BLACKROCK´S NEW AMBITION IS A SIGN OF FROTH / THE WALL STREET JOURNAL

BlackRock’s New Ambition Is a Sign of Froth

BlackRock sees an opening in the massive amount of money looking for a home, but that should worry investors

By Aaron Back
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BlackRock hopes to stand out from the private-equity crowd by adopting a longer time horizon and by cross-selling its new investment product to its huge, existing client base that includes some of the world’s largest asset owners. Photo: Michael Nagle/Bloomberg News


The king of passive investing is making a foray into private investments. While the move by BlackRock makes some sense strategically, it also may be the latest indication of froth in financial markets.

BlackRock is an investment industry champion with a stellar track record of gathering assets, based largely on the strong trend toward passive, low-cost strategies. Last year they pulled in record net inflows of $367 billion.

So it is a bit of a head scratcher why the company now feels the need to raise an additional $10 billion on the side to buy and hold stakes in companies, as The Wall Street Journal reported Wednesday. This will put them into direct competition with the likes of KKR, former parent Blackstone Groupand indeed Berkshire Hathaway , to whom BlackRock compared its new approach. That is some distance away from BlackRock’s core competency.


NO SHORTAGE OF ASSETS
BlackRock´s Assets under management

 

The apparent answer is that the money is out there for the taking. Total private-equity dry powder, or money sitting in funds waiting to be invested, exceeded $1 trillion at the end of last year, according to Preqin. That is up from just $560 billion five years earlier.

BlackRock Chief Executive Larry Fink may also figure that with equity and debt markets currently at very high levels globally, now is a good time to diversify into private-equity investments that face less near-term pressure to perform.

BlackRock hopes to stand out from the private-equity crowd in a couple of ways. One is by adopting a longer time horizon. The firm plans to hold investments for more than 10 years, the Journal reports. That is significantly longer than the typical private-equity fund; hence the firm’s comparison of itself to Berkshire Hathaway. A second way is by cross-selling this new investment product to its huge, existing client base that includes some of the world’s largest asset owners.

One can’t begrudge BlackRock for putting out its hand for a small slice of the money on offer. Even if the experiment somehow goes awry, it won’t make much of a dent in a company with $6.3 trillion of assets under management.

But the sheer imbalance between the supply of investable funds and suitable outlets for investment that gave rise to this move should ring some alarm bells for investors generally. At market tops when money is desperate to find a home, it often winds up in places it shouldn’t.