BlackRock Expands Mexico Infrastructure Investment Offering With Latest Acquisition

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Last week, BlackRock (NYSE:BLK) announced that it has inked a definitive agreement to acquire the Mexico-based independent infrastructure investment firm Infraestructura Institucional. [1] Notably, the move follows the asset management giant’s decision to partner with Petroleos Mexicanos (Pemex) on the development and financing of energy-related infrastructure projects in the Latin American nation earlier this month. [2] The fact that these two deals were signed in close succession indicates that BlackRock is pursuing an aggressive growth strategy in Mexico’s infrastructure investment industry. In this article, we highlight the reason behind this strategy, and also show how it is accretive to BlackRock’s long-term value.

We maintain a price estimate of $390 for BlackRock’s stock, which is about 10% ahead of the current market price.

See our full analysis for BlackRock

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While there is no doubt that the condition of the global debt and equity markets has improved considerably since the economic downturn of 2008, investment options have shrunk due to stagnant interest rates in the U.S. and the continuing slowdown in Europe. The situation has driven the demand for high-yield investment options among investors – something the world’s largest financial institutions have only been too happy to fulfill through their alternative investment offerings. Alternative investments focus on a gamut of non-traditional offerings like real estate, commodities, leveraged loans and even unlisted securities.

Asset managers have a lot to gain from alternative investment offerings because of their higher revenue potential in terms of fund expense ratios as well as performance-based fees. To put things in perspective, BlackRock earns operating fees which are roughly 0.65% of the total assets managed by its alternative investment funds (including infrastructure-related funds) in comparison to fees of under 0.2% for actively-managed fixed-income funds and a substantially lower 0.05% for passive fixed-income funds. More importantly, performance-related fees for alternative funds average 0.4% – more than 10-times higher than the 0.03% figure for actively-managed equity funds.

While this explains the push in alternative investment offerings by BlackRock over recent years, the company’s choice of Mexico is easily justified by the long-term growth opportunities that exist in the country’s infrastructure sector. As the country opens up its economy, its prospects look particularly good from its being a part of the NAFTA (North American Free Trade Agreement) with the U.S. and Canada. BlackRock currently has a 27-member team in its Mexico office managing around $25 billion in assets from around the globe. Also, the company’s global infrastructure investment platform has roughly $6 billion in assets under management. The recently announced acquisition of Infraestructura Institucional will add $1 billion in assets to both these figures.

We currently estimate that the size of assets managed by BlackRock’s alternative funds will increase by 5-6% annually over coming years, due to a combination of organic growth as well as targeted acquisitions. You can see how a faster growth in this figure can positively impact the company’s share value by making changes to the chart below.

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Notes:
  1. BlackRock to Acquire Infraestructura Institucional, BlackRock Press Releases, Jun 12 2015 []
  2. Pemex and BlackRock sign Memorandum of Understanding to Develop Energy Related Infrastructure in Mexico, BlackRock Press Releases, Jun 1 2015 []