BlackRock’s HPS deal seals Netflix-like strategy
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Jonathan Guilford
NEW YORK, Dec 3 (Reuters Breakingviews) -BlackRock BLK.N, oddly enough, is looking a lot more like a streaming service. The index-fund goliath agreed to buy private lender HPS for $12 billion, to get its hands on the hottest new content to push through its formidable pipes. It’s a strategy that sometimes only partly works. Just ask Apple.
This latest deal magnifies BlackRock boss Larry Fink’s binge. In January, the firm unveiled plans to buy Global Infrastructure Partners for $12.5 billion and in July decided to take over private-market research shop Preqin. HPS completes the trilogy, which together provide a range of illiquid investment risks, durations and returns, as well as ways to measure and perhaps, ultimately, index them.
This is the best way for BlackRock to captivate audiences. Consider insurer Prudential Financial PRU.N, which sells annuities and promises future payouts. Funding them requires healthy, safe yields that mature at the right time. Backing easily tradable debt for buyouts might generate a 7% return. Direct loans, like those offered by HPS, charge more for the same risk, a blockbuster formula.
Such interplay applies elsewhere, too. Private equity and credit shop Apollo Global Management’s APO.N offering to rich folks, dubbed AAA, doesn’t outperform stock indices, but it tries roughly to match them without the wild swings. Boss Marc Rowan is blunt: “Replacement is coming for the equity business.”
Thing is, equity products represent about half the $11 trillion that BlackRock manages. Apollo wants the rest, too, teaming up with State Street STT.N to produce an exchange-traded fund featuring private credit. If approved, it's a tentative pilot program that clearly takes aim at BlackRock.
The challenge helps explain Fink’s approach. BlackRock is paying 30 times the fee-related earnings it expects from HPS in 2025, excluding retention bonuses and other earn-outs for co-founders Scott Kapnick, Scot French and Michael Patterson, among others, which suggests a $400 million bottom line, including performance and management income. The implied return is only about 3%, although BlackRock says it’s 16%. Future growth and synergy predictions buoy the forecast.
Strategy matters more here. Apollo excels with products, or content; BlackRock shines in distribution. Their convergence resembles what happened when Netflix upended the television business model. Apple, in theory, should be dominant given its vast resources and the popularity of iPhones. Boss Tim Cook allocated some $20 billion for top-notch programming, but its U.S. viewership remains a tiny fraction of Netflix’s.
Fink risks a similar fate. BlackRock’s $9 billion acquisition of Barclays Global Investors powered his world-dominating ETFs, but other infrastructure and direct-lending deals have disappointed. In finance, too, the medium is the message.
Follow @JMAGuilford on X
CONTEXT NEWS
Asset manager BlackRock said on Dec. 3 that it had agreed to buy private credit firm HPS Investment Partners for $12 billion in an all-stock deal to expand in one of the hottest areas of investment. HPS oversees $148 billion in direct lending, asset-based finance and other similar strategies.
Under terms of the transaction, HPS owners will receive up to 13.7 million units of a BlackRock subsidiary, each of which can be exchanged for one BlackRock share. About 9.2 million units will be paid at closing, and 2.9 million in about five years. BlackRock will pay another 1.6 million units based on financial performance in five years.
BlackRock is creating a new private financing division that will be led by HPS co-founders Scott Kapnick, Scot French and Michael Patterson, who also will join BlackRock’s global executive committee.
Perella Weinberg Partners and Morgan Stanley are advising BlackRock. JP Morgan served as lead financial adviser to HPS, which also was advised by Goldman Sachs, Bank of America, Deutsche Bank, BNP Paribas and RBC Capital Markets.
Apollo and its ilk outperform BlackRock https://reut.rs/41b1Zb4
Editing by Jeffrey Goldfarb and Pranav Kiran
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