BlackRock Beefs Up its PE Group?

Trevor Hunnicutt of Reuters reports, BlackRock hires private equity specialists from Goldman Sachs:

BlackRock Inc said on Monday it is hiring two specialists from Goldman Sachs Group Inc to bolster its private equity business in New York, according to a staff memo.

Steve Lessar and Konnin Tam will join the world’s largest asset management company from Goldman Sachs this summer, according to the document, which was seen by Reuters.

Each will be responsible for expanding BlackRock’s role within a business that effectively enables investors in private companies and funds that invest in such firms to resell their stakes to other institutions. Normally, that money is locked up for years.

This market for “secondary” private capital saw a record $58 billion in transaction activity in 2017, according to investment bank Greenhill & Co Inc, with money chasing better returns than exist within public markets.

“Our plan is to place Steve and Konnin at the core of a team that will expand our existing offerings and make BAI the leader in this business,” said the memo, using the acronym for BlackRock Alternative Investors, a group that oversees largely private investments ranging from real estate to hedge funds.

BlackRock is known for more widely offered funds that invest in publicly traded stocks and bonds.

Yet Chief Executive Larry Fink has made it a priority to compete in private markets, too, against Goldman Sachs and other rivals better known for those sorts of investments, such as Blackstone Group LP. BlackRock was spun off from Blackstone more than two decades ago.

Fink told Wall Street analysts earlier this month that he expects so-called illiquid alternative investments, which include private equity and typically come with higher fees than its other funds, to “be one of the more significant” drivers for BlackRock’s business over the next few years.

Alternatives represent a fraction of BlackRock’s assets under management, growing at a slower rate than its other businesses, yet they account for outsized fee revenue.

Larry Fink is no fool, he knows where the big margins (highest fees) are in asset management and it's definitely not in stocks & bonds, BlackRock's traditional bread and butter business.

He first hired Mark Wiseman away from CPPIB to join his firm and recently hired André Bourbonnais from PSP to build this private markets team up.

Now he's hiring Steve Lessar and Konnin Tam, two stars at Goldman Sachs' Private Equity Group who specialize in secondaries.

You might be asking why secondaries? Let me explain. Go back to read my comment on whether CalPERS is outsourcing its private equity to BlackRock.

Early in January, John Gittelsohn and Melissa Mittelman of Bloomberg reported, Calpers Seeks Help Running Its $40 Billion Private Equity Portfolio:

The California Public Employees’ Retirement System, the largest U.S. pension fund, is formally soliciting a partner to help manage its $40 billion private equity portfolio.

The retirement system, which oversees more than $350 billion, sent requests for information in December to a group of asset managers seeking a “strategic partnership” for its private equity portfolio, according to a document released by Calpers. The partnership will work on opportunities for co-investments, funds, separate accounts and other vehicles.

“Calpers desires to create a collaborative partnership where the partner has investment discretion, but works with Calpers PE staff in the development of an annual allocation plan that Calpers will approve,” according to the solicitation request.

Possible partners include BlackRock Inc. and Neuberger Berman Group, among others, according to people familiar with the matter who asked to not be identified because the information is private. Spokesmen for both firms declined to comment.

Calpers plans to commit $7 billion to $10 billion a year in new capital to private equity, according to the solicitation. That follows comments by the system’s chief investment officer, Ted Eliopoulos, that he expects returns to decline amid expensive valuations and large pools of capital competing for deals. A record $453 billion was raised globally for private equity in 2017 and “dry powder,” or money awaiting commitment, exceeded $1 trillion at the end of December, Preqin Ltd. said in a report Thursday.

Joe DeAnda, a Calpers spokesman, declined to comment beyond an emailed statement saying, “This is part of our ongoing review of the private equity program, and we’ll spend a good part of 2018 continuing to explore strategic options.”

Calpers has been moving more of its investing capabilities, such as stock and bond management, in-house to reduce fees paid to outside firms. That’s harder to do with private equity because dealmaking expertise often commands compensation beyond what’s typically paid to internal managers at public pensions.

Under its current private equity program, Calpers has failed to meaningfully reduce fees or find co-investment opportunities to enhance its returns, according to a November report to the pension by consultant Meketa Investment Group.

The solicitation’s response deadline is Jan. 19. The Calpers investment committee will interview finalists in March and April with a decision on a partner to come later.

If I was betting on who CalPERS will hire to help them clean up their private equity portfolio, BlackRock would be the one I'd bet on.

And CalPERS isn't the only US public pension fund that needs help cleaning up its private equity portfolio, others will surely follow.

So, Steve Lessar and Konnin Tam are going to be very busy with secondaries in this massive portfolio and it makes sense to hire these two specialists away from Goldman Sachs.

What's the endgame for BlackRock? I already told you, Larry Fink doesn't just want to become the next Warren Buffett, he wants to dominate asset management across public and private markets.

There's a reason why BlackRock's founder and chief executive made $28m last year, up by nearly 10 per cent from 2016 and 195 times the median compensation at the world’s biggest asset manager, he's delivering great long-term results for his shareholders (click on image):

But as I told you on Friday, it's the end of good days for markets, so BlackRock needs to prepare for the storm ahead.

The storm I'm warning of will hit public and private markets but BlackRock needs to focus on expanding its operations in private markets because that's where big institutions are focusing their attention and that's where many US public pension funds need help.

You're going to read all sorts of good and bad comments on private equity but the truth is even the industry is bracing for a downturn (which is why I expect activity in secondaries to pick up).

So what is it? Is it the rise and rise of private equity or is it private equity laid bare? I suspect it's somewhere in the middle but one expert shared this with me:

Under conflicts, "Tunnelling" is an extremely serious allegation. He better have some facts to back that up.

IRR's are not meaningless to the investor experience. I would argue everyone should compute IRR for all asset class investment decisions. Right sizes returns for growing programs with higher dollars typically invested over time. Institutions quoting average annual returns while growing dramatically mislead how they are doing.

Fees and transparency is not the problem he makes it out to be. You sign the fee contract, so nothing prevents one from understanding what one is signing. When one understands why the fees are the way they are, the task is to determine if you are getting value for money. But the fee/terms alignment of interest is actually reasonable, or as much as can be to get both general and limited partners to want to be in the business. Those who have never been a general partner, which is most people require a lot of maturity to understand how hard it is to build these businesses to success for all.

PE has become large but is still small relative to global capital markets. It is targeted to sophisticated investors who are supposed to be able to look after themselves. If you dumb it down, you just put huge resources into protecting lazy people. ‎Let the public market take care of those that need it.

There is nothing fundamentally wrong with PE. It can be what its investors want it to be. If there are problems, the investors can fix them. My only issue is that fear mongering favours the goliath LBO focused firms that over resource for all these fears, but end up at way too large a scale. PE is best as a middle market focussed, craft type business, with a tilt to acquisitions and restructurings as the main skill set you are trying to advantage. I also believe growth capital with venture attributes remains under exploited. There are plenty of choices to do it the right way.

‎Trust me, having exposure to the underbelly of the public markets, the shenanigans that go on there‎, with the banks and investment banks, CEO's and the comp consultants, etc. makes the PE business look like an honour society.

He also added this on the rise and rise of private equity:

Being favourable on PE is like saying one is favourable on derivatives or public markets. It is all about execution, and we should all be glad we have so many execution choices. Most assets classes, however defined are not very favourable at the mean level of performance. Of course we all think we are better than average, that's why track record, if true and verifiable, is so valuable.

You need smart people who are able to verify the track record of GPs and make sure they're delivering what they promised to deliver and have proper alignment of interests.

That's what Larry Fink is doing at BlackRock, hiring smart people who can execute and gather assets from institutional investors who need help improving or ramping up their private equity portfolio (like sovereign wealth funds).

Below, BlackRock CEO Larry Fink recently told CNBC don't try to time this wild stock market. "We spend too much time talking about market timing," said Fink, co-founder of the world's largest money manager. "The key for investors is to stay in the market. ... You should be 100 percent in equities."

I respectfully disagree, think investors should be overweight US long bonds (TLT) here as I truly believe it's the end of good days for markets.

But unlike Larry Fink, I'm not in the asset gathering business which has made him a billionaire, I'm in the eat-what-you-kill business and if I don't kill anything, I starve to death.