BlackRock Looks To Europe Robo-Advising Market With Minority Stake In Scalable Capital

by Trefis Team
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BlackRock (NYSE:BLK) recently took its first step into Europe’s growing digital investment manager industry – commonly referred to as the robo-advisory industry – by acquiring a minority stake in Scalable Capital. BlackRock led the latest round of funding for the Munich- and London-based company to raise €30 million along with existing investors HV Holtzbrinck Ventures and Tengelmann Ventures. Scalable Capital is expected to use these funds to grow its presence in continental Europe by leveraging its strong presence in Germany and the U.K.

Notably, BlackRock’s stake in Scalable Capital comes almost two years after it acquired U.S.-based FutureAdvisor and is a logical next step for the world’s largest asset manager to tap into the low-cost robo-advisory business. Robo-advisory services have grown substantially over recent years, as the low-cost investment solutions they offer match the requirements of the price-conscious mass-affluent segment. Additionally, the move complements BlackRock’s push into low-cost ETF offerings over recent years and will grant the company access to a strong distribution channel to target retail investors.

BlackRock’s growth in the robo-advisory space will unlock considerable value in the long run. We are currently in the process of updating our $400 price estimate for BlackRock’s shares.

See our full analysis for BlackRock

With more than $5.4 trillion in assets under management, BlackRock is the leader in the global asset management industry. Over recent years, the single biggest source of growth for the asset management giant has been the popularity of exchange-traded funds (ETFs) – especially among retail investors. The retail investor market remains extremely under-served even today despite accounting for roughly 30% of all investable assets worldwide. As retail investors are much more sensitive to expense ratios, asset managers have been trying to attract them with a string of low-cost ETFs – something that has also triggered a price war among incumbents in the ETF industry. With the largest ETF providers – BlackRock (iShares), Vanguard and State Street (SPDRs) – now offering ETF products that are nearly identical in terms of investment philosophy as well as expense ratios, the focus over recent months has shifted to finding low-cost distribution channels for these products.

While traditional wealth managers remain the primary distribution channels for most investors, robo-advising is rapidly growing in popularity in the retail investment segment. The trend is easily explained given the fact that they provide a low-cost platform  – a critical criteria for retail investors, as we detailed above. BlackRock recognized this fact a couple of years ago, which led to its acquisition of FutureAdvisor in August 2015. FutureAdvisor currently operates as a part of BlackRock Solutions, and manages almost $1 billion in assets in the U.S. No doubt, the success of FutureAdvisor played a role in BlackRock’s decision to invest in Scalable Capital, as the company seeks to replicate its success in Europe too. We believe the move will be directly accretive to BlackRock’s distribution revenues over the coming years (shown in the chart below), while also indirectly boosting the size of assets managed by the company’s equity and fixed income iShares offerings.

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