Giant private asset manager BlackRock, Inc.’s (BLK) CEO, Mr. Larry Fink, made a modest prediction recently that the global economy might be on the brink of an “infrastructure revolution.” This forecast was made in the wake of BLK’s largest acquisition announcement in over 15 years.
With an initiative to invest in and own infrastructure, BLK is seeking to accelerate growth by announcing its plan to purchase Global Infrastructure Partners for $12.5 billion.
New York-based GIP owns and controls companies in sectors like energy, transport, water, and waste. If the acquisition goes ahead, it will be BLK's largest since it procured Barclays’s asset management business in 2009.
GIP, led by Adebayo Ogunlesi, is considered the third-largest infrastructure investor worldwide, falling behind Macquarie in Australia and Brookfield in Canada. Its assets are quite diverse, ranging from Gatwick Airport to Melbourne’s Port.
The cash and stock transaction between these two investment manager titans is slated for completion in this year’s third quarter, pending federal antitrust approval in the U.S.
This assertive acquisition represents a significant strategic push by BLK into the alternative investment sector, further securing its position as a dominant player in global finance.
Most of GIP's ownership resides with its six founding partners, five of which, including Bayo Ogunlesi (the CEO), will be joining BLK. Consequently, Ogunlesi will be tasked with leading BLK’s forthcoming infrastructure group while also becoming a board member and resigning from his position as the key director at Goldman Sachs.
BLK is strategizing to develop its private market operations, which suggests faster growth and higher possible returns when compared to its core business of trading down-priced passive investment products like exchange-traded funds. This deal will likely augment BLK’s private assets by roughly 30% and double the baseline management fees for its private markets.
With GIP, BLK is purchasing an infrastructure fund manager that manages around $100 billion, with a combined revenue of $80 billion from its portfolio companies.
After finalizing this acquisition, BLK aims to establish a separate Global Infrastructure Partners entity that melds the newly acquired firm with current BLK infrastructure teams.
The newly formed entity is projected to rank as the second-largest private infrastructure manager on a global scale, boasting over $150 billion worth of assets under its management – Brookfield Asset Management being the only firm outpacing this figure.
With government deficits on the rise, the demand for private financing for large-scale infrastructure projects has grown, and attractive investment subsidies may be key to meeting this need.
BLK's CFO, Martin Small, expressed that BLK's preference for acquiring GIP over opting for a traditional private equity buyout firm stems partially from the perception that the era of peak returns from private equity, facilitated by zero interest rates, might be on the decline.
BLK holds investments in several GIP funds, and there has been considerable competition for deals between the two entities. As Larry Fink propelled BLK to prominence in the field of traditional asset management, Adebayo Ogunlesi rose to head Credit Suisse's investment banking and fostered GIP in 2006 with his pool of fellow alumni from the now-defunct bank, who will also join BLK.
Acquiring GIP will promptly double BLK's management fees from private markets, highlighting that Fink appears to have found the prominent deal he has been seeking.
Nevertheless, BLK, as a publicly traded asset manager, faces the necessity to delicately balance the retention and motivation of GIP's top talent with the interests of its shareholders.
As part of striking a balance, it was decided that BLK would receive all the management fees on GIP funds in addition to 40% of the performance fees accruing from all future funds. GIP employees would retain all the carried interest in its existing funds and those slated for future raising.
To acquire GIP, BLK agreed to an amount of $3 billion in cash and 12 million of its shares, approximately equating to around $9.5 billion.
GIP is predominantly owned by its six founding partners, who will collectively ascend to become some of BLK's most significant shareholders, possessing about 8% of its outstanding shares.
BLK intends to distribute 7 million shares to the six GIP founders immediately and will add 5 million more in five years. A portion of this equity will be allocated to employees as a part of a retention strategy. As a result, the collective GIP team will ascend as the second-largest shareholder in BLK, binding them to the ongoing fortunes of their new proprietor.
But why is BLK pouring billions on infrastructure?
The evolution of the intervention of private investors in infrastructure began during the 1990s and early 2000s. Western governments burdened with mounting debts sought private investors to purchase and overhaul outdated infrastructure, from airports to water pipelines. Subsequently, numerous companies across industries, from energy providers to telecom operators, started selling assets such as pipelines and cell towers to these investors.
Presently, the demand for infrastructure investment is escalating, fueled by three significant trends:
- Decarbonization: In order to achieve global climate objectives, approximately $8 trillion is required to be spent on developing renewable energy infrastructure, storage batteries and transmission lines within this decade. Significant investments are also needed in hydrogen facilities to manufacture carbon-free fuel for aviation and maritime transport and in carbon capture technology.
- Digitization: While the software is increasingly dominating the world, it relies heavily on tangible assets, including fiber-optic cables, 5G networks, and data centers.
- Deglobalization: A shift in supply chains away from China has spurred demand for capital-intensive factories and new transport infrastructure to facilitate overland and sea freight movement. This trend has been further galvanized by increased calls for energy security in Europe following Russia's incursion into Ukraine, stimulating the construction of liquefied natural gas terminals to import fuel from less aggressive nations.
This skyrocketing demand for investment coincides with an era where government and corporate balance sheets are under significant stress. America's federal debt, nearing $34 trillion, is projected to continue snowballing throughout the following years. Additionally, several European governments face daunting debt burdens.
Rising interest rates have made these liabilities more burdensome to service and pose challenges to corporations that have capitalized on inexpensive debt to boost shareholder yields. Consequently, their capacity to finance substantial investments will be curtailed in the ensuing years. As a result, infrastructure investors are set to bridge this gap, having expressed their readiness and willingness to invest heavily.
Private equity groups anticipate growing their footprints in sectors like debt or infrastructure investment – sectors that are expected to profit from higher interest rates – either by incorporating public shareholders or merging with larger organizations. This approach extends beyond merely corporate buyouts, an area experiencing deceleration due to soaring financing costs.
The swift surge in interest rates has instilled caution among many investors, tempering commitment to fresh funds and stunting the utilization of existing ones. These prevailing circumstances present compelling reasons for independent firms to contemplate seeking out more substantial partners.
Fund managers hoping to benefit from the predicted influx of wealth from affluent individuals into private markets must heavily invest in novel products and distribution networks. Additionally, significant financial input into technology is essential to adapt to the advances in artificial intelligence.
The acquisition potentially furnishes BLK with a strategy to broaden its investment portfolio, thereby decreasing its vulnerability to market volatility. This is mainly due to the generally lower correlation that infrastructure investments bear with divergent asset classes and their reduced sensitivity to economic fluctuations.
Moreover, availing BLK of a comprehensive array of infrastructure assets could confer it with significant advantages. These mostly stem from those assets' capacity for long-term growth potential coupled with steady cash flows.
Following the acquisition, BLK is poised to emerge as a global leader, offering eminent infrastructure capabilities to its clientele. Clients who are persistently scouting for assets to counterbalance their extensive liabilities and diversify their portfolios may find solace in BLK's offerings.
Especially factoring in the prevailing economic conditions, this acquisition could prove to be a significant milestone for BLK. It would empower the company to effectively utilize its combined platform to capture a larger slice of the market share, churn superior returns, and seamlessly address the growing challenges and demands of its clients amidst the swiftly transforming infrastructure landscape.
Bottom Line
Throughout 2023 and well into 2024, two key trends have emerged within the financial sector: the escalating importance of private capital for infrastructure projects and the growing appeal of infrastructure assets amid economic uncertainty.
The recent landmark deal acts as a quintessential example of the consolidation trend that industry insiders have been forecasting. BLK has strategically secured a robust position in a market valued at $1 trillion today. Moreover, infrastructure is projected to be one of the most rapidly expanding segments of private markets in the foreseeable future.
While some caution against possible cultural discrepancies and potential conflicts of interest, the early market response to the deal appears stable. Shares of BLK surged by 1.3% immediately after the announcement.
Mr. Fink maintains his belief that the driving force behind their acquisition strategy has always been growth. With the acquisition of GIP, he firmly believes a similar scenario will likely play out. The efficacy of Mr. Fink’s belief is pertinent not just for BLK's shareholders but also for the entire industry that has billions invested in this premise.
The main query for BLK is whether this deal will finally serve as the key to unlocking a sector where it has previously found it challenging to gain substantial traction.
Besides the acquisition, there are numerous factors investors should consider during their assessment of the company. However, it might be prudent for them to wait and assess how this deal plays out.
Therefore, keeping BLK on the watchlist might be prudent at this juncture.
