has significant room to grow its assets there.

Private Assets: A Fast-Growing Space in Money Management

Private markets are a rapidly growing asset class in terms of AUM. McKinsey and Co. says that in 2023, fundraising in private markets was over $1 trillion. As of Jun. 2023, that the asset class grew by 12%. Bain and Company sees this growth slowing to 9-10% a year through 2032. However, it predicts that growth rate will be over double that of public markets' AUM.

Additionally, they expect the share of private markets AUM that retail investors control to increase. These are the investors BlackRock is targeting through its new platform. With BlackRock already an industry leader as the world's largest asset manager, the company is well-positioned to succeed in this space.

The market reaction to the deal is, so far, unclear. No analysts have updated their price targets yet. However, Wells Fargo did initiate the stock with an overweight rating on the same day the deal was announced.

Investors should keep an eye out for more details about the deal, particularly regarding the level of fees charged to access the platform.

The article "BlackRock: Expanding Into the Fast-Growing Private Assets Space" first appeared on MarketBeat.