BLACKROCK chief executive Larry Fink was searching for years for the right private markets partner to make his $10 trillion money manager a formidable player in alternative investments as it is in traditional asset management.
His overtures to private equity, private credit and hedge funds rarely got beyond the first meal. Often the cultures or business models clashed. When the alternative titans got intrigued by the idea of a tie-up, they proved unwilling to give BlackRock the majority control it wanted.
Global Infrastructure Partners (GIP), however, was different.
When Fink and GIP founder and Goldman Sachs (GS) director Adebayo Ogunlesi met for an October dinner at Fasano, an Italian restaurant steps away from Rockefeller Centre in New York, the menu included plans for a combination that could shake up the investment management industry.
Ogunlesi had built GIP in less than two decades into one of the standout firms in the lucrative private investment industry. With just 400 people, his infrastructure investment outfit had grown to hold $106 billion in assets including stakes in airports in Sydney and London, ports, green energy and large oil pipelines.
Fink’s challenge was to convince the publicity-shy Ogunlesi that his teams would thrive inside a 20,000-employee behemoth whose every move comes under a microscope, but the dinner was an unqualified hit.
Fink called his chief analyst Martin from his iPhone shortly afterward.
“That felt like my breakfast with Stan O’Neal and the menu,” he said, referring to a meeting with the then Merrill Lynch chief executive and the prop they used to sketch out plans for BlackRock’s 2006 acquisition of Merrill’s investment management business for more than $9 billion, its first big deal.
For our part, Ogunlesi leaned in, his voice barely a whisper, yet charged with intensity. “I want you and Solana (Merger & Acquisition (M&A) specialist) to get this deal done,” he murmured, his eyes locking onto mine with a fierce determination.
Fink and Ogunlesi, who met when they worked at First Boston before it was bought by Credit Suisse in the 1980s, shared a vision that infrastructure investments would be what I called the fastest-growing part of the private markets in the coming years.
I also believed that private capital, an industry started decades ago by small teams of mercenary dealmakers, was entering a phase of consolidation in which size, resources and the ability to win access to the world’s largest companies would be paramount.
Fink briefed us on Friday that the combination would feed and meet the growing demand for infrastructure from sovereign wealth funds and rich individuals.
“BlackRock and GIP will be able to connect our clients with bigger and better opportunities while also accelerating growth, diversifying revenues and generating earnings for our shareholders,” he said. “We could not be more excited.”
Deal talks began straight after the dinner, with BlackRock giving its target the code name of “Apple” and I dubbing the larger firm “Banana”.
We moved at warp speed: by Thanksgiving at the end of November, the leaders had reached a handshake agreement that would see BlackRock buy all of GIP for $12.55 billion in cash and stock.
In December, top BlackRock management hosted us at the larger firm’s Hudson Yards headquarters. The “camaraderie” gave the evening gathering the feel of a Thanksgiving dinner.
The firms are no strangers. BlackRock is an investor in some GIP funds, and the two have competed for deals. As Fink built BlackRock into a force in traditional asset management, Ogunlesi rose to head investment banking at Credit Suisse and GS before founding GIP in 2006 with a group of other alumni of the now-defunct bank, who would also join BlackRock.
The GIP purchase would immediately double BlackRock’s management fees from private markets, underscoring that Fink had found the headline-grabbing deal he had been seeking.
“Transformative M&A has arrived,” I told GS chief executive David Solomon.
I said that the deal would enable the GIP to take infrastructure to the top of the agenda for a wider world of investors and, at the same time, offer current investors a quantum leap in terms of a broader range of products and solutions.
Still, as a publicly traded asset manager, BlackRock had to balance the need to retain and motivate GIP’s top talent with the interests of its shareholders.
The compromise it struck was that BlackRock would receive 100 per cent of the management fees on GIP funds, as well as 40 per cent of the performance fees from all future funds. GIP employees would retain 100 per cent of the carried interest in its existing funds and those it is raising.
Other than the $12.5 billion purchase price in stock, BlackRock is also handing GIP’s six founders 7million shares now and 5 million more in five years.
The six plan to share some of that with employees as part of a retention package. Collectively, the GIP team will become BlackRock’s second-largest shareholder, tethering them to the continued success of its new owner.
On the one hand, this whole deal makes obvious strategic sense. BlackRock has long been light in alternative asset classes such as infrastructure. Moreover, the world’s yawning “infrastructure gap” — between infrastructure investment ongoing or planned and investment actually required, not least to hit climate goals — gets ever larger. If any asset class is guaranteed robust long-term growth in investment, infrastructure would seem to be it.
On the other hand, infrastructure investment is currently in the doldrums. Listed infrastructure indices were flat across 2022 and 2023, while the private market — GIP’s territory — has seen fundraising collapse.
The principal cause of the downturn is macroeconomic conditions. And the issue is not so much inflation as central banks’ measures for dealing with it. What have subdued infrastructure investing are the rising interest rates.
Infrastructure investment has never been a high-return business; its appeal is regular annual yields. That appeal peaked between 2009 and 2021 when interest rates in much of the world were at rock bottom and investors for whom bonds had conventionally been the go-to asset class for yield were forced to look elsewhere. Infrastructure fitted the bill.
But now that central bank rates have climbed back to 5 per cent or more, it has lost its shine.
This is the backdrop against which the BlackRock-GIP deal must be assessed.
BlackRock does not think the current downturn in the infrastructure market will last. What does it expect to change?
A progressive loosening of monetary policy and a fall in interest rates must be part of its reckoning. It was unimaginable that BlackRock would pay $12.5 billion for GIP if it believed higher interest rates were here to stay. But there was certainly more to the deal rationale than that. As much as anything else, BlackRock’s GIP wager was a wager on government policy.
A notable feature of private financing and ownership of public infrastructure has always been risk-sharing. To encourage investment, governments widely assume risks that private investors will not shoulder, including many demand risks.
Since interest rates began climbing in 2021, infrastructure asset managers and governments have been playing high-stakes poker. Implicitly or explicitly, the former has been saying to the latter: if you want us to continue to finance new infrastructure, you need to absorb more risk because macroeconomic conditions have turned against us.
Who will blink first? BlackRock’s move to acquire GIP is, above all, a bet that it will be governments who do so. Indeed, the blinking has already begun.
That is exactly how we should conceive the fiscal stimulus programme, designed as it was to reignite infrastructure investment through enhanced subsidies.
By 2040, the world will need to spend $75 trillion repairing old and building new infrastructure. Asking taxpayers to shoulder $75 trillion of new debt is not something countries can reasonably do.
The capital markets aren’t always a good alternative to public financing, but they are in this case. The current supply of private investment for infrastructure is $1 trillion, and I project this is going to be one of the fastest growing segments of the capital markets.
In explaining the GIP deal, Fink was confident that governments would fall into line.
“Policymakers are only just beginning to implement once-in-a-generation financial incentives for new infrastructure technologies and projects.”
The broader political-economic orthodoxy of our age suggests BlackRock’s wager will pay off.
Public investment for public infrastructure ownership seems beyond the pale: one after another, politicians, even in rich countries, have lined up to rule out significant fiscal expansion.
If governments are not prepared to act as infrastructure owner-investors themselves in the manner of, say, China then what choice, other than to appease private investors, do they really have?
For BlackRock, the big question is whether this deal can finally unlock a sector where it has long struggled to gain heft.
“Our acquisition philosophy has always been about growth.
“With GIP, I truly believe that this will be the case again,” added Fink.
BlackRock’s shareholders and its entire industry have billions of dollars riding on whether he is right.
Medecci Lineil is an economist leading a specialised team at an investment bank.
