BlackRock Looks To Boost Returns With Another Addition To Alternative Investment Portfolio

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Earlier this week, BlackRock’s (NYSE:BLK) real estate arm added eight garden centers in the U.K. to its portfolio – making this the latest move by the world’s largest asset manager to expand its alternative investment offerings. [1] BlackRock Real Estate acquired the garden centers from LaSalle Investment Management for £112.5 million ($171 million) as a part of its strategy to grow aggressively in the real estate and infrastructure investment space

Over recent years, BlackRock has diversified its alternative real estate portfolio in a bid to cash in on the steadily improving prices of alternative properties. In the short run, these investments will help boost BlackRock’s returns in this low interest rate environment. At the same time, the company’s alternative investment arm should also unlock sizable long-term value as a result of this strategy.

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We maintain a price estimate of $385 for BlackRock’s stock, which is around 25% ahead of the current market price. A bulk of this difference can be attributed to the substantial sell-off in shares across sectors over recent weeks on the back of weak global economic indicators.

See our full analysis for BlackRock

The alternative investment business is an important part of BlackRock’s business model – contributing roughly 9% of its total value. The business includes core alternative investments as well as investments in currencies and commodities. While BlackRock has significantly reduced its exposure to currencies and commodities over recent years, the increasing importance of core alternatives in its asset base becomes clear from the fact the size of these assets swelled from $68 billion at the end of 2012 to just under $90 billion in Q2 2015.

There are two important reasons for this trend. Firstly, the demand for alternative investment options that yield higher returns has increased substantially over the last few years given the impact of record low interest rates prevalent around the globe. And asset managers have been more than happy to fulfill this demand given the much higher revenue potential in alternative fund offerings 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, 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.

The higher revenue potential has driven a push in alternative investment offerings by BlackRock over recent years. In addition to launching several exchange-traded funds (ETFs) focused on real estate as well as other alternative investment strategies, the company has been focused in particular on long-term infrastructure investments in Mexico (see BlackRock Expands Mexico Infrastructure Investment Offering With Latest Acquisition). This year, BlackRock acquired a 50% stake in a wind energy project in Texas, and also forayed into the rental-home financing industry through several lending partners. [2]

The recent acquisition of garden centers in the U.K. is a part of BlackRock’s push in alternative properties, which also includes investments in doctor’s offices, student housing, parking garages, cinemas and gas stations. While the market for these properties is much smaller than that for traditional commercial properties, strong gains in their valuations makes them a profitable investment proposition.

We currently estimate that the size of assets managed by BlackRock’s alternative investment offerings 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 Buys U.K. Garden Centers in Hunt for Yield, The Wall Street Journal, Sep 7 2015 []
  2. BlackRock Announces Infrastructure Partnership with EDF Renewable Energy and Purchase of 50% interest in 200MW Hereford Wind Project, Texas., BlackRock Press Releases, Feb 19 2015 []