Q4 2023 Earnings Summary
- BlackRock demonstrated strong momentum in organic base fee growth, generating an annualized 6% organic base fee growth rate in November and December 2023, suggesting a return towards their 5% through-cycle target, supported by significant growth in European ETFs where European iShares captured almost 50% flow market share in an industry up 70% year-over-year.
- The acquisition of GIP is expected to be transformational, tripling BlackRock's infrastructure assets to $150 billion, nearly doubling private markets management fees to over $1.5 billion, adding over $400 million in post-tax annual fee-related earnings with margins above 50%, and is expected to be accretive to EPS and operating margin in the first full year post-close, supporting long-term organic growth ambitions.
- BlackRock is well-positioned to capture flows from the $7 trillion in money market accounts, with significant potential for growth in fixed income and infrastructure investments. The firm plans to democratize infrastructure investments for retail investors, opening new areas of growth in perfect retirement products with long duration, good yield, and equity upside.
- BlackRock's organic base fee growth in 2023 was only 1%, significantly below their long-term target of 5%, marking the second consecutive year of underperformance in this metric.
- The acquisition of GIP is expected to be only "modestly accretive" to earnings per share and operating margin in the first full year post-close, with significant contributions from performance fees not expected in the near term.
- BlackRock's growth projections rely heavily on clients re-risking portfolios and moving assets from cash into risk assets in 2024; if this shift does not occur as anticipated, the company's growth may be limited.
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Strategic Rationale for GIP Acquisition
Q: Why acquire GIP, and how will it accelerate growth?
A: Laurence Fink explains that acquiring GIP is driven by a bright investment horizon for infrastructure. Governments need private capital due to deficits, leading to enormous demand in energy independence, decarbonization, and upgrading infrastructure. Infrastructure assets provide long-duration, high-coupon, inflation-protected returns favored by retirement funds and wealth management. Bayo Ogunlesi adds that combining with BlackRock accelerates what GIP does, offering clients a complete array of solutions. They've taken 75% of the consideration in BlackRock stock, showing confidence in its value. Clients have responded positively to the transaction. -
GIP Deal as Transformational
Q: Is the GIP acquisition transformational for BlackRock?
A: Martin Small affirms the acquisition is unquestionably transformational, both in capabilities and financial impact. It's transformational in what BlackRock can offer clients and in earnings impact. GIP has strong performance and FRE growth. Laurence Fink adds that past transformational deals like BGI, initially met with skepticism, proved highly successful, citing iShares growth from under $300 billion to over $3.5 trillion. He believes infrastructure is at the beginning of a great need for capital, and this positions BlackRock to capitalize on that. -
GIP Transaction Economics and Performance Fees
Q: How do performance fees work in the GIP transaction?
A: Martin Small explains they expect the transaction to be modestly accretive to EPS and operating margin in the first full year post-close, adding pro forma $400 million plus of post-tax margin accretive fee-related earnings (FRE). They are acquiring 100% of GIP's assets and business, so all future management base fees are included. GIP owners and employees keep 100% of carried interest for existing funds; future funds' carry splits 60% to GIP teams and 40% to BlackRock. Performance fees from future funds are expected in later years. Fee rates are comparable to BlackRock's illiquid alternatives, think north of 100 basis points. -
Infrastructure Fundraising and Retail Access
Q: What's the outlook for infrastructure fundraising and retail access?
A: Martin Small notes clients are increasing allocations to illiquid alternatives, with BlackRock's alternatives assets totaling $330 billion, and private markets illiquid alternatives reaching $166 billion. Since 2021, they've raised approximately $96 billion in gross capital. They expect infrastructure and credit private equity solutions to drive growth over the next 3-5 years. Laurence Fink mentions GIP is in the final stages of raising a very large fund. Rob Kapito adds they're working to democratize infrastructure investments for individual investors, as it's a perfect retirement product offering long duration and good yield with equity upside. -
Fixed Income Flows and Growth Outlook
Q: What's the outlook for organic growth and fixed income flows?
A: Martin Small states BlackRock delivered $289 billion in net inflows in 2023 and maintains conviction in their 5% base fee growth target over the long term. They saw strong momentum in November and December, with an annualized 6% organic base fee growth. The GIP acquisition and opportunities in illiquid alternatives will bolster growth. Rob Kapito mentions there's $7 trillion in money market accounts waiting to move, and they expect significant fixed income flows as rates stabilize, with money shifting from money markets, direct securities, and bank deposits into products like ETFs and model portfolios. -
Integration Plans for GIP Acquisition
Q: What are the integration plans for GIP?
A: Martin Small explains BlackRock has a strong track record of successful integrations, and this transaction is expected to be another success. GIP shares similar client focus and values, and the transaction is structured to reduce strain on teams. Integration is less complex due to highly complementary platforms with limited overlap. Laurence Fink adds he and Bayo will be meeting clients to communicate the merits of the combination. -
Money Market Flows and Rate Cycles
Q: Why believe money funds will rotate into risk assets now?
A: Robert Kapito says once the rate cycle stops, people start to re-risk investments. They saw about $40 billion come out of money market funds as people re-risked, but market volatility caused stops and starts. Significant shifts are expected at the end of the rate cycle. When people re-risk, they move into higher fee investments where yield matters, benefiting BlackRock.