In the fierce realm of asset management, standing out is no small feat. As we venture into the last stretch of 2023, BlackRock Inc. (BLK, Financial) is not just standing out; it is dominating with a towering $9.1 trillion under management.
This astonishing figure is a testament to the company's prowess and marks a robust year-over-year surge of a whopping $1.1 trillion.
With client trust echoing through a net inflow of $193 billion in just the first nine months, BlackRock showcases its unyielding allure and capacity for organic growth.
AUM growth and client flow
As of the third quarter, BlackRock has a colossal $9.1 trillion in assets under management for its clients. It represents a year-over-year increase of $1.1 trillion. Also, the company has shown a consistent ability to attract and retain clients' assets. In the first nine months of 2023, clients entrusted BlackRock with $193 billion in total net inflows, translating to 3% annualized organic asset growth. It represents the company's continued appeal to investors and its capacity to generate organic growth.
Fundamentally, market conditions and policy uncertainties can impact asset management flows. However, BlackRock has proven its resilience by remaining close to clients during these periods. It provides insights, advice and solutions, helping clients navigate the uncertainty and adapt their portfolios.
Based on its adaptability and client-centric approach, BlackRock may benefit from the long-term trend of clients consolidating their businesses with fewer asset managers. The company's client base is actively engaging, expecting this trend to accelerate. In this context, BlackRock is already leading the market with a decisive difference.
Source: Statista
Finally, BlackRock achieved impressive fund sales, with gross sales reaching 95% of average levels over the previous 12 months. Client momentum remains strong, excluding specific redemptions and outflows, indicating its ability to attract new assets and maintain existing client relationships. However, it is critical to note that $13 billion of redemptions from precision exchange-traded funds and $2.5 billion of outflows from retail liquid alternatives can weaken BlackRock's revenue and product mix if the trend continues or accelerates.
Source: Third-quarter 2023 earnings report supplement
Strategic focus on technology and private markets M&A
BlackRock's targeted approach to mergers and acquisitions in the technology and private markets enhances its competitive advantage and opens avenues for top-line growth.
For instance, BlackRock strategically acquired Kreos Capital, which added venture debt capabilities to its credit and private markets franchises. This acquisition strengthens the company's capabilities and diversifies its offerings, tapping into revenue pools in adjacent industries.
Also, it is important to note there was a decline in the private capital fundraising market in 2023. However, it is expected to regain momentum, which may benefit managers with adequate resources to capitalize on opportunities rapidly.
Source: FT.com
In the same context, the acquisition of eFront has been transformational for BlackRock. It has allowed the company to provide a unified investment management process and offer clients comprehensive technology solutions. This positions BlackRock uniquely in the asset management industry, as it can seamlessly connect various aspects of client investment processes.
BlackRock's integration of eFront has created a data platform covering 13,000 funds and over 150,000 assets, a significant portion of the private market fund universe. The integration solidifies industry expectations of transparency in private markets and enhances BlackRock's moat in the technology market.
Pioneering deals, deepening ties and powering investment excellence
BlackRock's extensive global presence and strong deal flow capabilities contribute significantly to its ability to deliver differentiated investment performance and drive revenue growth. Its worldwide network of relationships with corporations and governments is valuable. This extensive network helps the company source unique deals and investment opportunities. Fundamentally, establishing and maintaining strong relationships is a key advantage in the financial industry.
For instance, BlackRock's collaboration with the New Zealand government to launch a climate infrastructure strategy with over $1.2 billion in assets exemplifies its commitment to pioneering solutions. These initiatives demonstrate the company's ability to deliver the entirety of its platform to meet clients' evolving needs.
Also, BlackRock's success in scaling successor funds in private markets is evident. For example, it is on the 10th vintage of its flagship U.S. Private Lending Fund, showcasing its ability to raise larger funds through subsequent fund vintages. It reflects strong investment performance (35% net internal rate of return) and client demand.
Lastly, BlackRock's proprietary, differentiated deal flow is critical in driving long-term investment performance and outcomes for clients. The company's global reach, data and analytics capabilities and flexible capital enable it to source unique deals.
Source: BlackRock
BlackRock's market sensitivities and the challenges of fee compression
Looking at the downsides, BlackRock's flows and organic growth are influenced by market conditions. For example, the flows are impacted by "low fee redemptions" and it expects to see a pickup in fixed income flows once the Federal Reserve's rate increases are completed. It implies the company's growth is sensitive to market dynamics, so any prolonged adverse conditions (more hikes or longer than expected interest rate elevation) could hinder its value growth.
In detail, the 2% deterioration of the total quarterly annualized organic base fee indicates that BlackRock faces pressure to maintain fees, especially in areas like precision ETFs and retail liquid alternatives. It can be considered a fundamental weakness because fee compression can impact revenue growth, especially if the company is unable to offset it with growth in higher-fee products or other revenue streams. Looking forward to this trend, BlackRock may need more time to maintain a 5% base fee target in the short-to mid-term.
Finally, during the third quarter, there were significant institutional index equity redemptions, including $19 billion from one non-U.S. client. While it is noted that these redemptions have little impact (sub-3% of revenue), they do affect flows. BlackRock's dependence on institutional clients for large mandates could be a risk. For instance, BlackRock had a net inflow of $60 billion, offset by $50 billion of institutional index equity redemptions. While the net inflow figure seems positive, the outflow due to redemptions, especially from key institutional clients, can erode the company's overall growth potential and hinder value creation.
Source: Third-quarter 2023 earnings report supplement
Takeaway
Amidst the volatile asset management landscape, BlackRock's staggering $9.1 trillion in assets under management underscores its industry dominance and unwavering client trust. A relentless client-centric approach, a strategic embrace of technology and an expansive global network punctuate this growth narrative.
However, with this grandeur comes inherent challenges, from navigating market sensitivities to managing client redemptions. As BlackRock continues its ascent, its adeptness in balancing these dynamics will be pivotal in shaping its future legacy.
