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

Yes. So we have hit our 5% organic growth objective over the last 5 years. We've hit it in 7 out of the last 10 years. And most importantly, I'd highlight that in the most challenging years in 2016 and 2018 and 2022, and even in the last 12 months, we've generated positive organic base fee growth, organic revenue growth at a time when the industry has seen obviously a substantial amount of decay. Our objective is not to be the fastest grower in any quarter, in any one year, but to deliver durable, less volatile organic revenue growth through a cycle. We reunderwrite this target all the time. And keep coming up with 5% or better in terms of where we think we are. Importantly, what I'd say is the reason that we have conviction in the 5% target is because BlackRock is a structural growth firm, like our fortunes and our outcomes are not tied to the market. Most definitely economic cycles will impact the velocity or the pace of change or the revenue growth in any one of these periods. But we don't feel like our fortunes in terms of being able to hit 5% through a cycle are tied to short-term market conditions. And it's because we have these structural durable growers. I know that model portfolios powered by ETFs are going to be much, much bigger in 5 years than they are today. I know the ETF market is going to be much bigger than it is today. I know private markets are going to be bigger than they are today. I know that clients are going to need more technology, not less technology. I know that clients are going to need to tap into scale in a unique way [indiscernible]. I know that they're going to do business with fewer providers, not more providers. So those long-term durable, inexorable fundamental trends are the ones that we build our 5% organic revenue growth assumption on. So what I'd say a little bit is when we talk to clients about picking active managers or thinking how to build portfolios, I always talk to them a little bit about like upside and downside capture, right? And to me, when we talk about things like active equities or we talk about liquid alts, places that have been big base fee growers in the industry, and in particular, BlackRock in the last several years, they have some degree of procyclicality to them. We know that. You all know that. But to me, if you were to look at where does BlackRock been in terms of upside capture, like our upside capture is really high on organic base fee growth in those years where markets are really coming on strong. And actually, our ability to still drive positive organic revenue growth in markets that are weaker or tepid or even monumentally down like in 2022, is also really strong on a relative basis. So when I think about kind of our organic revenue growth target through the cycle, I also think about it just in terms of the upside and downside capture, like we have captured way more on the upside than we have, and we've controlled obviously, the downside really well. So I think, again, it's 5% based on the structural growers we have, and I like having some of this procyclicality in our revenue base. It's actually been an outsized contributor in really good years, and we hold a lot of that revenue, even if it might put a little volatility on the top when markets come down. I like having that. I like that optionality in terms of our growth path.

Yes. Well, and we've seen that in 2020, '21 with like nearly high single-digit organic growth, I guess, from some of these products. Okay. All right. So let's talk about ETFs. Clearly, it's been the crown jewel. Many people would argue it's still probably one of the more valuable and more interesting parts of the business, one of the fastest-growing parts of the business for sure. You sort of maintain your leadership in fixed income ETFs outside the U.S., you've also been doing great in Europe with that footprint. As you look forward, what's the vision for ETF growth from here and especially when it comes to newer things, whether it's crypto or active ETFs. I've seen a couple of filings from you guys on that front. Should we expect more sort of innovation in the iShares suite over the next couple of years as well?

Absolutely. There's no question. This is a durable growth market. The exchange-traded funds market will be much bigger. We have forecast of the ETF market being a $25 trillion market by 2030 with $19 trillion of equity, $6 trillion of fixed income ETFs, and we're in a market-leading position. We have 1,400-plus ETFs. We have the broadest lineup by any metric, whether that's by style, whether that's by asset class and our footprint is global, in particular, with 2 very scaled product lines in the United States and in EMEA. What's interesting to me in the last year has been that the ETF market is showing a lot of resilience even against some softer flows, like gross sales in mutual funds, if you look at the Broadridge data, the ICI data, the Ecoflex data, gross sales in mutual funds are off $1 trillion this year relative to the last 5 years. ETF flows are going to be -- ETF flows are about $800 billion globally, they're down 1% kind of year-on-year. So continuing to show a lot of resilience. Again, they're structural growers. We have a market-leading position in a structural growth market. But what I would sort of look at as the hallmark of the 2 things going forward, they're going to propel outsized growth for BlackRock, there's a general bucket that's about innovation and growth. And then there's Europe. That's my second bucket. And in the first bucket, I look at things like active ETFs. As you said, Alex, we've launched 18 active ETFs this year across options-based strategies. They've been some of the fastest ETFs to get to $1 billion in the history of the industry. We've launched active ETFs on the back of some of our highest profile portfolio managers like Rick Rieder, our Income Series bank. We've done the same in large-cap equities. We've done by right strategies and fixed income that have been really interesting and unique. So I think we have a lot of runway to continue to innovate. And what's interesting is clients expect at this point, everything to be ETFed. They expect to be able to use the ETF wrapper to access any style, any asset class around the world. So we think we have a lot of room to grow on innovation. The second is Europe. It's really staggering. ETF flows, as I mentioned, globally, are pretty much flat year-to-date, but the U.S. is off about 20% and Europe is up 70% year-on-year. And I want you to think about this. A huge ETF market has been built in the United States on the back of a national exchange system, an NBBO market, a set of established market makers -- I mean real exchange trading. Europe has built a $2 trillion ETF market with no national best bid, best software system, a relatively fragmented capital markets ecosystem. But the direction of travel is actually to replicate more capital market structure. So just like they built a $2 trillion market without all of those benefits of a single market system, I really think the growth opportunities in Europe are incredible for the ETF market. The growth of DPM platforms and fee-based advisory, all the same trends we saw in the United States, model portfolios are taking root in the European market. And for us, that's a market where we've been running at 45% to 50% market share this year, and it's one where the competitive landscape is different in terms of the direct-to-consumer players not really being present in those marketplaces. So I think it's a great strategic advantage for us, and that's the path to me as to how we propel outsized growth. You mentioned crypto, we have a filing. So I can say we have a filing, and that's about as much as [indiscernible].

Right. Right. Fair enough. Let's talk about private markets for a second. That's another one of the kind of key strategic pillars of your growth. And I think at the Investor Day, you laid out a target to double your private markets revenues in 5 years. Areas like global energy transition and retail alts are 2 really important subcomponents to that. So maybe we can talk a little bit about both. Obviously, there was a nice announcement out of the UAE. I think it was last week, you guys are in the mix of getting some of that capital allocation. So talk to us about what are you doing to build a bigger footprint in private markets, particularly across those 2 markets?

So as I mentioned, Alex, everything we aim to do strategically is rooted in, one, wanting to be a structural grower, and two, wanting to be incredibly relevant in serving whole portfolios. I think it's absolutely remarkable. I mean I've been working at BlackRock since I was a baby. And in all those times, it's hard to believe how much clients have grown their private markets portfolios. We would see the leading sovereign investors in the world maybe have 5% to 10% allocations in private markets. Many of them are now at 50% footprints in private markets. And we have been driving our business to meet all those clients, I think where they are and importantly, where they're going. So our acquisition of eFront in that space was to have Aladdin be a whole portfolio system that covered public markets and private markets in an integrated view. We've done a substantial amount of inorganic activity over the last decade to build out private markets capabilities across private credit, private equity solutions, infrastructure equity, real estate and the like, and we have $160 billion of illiquid AUM spread across those asset classes that, as we mentioned at Investor Day, we're looking to double the revenues in that business over the next 5 years. And I think all the secular trends are there. But the place where I really think BlackRock is [indiscernible] like as a sample set of 1 is we're one of the few firms -- sorry, we're the only firm [indiscernible] statistics just got terrible, right? We're [indiscernible], right? We're the only firm that really has, I think, relationships with finance ministries, ministries of the interior, long-dated sovereign wealth investors and bringing this sort of public and private entities together to do outsized incredible, ambitious infrastructure projects. And I think it's a place where we can really log differentiated growth. And the announcement that you just referenced out of the UAE with the Alterra, kind of energy transitions and climate finance partnership funds, there's a $2 billion allocation to BlackRock private markets in these areas where we have differentiated capabilities. But importantly, I think our ability to originate transactions that are really different that come from this incredible position of service and trust working with public and private institutions together, I think it's a real differentiator in who we are, what we do and how we can grow. And you've seen it with Acacia Energy. We did it in New Zealand and building a climate finance partnership there. Our decarbonization partners joint venture has raised $1 billion for a first-time fund, which is pretty incredible. So this is a place where we see great momentum and I really think there's outsized potential for growth for BlackRock.

Great. Let's shift gears entirely. Let's talk about tech services. It's again an important area of growth for you guys in the last year. You've been doing kind of back to the low double-digit growth. I think that's the guidance for 2023, I guess, higher than that in 2022. As you look forward, what is the expectation for that business? And again, similar to the way we talked about private markets. What are the key kind of pillars you expect to support that growth?

Yes. So we have $1.5 billion tech services business, a revenue business at BlackRock. There aren't a lot of technology businesses that get to $1 billion of revenue period. And so for us, this has been a key grower, a key part of the technology that powers BlackRock but also powers many of our clients. And the trends for having integrated portfolio management, risk analytics, data insights, whole portfolio views, we see those again as structural growth trends, sort of durable, inexorable fundamental ways that clients want to run their businesses, moving from sort of a patchwork of spaghetti legacy systems into one integrated system with gold copy data. And also one that, as we talked about at Investor Day, has these platform positive network effects. The more people that you're using Aladdin, the better the quality of the data. The more people that are using the functionality, the better the functionality gets. And so we see more and more clients gravitating towards Aladdin. It's interesting, 2022 was actually a record net sales year for Aladdin, but we had some headwinds creep into the business that really came from the markets [indiscernible] Aladdin fixed income. So when you have obviously, a double-digit decline in the ag, for example, we're going to see some of that weigh on the revenues. And then we had some FX also for the non-U.S. dollar positions that were on Aladdin. We continue to have a lot of conviction in our low to mid-teens ACV growth for the Aladdin business over the next several years. And again, I think the growth engines are going to come from kind of these whole portfolio views of combining eFront and Aladdin capabilities. It will come from a lot of the work that we've done in integrating Aladdin into the provider ecosystem that we really think has great benefits, sort of win-win-win for the providers, custodians, clients in BlackRock [indiscernible]. And then we've done a lot to open Aladdin with APIs so that clients are getting more functionality out of it. We're forming more strategic partnerships that we can also monetize in growing the Aladdin base. But we still have a lot of conviction in our low to mid-teens ACV growth through Aladdin. And if anything, these markets where people feel the profound effects of what it means to have great risk analytics versus not, when all of a sudden, you have double-digit market declines, people remember, they really need great systems, they need great operations, great [indiscernible] investment processing to run their businesses better, faster, cheaper, more nimbly and tapping into scale. So we're seeing some of the best opportunities that we've had and currently, we reaffirm our ability to grow at that mid- to low teens ACV.

Great. That makes sense. All right. Last question for me. I want to pivot to M&A, not surprisingly, given Larry made a number of statements about having to do a potentially transformational deal. And I want to unpack that with you a little bit because BlackRock has clearly done a number of transformational deals in the past, iShares [indiscernible], but the company is much bigger now. So the concept of transformational might mean slightly different things today than it did a decade ago. So when you guys talk about a transformational deal, what do you mean?

Yes. So I think when I started at BlackRock, there were about 1,000 people, $350 billion of assets or something like that, and I thought the firm was huge. And so I've really had, I think, kind of the perspective of sitting through time and watching the firm grow. We've grown organically, I think, in a way that is very compelling. Our ability, as I said, to kind of invest in the platform, technology, people, capabilities, we've grown well organically. I think we've spent our investment dollars well and growing the firm. But we've been a good acquirer. We've been a good acquirer, and I think it's been a really key part of our story, whether it's State Street Research & Management in 2005, Merrill Lynch Investment Managers in 2006, Quellos in 2007. Obviously, BGI in 2009. During the BGI acquisition, I worked on this very small acquisition that was called Helix, a company we bought for single-digit million dollar, so there was a big deal going on. I worked on a small deal every time. [indiscernible] actually that acquisition burst our innovation hub in Gurgaon, India. So there were transformational impacts from small dollar acquisition that really reshaped a lot of the workforce that we have at BlackRock. So these acquisitions have been really key to building a best-of-breed firm. And our view is we need to keep doing them. We need to grow organically, but we also need to grow inorganically. And our philosophy for growing organically -- inorganically is it's all about growth, right? We're doing acquisitions to get new capabilities or to derisk the capabilities that we're building. We're doing acquisitions because we want to serve clients in a way that we can't or maybe get to markets that would take us too long to get to without an acquisition. So for example, regional plays. Most importantly, we've never done acquisitions with an idea of we're trying to consolidate or cut costs. And the reason for that is, I said earlier, AUM does not equal scale in public markets. And so simply putting 2 firms together and ripping out cost doesn't actually have a growth vector in our minds in that what's in it for clients. It's not clear what's in it for clients. Whereas when we've done acquisitions like Aperio [indiscernible] direct indexing or eFront, we know what's in it for clients. It allows clients to grow faster. So as we think about transformational, transformational for us, I think, really means 2 things. And the first of them is transformational in capabilities and our abilities to serve the whole portfolio, and in our ability to deliver something to clients that we weren't able to deliver before or deliver it in a more scaled way. The second thing is transformational in terms of financial impact. meaning earnings acceleration and earnings growth or earnings diversification. When we can get an acquisition to do both, we think it's really great. But for us, we think about the acquisitions across those 2 dimensions, transformational in terms of capabilities and long-term growth and transformational in terms of earning acceleration, diversification and the like. So if we can find things that are out on the top right, in terms of earnings growth and transformative capabilities, that's a sweet spot for us. We see those opportunities in private markets where we think we are growing really well organically, have an ambition to double the revenues on the assets that we have today. But we think that inorganically in infrastructure, private credit, and potentially some other parts of private markets are attractive, technology, expanding the total addressable market in which our Aladdin business operates, we think would be an attractive but also regional plays. We did a joint venture in India recently, which is a way of expanding into new markets as well. So we're really looking at all those options. And if anything, I think we've been a good acquirer. It's an important part of our story. And obviously, Larry is energized by it as is the whole team.

Yes. Well, we're looking forward to seeing what that might or may not end up being. So I appreciate you being here.

Terrific. Thanks.

Thank you, Martin.