BlackRock Expands Private Markets?

Robin Wigglesworth of the Financial Times reports, BlackRock to expand its private investment activities:

BlackRock plans to ramp up its private investment activities, concerned that the US stock market is being shrunk by the surge in buybacks and a dearth of new listings but also enticed by the growing opportunities in the private debt market.

Mark Wiseman, global head of active equities at BlackRock and chairman of the asset manager’s “alternative” investing business — such as private equity, real estate and hedge funds — told the Financial Times that expanding its private investment capabilities had become an “increasingly big priority” for the $6tn investment group.

“I think it’s one of the most exciting things happening in BlackRock today,” Mr Wiseman said. “I think that most investors are heading in that direction. In part they’re heading in that direction . . . [because] the liquid public markets are shrinking.”

“Private markets” is a broad term for any asset that does not trade on an exchange, such as direct loans or unlisted shares. JPMorgan analysts estimate that pension fund allocations to traditional equity investments have shrunk by about 10 per cent over the past two decades, but allocations to private markets have increased by roughly 20 per cent over the same period.

Interest has been particularly strong in recent years, driven by a profound shift. While the value of the US stock market — as measured by the S&P Total Market Index — has roughly doubled over the past decade to $31.6tn, this is primarily because of rising prices rather than an expanding universe of listed companies.

Initial public offerings have sharply slowed since the dotcom boom and US corporations have instead emerged as the single biggest buyers of their own stock, both through mergers and acquisitions and huge share repurchase programmes.

This year’s corporate tax cut has further stirred the buyback frenzy. Bernstein analysts estimate that US companies are on track to repurchase $1.2tn of their own shares this year. That would lift the total since 2010 to more than $5tn — bigger than the Federal Reserve’s entire post-crisis quantitative easing programme.

BlackRock earlier this year announced it would raise up to $10bn for a new “long-term private capital” vehicle, and bought Tennenbaum Capital Partners, a $9bn investment group, to bulk up its private debt investments. Together with infrastructure and real estate, these four areas will be the main “pillars of growth” for BlackRock, said Mr Wiseman.

The Tennenbaum acquisition increased BlackRock’s “illiquid alternative” assets by $9bn to about $76bn, and Mr Wiseman indicated that this was just the start of a broader private market push by the BlackRock Alternative Investors unit led by David Blumer.

“There’s a lot of capital looking for risk and they’re not finding that risk in the public markets so they’re moving into private asset classes,” Mr Wiseman said. “There are huge opportunities.”

While valuations in private markets were “toppy” across the board, that did not mean this was a passing fad, argued Mr Wiseman.

“It’s like saying the public markets are overpriced right now; it doesn’t mean abandon public markets as part of the source of return. You just have to be that much more careful in terms of the positions that you take,” he said.

Very interesting article. You should also read an FT interview with Mark Wiseman on the need to evolve, it is excellent.

Mark Wiseman, the former president and CEO of CPPIB is right, you can't abandon public or private markets because they're overvalued but you need to be more careful in terms of the positions you take.

This is particularly true for private markets which are illiquid and very hard to hedge properly using derivatives which you can do to a certain extent in public markets.

But let me be clear on one thing here, both public and private markets are way overvalued, there is simply too much money chasing too few deals.

Still, there are opportunities, especially in private markets which by definition are less efficient and less well-covered, but asset managers need to work a lot harder finding great deals that make sense over the long run.

As far as BlackRock, it has been beefing up its private markets team all year and even recruited PSP's former CEO, André Bourbonnais.

The reason? Private markets are hot, that's where pensions and other institutional investors are focusing their attention. More importantly, the fees are a lot juicier than public markets where BlackRock has to compete with Fidelity, Vanguard and others for active and passive business.

But there is a lot of competition in private markets too and BlackRock needs to recruit talent and be competitive to win over mandates from large investors like CalPERS which is gearing up to go direct.

This is Mark Wiseman's job, to bring BlackRock's active equities team up to par with competitors across public and private markets. He already cleaned up public markets and is now focusing all his attention on ramping up private markets.

Below, a clip from last summer where Mark Wiseman explained how his company is using technology to augment money management for clients. Smart man who has a big job at BlackRock.