BlackRock, Inc. (BLK) Earnings Call Transcript & Summary

All right. Thanks, everyone, for joining the call today with BlackRock, and hope you're all well. I'm Mike Carrier, the broker asset manager and exchange analyst at Bank of America. I'll provide a quick explanation on how this call will be structured, and then we'll begin. From BlackRock, we have Edwin Conway, Global Head of Alternative Investors. And given the structural growth in alternatives, the recent Department of Labor letter and the firm's positioning, it will be great to get an update on BlackRock's strategy. In terms of the structure of the call, given limited time, as we need to wrap up by 1:45, I'll be leading the Q&A for the call today. [Operator Instructions]

Edwin, thanks for your time today. So let's kick it off with a bigger-picture question, just to provide some context. Can you discuss the evolution of BlackRock's alternatives platform including growth of the business and a breakdown of the different strategies you offer today?

Hey, Mike, listen, first and foremost, thank you to you and all of those joining the call today. We very much appreciate the opportunity to tell you more about what we're doing, not just past state but, obviously, future state, too. I would -- as you think about the alternatives franchise within BlackRock, we've actually been a stable part of the diet for many of our clients for now albeit 30-plus years. Despite the scale of the other component parts, we have, over the past 30 years of managing alternative assets, now grown into one of the larger, multi-alternative asset managers in the world. Today, we would approximate about $230 billion of assets within the alternatives franchise. I think that makes us the fourth or fifth largest alternative asset manager in the world. And as you break that apart, with the 1,000-plus dedicated professionals to BlackRock Alternative Investors, as we would call it BAI, that now preside in 49 offices around the world focused to this alternative franchise, we really built what is, what we will call a multi-alternatives platform that's really focusing on all the major private market asset classes, as well as the solution aspects of alternatives that they developed over the years. Let me explain what that means. So for us, that means we're in 4 direct-fund businesses. Infrastructure being one, both debt and equity; real estate and other, also debt and equity. As you can imagine, given the start of the firm, and it's focused very much on fixed income assets, we've really built up over the past 30 years the extraordinary credit franchise, both leveraged finance all the way through to illiquid private markets. That's one of the other very critical sizable pillars in our business. We have then a long-term private capital, which is a longer-dated, evergreen, private equity investment capability that exists as well. So if you think about the direct businesses, that's what comprises of it. On the other hand, we also have solution-oriented activities as well. So when you look at private equity, we have our private equity business that has been investing in general partners for years. We have co-investment capabilities there as well as secondaries. We have another hedge fund solution oriented offering, which -- BAA, we call it BlackRock Alternative Advisors, which is really now -- it's just its 25th year investing anniversary as of, I believe, the end of this week where we build bespoke customized exposure for clients through hedge fund exposure. And then I'd say, last but not least, within the solutions set of our business, we really have a function called alternative solutions whereby we build the best of BAI really focused on outcomes for our clients. So as mentioned, after 30 years, the scale at which we operate is certainly relative to the $7 trillion in assets that we approximate. Now as a firm, at $230 billion, we're sizable. But with regard to the prominence in our clients' portfolio, it's absolutely growing. I'm very thankful that as clients continue to contemplate what the future looks like, actually, they're contemplating us as part of that in their reorientation of their portfolios. An interesting part of our business, obviously, is not just the focus on performance because, as you know, the rationale for many institutional wealth clients to migrate assets for more traditional sources, both active and passive, to alternatives is the pursuit of alpha, is performance and diversification. So for us, over the 30-odd years of managing alternative assets, that has been a critical focus for us, and I'm very happy to say, with the vast majority of our strategies, both separate accounts and commingled vehicles, we have very much been able to deliver against clients' expectations and, in most cases, to exceed them substantially, and hence, we've had the good fortune of growth. But maybe I'll just take a step back, Mike, very quickly, to give you a sense of each one of those businesses I mentioned, to give you a sense of their scale and the prominence. On real assets today, in real assets, that's -- we have both real estate and infrastructure, that's what we call real assets at BlackRock, we would approximate about $50 billion in assets under management today. And we have expertise in both core and value-added spaces across the board there. I would say, if you look at many aspects of what we do, I think we're feeling very proud about how we're originating deals within this spectrum of our offering, actually, to the point where nearly 80% of the deals we do within these businesses are off market. And the thing that we like to pride ourselves, as mentioned, we're in 49 offices around the world, is really the origination of deals and exposures that we hope our clients don't see in other places. And I think, we may get into this a bit later, but part of the issue as an industry we need to evolve into is to remove the duplicity that exists across managers, funds and exposures, for clients, all of a sudden, have very unintended exposures as a result of the duplicity. We're working very hard at sourcing, originating and putting exposures in our portfolios that actually nobody else has. So real assets represent $50 billion in our credit platform. As mentioned, it's a sizable one for us. It's $90 billion in assets for us. And we combine both public and private market exposure there. That is all the way from leverage finance through to both opportunistic and distressed. The reason we hold those together is clients today, quite frankly, find it very hard to time cycles and, as a result, have asked us to really be able to invest across those time frames, across these duration-type assets and optimize on both the returns, the exposure, whatever characteristics they're looking for us to do so. And hence, by having them together, we're very fortunate to be able to deliver, I think, more holistic credit solutions for our clients. And again, it's about a $90 billion business for us. In private equity, we're up to $25 billion today, and we offer 4 points of access to private equity. And then think about these sub-asset classes: a direct evergreen strategy, as mentioned, this is the long-term private capital structure; then we have our secondaries capability where -- as we do private equity secondaries; and then, quite frankly, co-investments, which has become a very significant part of our business and growing as well as a result of our clients' need to use secondaries and co-investments now as a private equity asset allocation tool not just for, let's call it, shorter duration exposure but to better optimize the things they want to see in the portfolios versus what they get in blind pool. So really significant part of what we do. And then I would say, the last but not least, we would invest in primary funds on behalf of many of our clients, both wealth and institutional. And there, given the 2,600 general partnership relationships we have, as of today, I would approximate we're invested with, let's call it, 400 general partners to really get the private equity exposure our clients are looking for. Before I end on the illiquid side, I mentioned earlier, alternative solutions. Certainly, a very significant trend across alternatives is the desire on our community, the alternatives community, to be much more empathetic to client situations and then obviously to deliver outcomes. We built a solutions business that fits across BAI. And by that, I mean, as of today, it's close to $9 billion. It is very much about building bespoke and customized private market exposure for our clients, whereby, many investors who've had decades long of experience in investing in private markets are really lucky for us to bring them deal flow that they don't already have. And by leaning into both our infrastructure, real estate, private equity, private credit businesses, actually, we've been able to design things that are very special for clients to complement and not duplicate. So that's about a $9 billion business today, and I would expect to see that grow substantially like the rest over the coming years. And then last but not least, there's about $60 billion within our hedge fund complex. That really is both direct funds as well as a kind of a hedge fund solutions approach. So across that, that really equates the $230-odd billion that we manage for our clients today. And quite frankly, irrespective of -- on being very unfortunate circumstance that we're dealing with, with COVID-19, I would say it really hasn't stalled the appetite, if anything, as clients have continued to look now at public market valuations and pricing. Certainly, private market continues to remain top of their minds. So we've had over $7 billion of net inflows across our both liquid and illiquid alternatives year-to-date, which really represents an 11% annualized organic growth rate. And really, if you look over the past 3 years, over $50 billion in gross capital has been raised, and we're very happy to see that trend continue. So with that, we have -- we look forward moment in time now with all these dislocations and uncertainty in the world with about, let's call it, $25 billion in dry powder, which we're ready to deploy as opportunities present itself, but that will be the complexion of the business today, Mike, as we've built it over the past 30 years.

Okay. That was a great overview. So as you build out over the years, you guys have made a number of acquisitions to get to where you are in some of these businesses. Do you view this platform as having any gaps still? And then if so, will you look to address those organically or inorganically?

So yes, we've really invested heavily in alternatives business over the last several years, and you're absolutely right, both organically through head count and seeding new capabilities and then obviously through the acquisition trail where we particularly spent time and attention with acquisitions in real estate and infrastructure as well as more recently credit. And I can hit in all of those. We started to build our infrastructure. And maybe just spend a few moments on that first because of its prominence, not just on our portfolio but quite frankly, infrastructure is probably the most underinvested, let's call it, alternative asset class across our global clients' portfolios. And about a decade ago, we decided to organically build out a renewable power capability where we saw, quite frankly, white space. And independent of the growth year-over-year certainly with an infrastructure to us, we saw a few interesting attributes. And this is how we think about organic and inorganic, Mike. There, we sell white space. We sold very few with the expertise to deploy capital in a fashion that we thought would be commensurate with clients' needs. And infrastructure, quite frankly, in a world where many of the assets provide yields well below what the historical norms have been, we saw diversification characteristics, yield and return characteristics that were massively appealing to our clients, both wealth and institutional, in infrastructure. And at that time, very few did wind and solar well. So 10 years later, we now have, I believe, the largest renewable power capability. We've grown that organically. We have, let's call it, about 250 to 260 assets around the world where we've helped governments, nations, municipalities transition from traditional sources of energy to more cleaner sources. And of which now I would equate those 250 assets to produce enough energy to power Spain, as an example. So a very significant franchise, over $25 billion in assets under management when you combine the hest of what we do in infrastructure, but we purposely started there organically 10 years ago. On the inorganic route, in 2017, as an example, we look to extend the -- let's call it, the energy exposure we're hoping to provide to our clients. I just think we continue to think energy is really important in the investment opportunity set. And to move beyond wind and solar renewable power, we extended that to other sources of energy. And there, we bought a business in 2017, an infrastructure equity capability for First Reserve. That's been absolutely fantastic, a great addition of talent, culture and really now a business that has extended what we can do from a solutions mindset to our clients. But to give you a sense of how important that was, as a result of joining BlackRock, as a result of getting access to the sourcing capabilities, the networks that we have, we're very happy to, in Q1, have our final close of a strategy within first -- the old First Reserve team was just slightly north of $5 billion. And this is an energy and power infrastructure fund. And that's actually our largest alternative private market fundraise in history. And -- but by being able to combine what was, I think, a talented team culturally aligned with ourselves and bringing them onboard to enable us to help the many clients contemplate this energy transition that's happening globally, it gave us another arrow and a quiver. And you'll see, as Larry spoke about in our earnings call earlier this month, infrastructure will continue to play a very key component to driving growth as we look ahead and to restarting the global economy. So I would say, continue to look at that space as an area that we will evolve, we will grow, there will be opportunities to both do so organically and inorganically. And as mentioned, we do believe it's probably the most underserved allocation in our clients' portfolios today. And relative to the attributes it can bring to them, we really want to try and help introduce this to our clients in a way that should be much more prominent just given what it can do for them. So I would say there's certainly an area where you'll see progress. We did acquire Tennenbaum Capital Partners, TCP, as they were previously called. That was rolled into, like, as mentioned, what is now a $90 billion credit franchise. So that has allowed us to extend our middle market lending capabilities within the U.S. We have lending capabilities overseas. We had that capability here in the U.S. What they had was highly complementary, not at all duplicative. It brought at a time a 19-year track record of very sensitively investing and deploying capital in the middle market lending space. And obviously, with the banks retreating and with private enterprise looking not just for equity but also debts, we saw this is an area where we could lean in, do more. And again, we found a culture, an organization, a track record that fit very well alongside our very much fiduciary mindset to help our clients on their long-term goals and their long-term needs. So I would say credit and infrastructure, in particular, we see as critical areas of growth just by virtue of how underserved they are today relative to what they can become in our clients' portfolios.

Okay. That makes a lot of sense. And then you mentioned in your comments like the allocation of opportunity for some clients. So maybe just stepping back given the relatively small size of some of the private markets versus the public market, how do you see your alternative business evolving over the next, say, 5 to 10 years?

Now it's hard to believe it will relent anytime soon. So just to give you a sense, the private market exposure in the world today still represents only around 10% of the entire investable universe, which, as you think about our clients, let me give you some numbers as they think about the evolution of portfolios. It's kind of comical to think that we're still calling it alternatives. Alternatives, they've really become core to particularly the institutional client communities portfolios. And by that, I mean, if you take the average pension client at BlackRock, 25% of their portfolio today is in private markets. We, on an annual basis, take a step back, really work with our clients to understand what are the driving factors with regard to the reallocation of assets, what are the outcomes they're looking to achieve and really get inside their heads and how best we can serve them. Without exception or, say, with few exceptions, I would say, if you just take the pension community, they're looking to increase their allocation substantially well above and beyond what is the 25% private market exposure today. Actually, based on the feedback we're getting, it looks like it will grow to anywhere from 35%-plus. That's an extraordinary growth just for a pension client. By the way, you're in down with some foundations who already invest 50% in alternatives also professing that they will see growth. So a couple of interesting stats. 10% of the investable universe with debt and equity, so still small on a relative basis. AUM in total has surpassed $11 trillion, and some of the studies are showing that by 2023, it will be about $14-plus trillion. That's a substantial add in a small space of time. But believe it or not, the crux of that is still coming from institutional investors. So if you look at our business, 90% of our assets are institutional assets in alternatives. And they've told us they're increasing their allocations on average by 8 to 12 percentage basis points more, 8% to 12% more, above and beyond what they're already investing in. Now if you take a look at wealth investors where we do think this is a substantial area for growth, we are a, thankfully, very well entrenched with the wealth community. We work very, I think, harmoniously with, obviously, many of the organizations and firms that are on this call as one of the largest providers of ETFs and mutual funds. But as wealth now that approximates in the U.S. in alternatives to be less than 3% of their total allocation, so we say that kind of this is really interesting. U.S. wealth client, on average, has invested less than 3% of their assets in alternatives. Yet the target is anywhere from 20%-plus. Actually, the same statistic is very real in Europe. The average allocation in Europe is less than 3%, too. And the target allocation from what we're hearing from most of our wealth clients is 20%-plus. So you think about the wealth explosion this world has experienced over the past 12 years, at 10, 12 years, you think about that a wealth client who is massively underweight relative to their ambition and an institutional client that's looking to increase their allocation by nearly double digits. So this growth, we think, is here with us for a long time, Mike. And quite frankly, beyond the attractive expected returns or the resilience that people are expecting in down markets, alternatives are playing a critical and grading in a much more holistic portfolio construction approach. And by that, I mean, if you look at insurers today, as an asset manager, we're working with them to build capital-efficient solutions that will work with Solvency II rules. And that's a really important part as their start for yield with literally these fixed income assets in their general account that are really underserving them relative to what they would expect. And obviously, the wealth channel is enormous. And now as regulators are looking to allow wealth have access to a liquid and alternatives for the first time, we get very excited about helping that part of the market comprehend what private market and public market can do together. And rightfully so, as a result of this momentum, the things you're really starting to see is a huge demand for transparency, much greater persistence in returns, and there's definitely pressure across the board on fees because clients are now looking for outcomes. They're no longer looking for a manager who's just going to sell them a fund. And just to give you a sense of today what's happening, the dispersion for a private fund performance is so much wider than public markets, to the tune of 14% in 2019. Again, manager to managers, you look at the quartile rankings and performance, you can see on an annual basis a dispersion of about 14% in private market returns that managers are providing versus 7% in public markets in 2019. It's a very big -- very big difference in delta. So you're really going to see the client community spending time appropriately diligencing the managers and understanding how best to put them together. And this is where it's really hard. Data is limited. Investors don't have it. And private asset classes and private asset managers have been very secretive in the past. So to make a relative value judgment across private asset classes, it's really necessary to build these robust portfolios, yet it's shockingly hard to do. And so as we all talk about resilience in a world which is going through tremendous change, certainly, the necessity for technology is really high now. The necessity for transparency and data is higher than it's ever been. So you can have a common language, a much better understanding of what could be owned, for how long and its effect not just in an isolated fund but across a total portfolio, whether you're an institutional client or wealth client. So tremendous growth still coming, double digits, without question with -- for the next 5-plus years. And if wealth really hits its potential, those numbers could be very, very large. And like I said, I'm very thankful that our station with our -- the institutional client community is very strong globally, as it is with the wealth channel. So I think that bodes us well, assuming, of course, strong performance continues that we will see double-digit growth year in, year out as well.

All right. That's good color. And given the growth, I wanted to pivot a bit and just spend a few minutes discussing the competitive landscape. So what is BlackRock doing to compete with the large pure-play alternative manager competitors? And how is BlackRock differentiated in this space?

So well, we are one of them, right? The -- again, the league tables, you wonder where you come out month in, month out, quarter-to-quarter, but we've been in top 10 for many years. And over the past 3 years, we've climbed up to, I think, the fourth or fifth largest in the rankings today. I would expect the competitive landscape to change significantly. I say that for a reason. So alternatives, if you ask a typical client a question about what do they believe the alternatives manager is synonymous with, it's very interesting, the feedback you get. It's one of secrecy, not transparency. It's one that tends to have been around a one shoe fits all, meaning, as an industry, it's been about blind pools or mingled vehicles that tended to be long locked, not outcome-oriented or solutions-focused. You definitely hear commentary around self-intelligence within the industry where there's very little empathy for the clients and much more consideration for the manager themselves as a result of high fees and just a lack of flexibility and customization. And then technology and data-locked versus technology and data-enabled. So I mean, I would say, at a point in time, which we're at now, where alternatives are absolutely core, they're critical to both wealth and institutional clients' portfolios, all of that has to change. And being in this space and working as a fiduciary for clients for 30 years, being in alternatives and working for our clients in BlackRock for 30 years, I think it gives us an extraordinarily big leg up on our peers. And just to give you a sense of what's happening, because of the proliferation of managers, there -- I saw the last count, it's well in excess of 30,000 alternative asset managers in the world today. I think you're going to see extraordinary amount of consolidation. I do believe you're going to see many not being going concerns in the future. And I say that because, very purposefully, our clients are telling us that they're looking to consolidate their manager roster. Because they need to see more, understand more, customize more, they feel they need to do, and I think, rightfully so, they need to do more with fewer. And just to give you a sense, the larger institutional clients today can have hundreds of not just funder relationships but manager relationships in alternatives. And that really diffuses their ability to negotiate, their ability to get information, understand it and then think about a whole portfolio. And this is where it's really important. If you are now 50% or 35% alternatives in your whole portfolio, a client really needs to understand how that will behave in context of what's happening in the public markets, too. How do you knit them together? Where do you fund them from? And by the way, there's an opportunity cost, obviously, to everything. So what is that opportunity cost and understanding to limit those costs so you can enable these investments to really play their role out. So where do I think we were different than the rest? We're really building, I believe, tomorrow's alternatives platform. This is all about outperformance with true partnership. And this is the time when clients need partnerships. So as we think about it, in those 49 offices around the world I mentioned, I think it's absolutely critical that sourcing, it will become a very meaningful part of everybody's alpha going forward. With these assets that are flowing into the space, if you're not local, speaking the local language, embedded in local cultures, being able to source like I did in many of our cases, 80% of your assets that are off-market, that's, I believe, what value-add is in this space. So you have to be more global in my mind. You need to be boots on the ground. And I think we have an advantage there, which we're going to continue to exploit and grow. We have over 2,000-plus investors around the public market world. By allowing ourselves to understand their insights, their views of the world and complement that with what we are seeing or feeling on public -- on the private market side, I think that synergy is massive, and we're going to continue to harmonize that to really create insights for our team to invest in a more prudent way on a going-forward basis. I think about them, we've created a capital markets desk that spans across all of BlackRock Alternative Investors. That capital markets desk, I think, has done a much better job of harmonizing what it is we do as we intersect with The Street. We're not only talking about $230 billion of assets now having a single voice intersecting with our counterparts. We're now speaking about, in many cases, a $7 trillion asset pool. So as our partners, our firms, The Street intersects with us. They, in many cases, don't need to syndicate. So we can consume what could be a great exposure that could have a home in many of BlackRock funds by really building a desk that focuses on the efficiency of financing, the efficiency of sourcing outside of the proprietary networks we have in each one of the investment teams. I think we now have the mechanism where we're seeing, if you look at 2019 alone, over 7,000-plus actionable deals came through our private markets teams. Of course, we invest in far less than 5% of those. But getting that volume up is really important. As so many assets flow into the space, ensuring that you can kiss a lot of frogs, turn over a lot of stones is going to be a critical advantage going forward, and we're going to continue to focus on that. And maybe last but not least, if I just talk about the technology component, it's a very fundamental-oriented business, private markets. It's human capital-intensive. But we have really been focusing on taking the data and the technology that we've accumulated as a firm for over 30 years. Now I think about this data set. I think about artificial intelligence, and I think about the insights that can come as a result of how we've invested in systematic approaches for over 30 years as well and complement that with a private market exposure. And I think the advantage there is massive. As one of the largest procurers of data in the world, by now, using DaaS in many aspects of what we're doing to complement the human being, to complement the fundamental processes and approaches that's now enabled by the Aladdin system, which has -- in our mind, has become one of the most advanced technological systems that both our peers and clients are using. And then with the acquisition of eFront over a year ago and rolling that technology in allows us to, I believe, understand our portfolios better, have a much more common language than our peers and really better comprehend as they grow -- meaning our clients, both wealth and institutional, from their current alternative exposure today, how they grow sensibly to what it needs to be tomorrow without compromising what's working today in public market. So data for insights, technology for portfolio building and really having a whole portfolio view is just something nobody else can do. But I think that's an advantage in tomorrow -- today's and tomorrow's world that we have over any of the alternative asset managers that are there today.