In early and mid-1980s, Larry Fink was a young, up-and-coming mortgage trader at a conservative bank called First Boston in New York. He built the bank’s mortgage business from scratch and had his sights set on competing with bigger players in the mortgage space, like Salomon Brothers. His aggressive trading paid off, bringing in US$1 billion in business, turning him into a star at his firm.
Then, disaster struck. Fink loaded up on mortgages just as interest rates unexpectedly started to fall. That led to him losing an astronomical US$100 million in just one quarter.
He went from star to pariah.
Understandably, that loss led to deep introspection, and Fink recognized that he needed to get better at risk management.
A short time later, Fink and seven partners co-founded an asset-management company called Blackstone in 1988. Its main business was investing money from pension funds and other long-term asset holders in bonds.
His first employee built software that gave investors something they'd never had before: a clear, unified view of portfolio risk. Called Aladdin, the software filled a gap in the market and made Blackstone millions.
In 1995, a falling out between Fink and Stephen Schwarzman, Blackstone’s cofounder, led to the firm splitting off, and being renamed Blackrock. And fours year on, Blackrock managed US$165 billion and became a public company on the New York Stock Exchange.
A decade after, Blackrock pivoted. Fink recognized the growing clout of ETFs and how passive investing was democratising markets for the masses. And there was a forced seller, Barclays, which needed to raise capital due to the financial crisis and wanted to offload a business that included its iShares ETF business. So, at the start of 2010, Fink bought this unit for US$13.5 billion, which catapulted Blackrock into being the world’s largest asset manager.
It turned out to be perfect timing and the company has since ridden an extraordinary 15-year boom in passive investing.
Source: ETFGI
Fink certainly wasn’t the first person to realise the potential of ETFs, but he bought at the right time and built the business into a powerhouse. Blackrock now manages US$11.6 trillion, of which $2 trillion comes from iShares.
Now, however, Fink is pivoting again.
What’s he up to?
Over the past 14 months, Fink has moved aggressively into private assets.
In January last year, Blackrock agreed to acquire Global Infrastructure Partners (GIP) for US$12.6 billion. Later in 2024, it also snapped up private markets firm Preqin for US$3.2 billion. And last December, it bought HPS – a private debt manager with US$148 billion in funds under management.
In total, Fink has spent US$28 billion.
In his latest shareholder letter, he acknowledges that these purchases have fundamentally changed his company:
“…we’ve been—first and foremost—a traditional asset manager. That’s who we were at the start of 2024. But it’s not who we are anymore.”
The strategy
The question is: why is one of the smartest people in finance buying into private assets? In the letter, Fink says he sees another gap in the market, or three gaps to be more precise.
First, he thinks we’re on the cusp of an explosion in infrastructure investment. He cites data that new infrastructure investment of US$68 trillion is need globally by 2040. Hence, why he purchased GIP, which already manages large infrastructure assets such as Gatwick Airport in the UK.
Source: Blackrock’s Larry Fink
Second, private asset managers can help finance the infrastructure needs. Funding for infrastructure projects has traditionally come from Governments, banks, and public markets. Yet, most developed market countries are running large budget deficits and can’t afford to fund these projects. Meanwhile, banks are stepping back from funding such projects as regulators tighten lending standards. And lastly, public markets are shrinking which means listed companies are less likely to provide capital for infrastructure investments. Private asset managers can fill the breach.
Third, Fink thinks that as ETFs have done with indices, Blackrock can index private markets to make them accessible to the average investor. To do this, he wants to make Preqin the Bloomberg of private markets, providing performance data on managers and offering comparable valuations for private assets.
Barbell strategy
Consultant Huw van Steenis believes Fink is employing a so-called barbell strategy. On the one hand, he’s still riding the passive investment wave, with its growing assets and low fees. On the other hand, he wants a piece of the faster growing and more lucrative private assets business.
To put the later into context, alternative investments now make up 4% of Blackrock’s total assets but are expected to account for more than 25% of its profits.
If passive investments are one side of the barbell, and private/alternative assets are on the other side, what’s in the middle then?
According to van Steenis, it’s traditional fund managers, who are stuck between the low fees offered by ETFs, and the higher fee, but potentially better performing alternative asset managers such as hedge funds, private debt funds etc.
From 60/40 to 50/30/20
As markets evolve, Fink says the traditional investor portfolio of 60% equities and 40% bonds may not be fit for purpose. That is, it may not bring the diversification that investors need.
He envisions a future where a standard portfolio may look more like 50/30/20 - stocks, bonds, and private assets like real estate, infrastructure, and private credit.
While private assets may carry greater risk, Fink says they also provide great benefits. For instance, infrastructure can offer inflation protection, more stable performance, and help boost overall portfolio returns.
Source: Blackrock’s Larry Fink
My take
Will Fink’s latest moves pay off?
I think Fink is spreading his bets in private assets and not all of them will bear fruit.
In infrastructure, there are already large, reputable players, like Brookfield Asset Management. Fink will have to fight competition from these players to gain scale in this business.
That said, infrastructure is likely to be a growth area and I can see it playing a large part in investor portfolios, possibly at the expense of bonds, which remain on the nose with investors after a four year bear market.
Like infrastructure, private debt already has big operators, such as KKR, Apollo, and many others. These firms have been in the business for years and have scale. However, private debt is growing fast enough to potentially include newer entrants such as Blackrock.
The area with the greatest potential is in indexing private assets. If investors can view data on private asset managers and their underlying portfolios as they do with LICs and active ETFs now, that would be revolutionary. As would investors being able to invest easily in a much broader range of private assets and managers.
James Gruber is Editor at Firstlinks.