Why BlackRock Is Bulking Up Its Private Markets Business

BlackRock’s stock (NYSE: BLK) has gained roughly 32% year-to-date, as compared to the 28% rise in the S&P500 index over the same period. In comparison, BlackRock’s peer State Street’s stock (NYSE: STT) is up 31% year-to-date.  

The performance of BlackRock stock over the last few years has been mixed.  Returns for the stock were 29% in 2021, -20% in 2022, and 18% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, what’s happening with BlackRock stock, and what lies ahead?

Blackrock’s Q3 results were better than expected. While revenue stood at $5.2 billion, up 15% compared to last year, net income came in at $1.63 billion up 1.7% year-over-year. Growth was mainly driven by the positive impact of the markets, organic base fee growth, as well as higher performance fees. The company’s average assets under management (AUM) increased by $2.4 trillion year-over-year to $11.5 trillion driven by $456 billion in net inflows as well as higher asset valuations. The company’s margins have also been picking up. Operating margins rose 350 basis points to 45.8%. Margins growth is being driven by a couple of factors. BlackRock is seeing a higher mix of higher-margin, higher-fee products including alternative investments which have higher fees. Moreover, flows toward exchange-traded funds have also been rising. While fees on these products are low, they are highly scalable, meaning that as AUMs grow, BlackRock’s incremental costs grow at a slower pace.

BlackRock has also been steadily pushing into the private markets this year. In January, the company announced a deal to acquire Global Infrastructure Partners for about $12.5 billion, followed by a June announcement to buy Preqin, a leading private-markets data provider, for $3.2 billion. Earlier this month, it announced plans to acquire HPS Investment Partners, a private credit manager, in an all-stock deal valued at about $12 billion. This deal is expected to add approximately $850 million in base fees for 2025. The push into private markets is crucial for BlackRock, as the ETF space it dominates has become increasingly competitive with limited scope to increase fees.

On the other hand, in the private assets space, the company can charge higher fees to clients, who are institutional investors and wealthy individuals. This move also helps BlackRock diversify and reduce its exposure to the volatility of public equity markets. Moreover, BlackRock’s existing clients including pension funds, endowments, and sovereign wealth funds are increasingly allocating capital to private markets to meet their long-term return expectations. We estimate BlackRock’s valuation at about $913 per share, slightly below the current market price. See our analysis of BlackRock’s valuation for a closer look at what’s driving the stock.

[1] Returns as of 12/9/2024
[2] Cumulative total returns since the end of 2016

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