Key Points
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BlackRock built a massive business around exchange-traded funds.
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The company’s current focus is to build out its private markets business, which could be a much more profitable opportunity.
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Dramatic growth in private markets could come if they are offered more broadly within retirement plans.
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BlackRock (NYSE: BLK) is one of the largest sponsors of exchange-traded funds (ETFs). ETFs make up around 40% of its business. There’s just one problem with that: ETFs generally have low expense ratios. ETFs are a reliable business, but other businesses are more profitable. One such business is private markets, where BlackRock is currently focusing its growth efforts. Here’s what you need to know.
BlackRock has a solid foundation
To be fair, given the size of BlackRock’s ETF business, it generates significant revenue from these generally low-cost products. Economies of scale are hugely important in the finance industry. The company’s ETF operation is a solid foundation for its other businesses. And, notably, it can even complement them. That’s actually an important fact to consider as BlackRock looks to expand its private markets operation.
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Private market investments are, basically, investments in non-public businesses. These investments take many forms, including debt, real estate, infrastructure assets, and private company investments. Investors hope that returns from private market investments will be higher than those available from public markets. For BlackRock, a manager of private-market investments, the appeal of the space lies in the higher fees it can generate from managing these investments.
Notably, BlackRock’s organic net fee growth rose 8% year over year, marking the seventh consecutive quarter above 5%. The 8% figure is also the highest for the first quarter in five years. A big part of the story has been the company’s push over the past several years to build out its private markets business.
BlackRock is ready for the next big opportunity
At this point, BlackRock is something of a one-stop shop, allowing customers to meet a plethora of investment needs with just one relationship. However, there’s an important aspect to this story that could allow the company to really hit the accelerator. At this point, private market investments aren’t generally available in retirement accounts, like a 401(k).
There are efforts underway to change that, which would open up a whole new playing field for BlackRock. It already has a place at the table, however, so it will just be expanding on existing relationships. That will likely even include increasingly adding private-market investments to ETF products. If you own BlackRock or are considering buying it, you will want to keep a close eye on the growth of its private markets business. It could even be more important to the company’s earnings than the sheer size of the assets it manages, given the higher fees private market investments generate.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends BlackRock. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
