GIP and Blackrock Flashcards
Industry BlackRock and GIP
BlackRock: Financial Advisors
GIP: Infrastructure fund manager industry
Industries by Standard Industrial Classification (SIC)
Suppliers BLK and GIP
Employees / Human Capital that build the funds and invest the money due to:
- Human Capital intensive business (comparable to management consulting)
- The majority of their expenses is related to employee compensation
Porters 5 BlackRock
Threat of New Entrants: LOW.
BlackRock is the largest financial advisor in the market with USD ~9.1tn AUM and has extensive resources. Even if more financial advisors enter the market they pose a low threat to BLK because of their scale.
Bargaining Power of Suppliers: HIGH.
The “war for talent” (Burrola, 2023) keeps increasing in the last years and good talent has more opportunities to switch their employers.
Bargaining Power of Buyers: MODERATE TO HIGH. Buyers are the investors in BLK’s products. Several asset managers in the market so investors can choose their preferred asset manager. However for large investments trusted and large-scale partners like BLK appear trustworthy and are preferred by many investors, which lowers the power of investors.
Threat of Substitutes: HIGH. Substitutes to a classic financial advisor like BlackRock are online resources that are free to use and available everywhere
Industry Rivalry: HIGH. There are many financial advisors in the market that are able to threaten BlackRock.
Industry is competetive due to high bargaining power of suppliers, industry rivalry and substitutes.
Porters 5 GIP
Threat of New Entrants: LOW. A recent study by McKinsey revealed, that the biggest fund managers received most fundraising in 2023 (Top 25 fund managers received 41% of fundraising) –> entry barriers for smaller, new funds are high and the threat of new entrant is low
Bargaining Power of Suppliers: HIGH. War of talents.
Bargaining Power of Buyers: MODERATE. Investors were giving out USD ~92.4bn in capital to 67 funds that were fundraising. According to Preqin data these funds had an average target size of USD ~2.0bn, while investors were giving USD ~1.4bn on average across funds. This is an indication that investors can choose where they invest based on the best offers. Still not all the funds have competitive capabilities so that buyers can switch to all of them.
Threat of Substitutes: LOW. Reasonable substitutes are all other asset classes within alternatives like Private Equity, Venture Capital, etc. However, these substitutes are different in their risk-return profile (J.P. Morgan, 2024).
Industry Rivalry: HIGH. There are many funds in the market and only the best get sufficient fundraising. The industry rivalry is high.
Industry competitive through high bargaining power of suppliers and industry rivalry.
Attractive and Unattractive Industry according to Porter
Attractive Industry Traits: High entry barriers, low bargaining power for suppliers/buyers, few substitutes, stable competition
Unattractive Industry Traits: Intense rivalry, numerous substitutes, powerful/price-sensitive buyers
Value Creation Framework - Total Value
The total value created is the difference between the customer’s willingness to pay (WTP) and the supplier’s opportunity cost (SOC).
WTP BLK and GIP
WTP represents the total value the product provides to the customer
The WTP arises from the return that BLK and GIP are able to deliver to their customers.
SOC BLK and GIP
SOC refers to the revenue a supplier would earn by selling their services to another company.
The suppliers for BLK and GIP are their employees so the SOC are the salary they could earn elsewhere in the market
Price BLK and GIP
The Price is the amount charged for the product or service.
Here, the management fee BLK and GIP charge their clients. There is no specific data on the actual management fee by BLK and GIP, but following Heal, who analysed fund data from Preqin, the average management fee ranges around 2% (Heal, 2024).
Cost BLK and GIP
The total costs for BLK and GIP are therefore the premium they have to pay to retain their top talent plus additional costs like for BLK “distribution and service” or “general and administration expense” and for GIP marketing, property and travel expenses
However, because of their scale GIP, but especially BLK, both can create significant efficiencies, decreasing cost, and thereby, increasing the value created distributable between them and the customers.
Net value created for customer GIP & BLK
The net value created for the customer is the difference between his WTP and the price charged for the service by the company
The value created for the customer is the amount by which the fund return exceeds the management fee.
BLK can deliver those returns because of their superior talent and track record.
GIP delivers this value through expertise in infrastructure investments which leads to stable, long-term cash flows that outperform other funds
Resources BLK
- BLK’s financial advisory offering, including its unique Aladdin software platform for institutional portfolio and risk management
- BLK’s highly skilled and experienced human; can solve client needs and deliver value, navigate complex financial markets and drive innovation.
- BLK’s strong brand reputation as one of the most recognized and trusted brands in finance
- Global network to attract clients and enable access to capital worldwide
Resources GIP
- Deep industry knowledge and experience through its Business Improvement Team (BI Team) that specializes in optimizing infrastructure investments.
- GIP’s reputation as a leader in the infrastructure sector positions it as a top choice for impactful investments.
- GIP’s network with corporates and governments provides exclusive access to proprietary investment opportunities.
Resources Definition by Barney
All assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness
Degree of Uncertainty - Product
Uncertainty exists where it is not possible to assess future payoffs: uncertainty associated with the products and willingness by customers to use the product over time
Product = different Infrastructure Funds
Customers = investors such as public pensions, insurancers, high net-worth individuals
Performance Indicators IRR and asset quality.
IRR: GIP outperformed market
Asset quality: need for USD 15tn from the private market driven by energy transition –> there will be high quality infrastructure assets in the future
LOW UNCERTAINTY RE PRODUCT
Degree of Uncertainty - Willligness to use the product
Prequin found 67% investor expectations were met, 21% above, overall sentiment very positive
98% expect performance in next years to be even better, only 22% want to invest less in infrastructure
Preqin expect the annual fundraising to increase USD ~92.4bn in 2023 to USD ~149.5bn in 2029F representing an annualized growth of approximately 8.4% (Preqin, 2024).
LOW UNCERTAINTY
Forces of Competition
When investigating the top 40 infrastructure fund managers one can see that only 11 out of those are still privately owned and four have been recently acquired.
In 2024 CVC acquired Digital Infrastructure Partners, Bridgepoint acquired Energy Capital Partners, General Atlantic acquired Actis and Commerzbank acquired Aquila Capital.
There is an ongoing wave of consolidation in the infrastructure fund market. This implies for BlackRock that even though there might be no competitor directly involved with GIP the chances are high that GIP will be approached in the next years.
Therefore, it can be concluded that the forces of competition are high, and an acquisition is the preferred choice to preempt competition.
Competencies at Collaborating - General idea
When pursuing external growth and choosing between an alliance or acquisition, companies tend to favor strategies in which they have already developed expertise.
Utilizing existing resources may seem an efficient approach but does not necessarily lead to the most effective decision. Companies that were using both strategies grow faster than their rivals and therefore it is advisabel for companies to simultaneously develop alliance and acquisition capabilities.
Competencies at Collaborating - BlackRock
Known for Acquisitions: The firm has historically expanded its business through acquiring asset management firms and related entities, especially those that complement or extend its investment capabilities.
Example: Acquisition of Merrill Lynch Investment Management in 2006, which expanded BLK’s retail and international presence, and the purchase of Barclays Global Investors (BGI) in 2009.
Also builds alliances: Partnership with Microsoft, leveraging Azure to scale its Aladdin platform and enhance sustainability analytics
In 2023, BLK also partnered with Avaloq, integrating Aladdin with Avaloq’s banking services, alongside making a minority investment to strengthen their collaboration.
BLK’s minority investment in Avaloq can be linked to Cisco’s strategy, where alliances act as stepping-stones to potential acquisitions, especially in cases of uncertainty around new technologies. These equity relationships enable companies to acquire firms when the timing is advantageous and prevent rivals from acquiring.
With a few exceptions, BlackRock has predominantly pursued acquisitions. However, further research shows that they developed capabilities in forming and maintaining alliances, proving they outweigh and use both competencies. They seem to follow the dual approach as recommended by the framework, mitigating the risk of being biased towards an acquisition-only-approach.
CVC Matrix - Operational Linkage
- They want to create a combined platform that brings together
- Network with global corporate and public sector
- AUM scale that ultimately supports larger average deal size
- BLK existing infra clients and GIPs which creates scale benefits & access to GIP’s industry-leading business improvement process
- GIP and BLK highly skilled HC
- Combined Resources: Team, Capital, Network, Leadership, Reputation, Expertise
—> Tight operational relationship between BlackRock and GIP**
Strategic vs. Financial Objective
- Strategic Expansion in fast growing infrastructure market
- Highly complementary platforms with over $150 billion in pro-forma client asset
- Combined platform to create significant future fee base growth
- Premier infrastructure investment team globally; GIP founders to lead overall combined infrastructure platform
- Significant AUM scale and capital base supports larger average deal sizes as market demands higher levels of private capital to build critical infrastructure and fund shortfalls arising out of public deficit
- Strong strategic fit with limited LP overlap and the combined platform is pro-forma #1 in fundraising over last 15 years; This provides opportunity to deepen client relationships, grow future programs & innovate new solutions
—> Strategic Objective
Attractiveness test
- Traits:
- Barriers to entry: High (biggest funds get funding only)
- Bargaining Power: Suppliers (HC )High; Buyers (Investors for fund) Moderate
- Substitutes: Low
- Competition: High (only best get funding)
- —> More Unattractive than attractive BUT high potential
- Diversification should target industries with favourable structures that yield returns above the cost of capital
Cost of Entry Test
- $3 billion in cash and approximately 12 million shares indicates a substantial investment
- Using stock in the transaction reduces integration costs
- AND
- High margin addition to BLKs income: acquisition is expected to add over $400 million in FRE (Fee-Related Earnings) after taxes, with profit margins above 50%
- Nearly doubles pro-forma private markets management fees to over $1.5 billion
- Estimated 15% IRR, well in excess of cost of capital
