The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Jonathan Guilford

NEW YORK, Jan 29 (Reuters Breakingviews) - Larry Fink built BlackRock BLK.N into an asset management titan with the help of canny dealmaking that caught hold of a huge shift in the way people invest. Now, as he tries to keep up with rivals, the 72-year-old has launched another splurge of M&A, splashing out a total of $28 billion on specialist fund manager Global Infrastructure Partners, private lender HPS, and data firm Preqin. The next challenge is making those acquisitions work. It’s a task complicated by the question of when he hands over the reins.

Fink is familiar with revolutions in asset management. Founded in 1988 and spun out from parent Blackstone BX.N in 1992, BlackRock started out with a novel approach to fixed-income investing for sophisticated institutions like insurers. At about the same time, exchange-traded funds - stock-like wrappers for buckets of assets that conform to an index or theme - were shaking up the world of equities. Barclays Global Investors, owned by the British lender, became the dominant provider.

In the aftermath of the global financial crisis in 2009, Barclays had to sell assets to boost its capital base. Fink snapped up BGI for $13.5 billion, making BlackRock the world’s biggest money manager. His timing was impeccable: in 2010 investors in the United States, United Kingdom and Europe had parked $1.2 trillion in ETFs, according to Oliver Wyman. By 2020, that figure had quintupled. BlackRock went from overseeing around $3 trillion in assets after the deal to more than $11 trillion today. Its shares have risen roughly 475%, lifting its market value to around $160 billion.

But the next shift in fund management is already underway. Institutional clients hungry for outsize returns are turning away from the liquid, public assets which BlackRock dominates in favor of less-liquid markets for private debt. By 2022, a fifth of U.S. insurers’ bond portfolios were private, comprised heavily of debt issued to fund infrastructure investments and various asset-backed securities, according to the Federal Reserve Bank of Chicago. Alternative asset managers like Brookfield Asset Management BAM.TO, Apollo Global Management APO.N and Fink’s old colleagues at Blackstone dominate this field. Now retail investors have growing access to these investments.

This threatens to further squeeze the public markets in which BlackRock operates. So Fink has again gone on a spending spree. A year ago, BlackRock agreed to acquire GIP for $12.6 billion, boosting its exposure to funds investing in energy, roads and data centers by $100 billion. In December it spent $12 billion on HPS, bringing $148 billion of private debt into the fold. In between, Fink also snapped up private-markets data firm Preqin for $3.2 billion.

The logic that unites the three purchases goes something like this: BlackRock has tight connections with governments, sovereign investors and corporations around the world. As those customers and counterparties get to grips with, say, the vast investments demanded by artificial intelligence, BlackRock has more ways to get involved. It can directly finance infrastructure: indeed, GIP Founding Partner Adebayo Ogunlesi recently joined ChatGPT maker OpenAI’s board. The investment splurge creates opportunities for HPS to provide financing. Investors building new data centers, like the recently unveiled Stargate venture, will likely issue debt backed by assets like high-speed chips. Preqin can help both in benchmarking these investments for institutional backers, and by potentially building out indexes tracking private markets that can undergird retail products.

Yet while the opportunities are vast, BlackRock has paid a very full price for them. Take HPS, which between fee and performance income will likely deliver about $400 million of after-tax earnings in 2025. GIP, meanwhile, generates over $400 million in annual fee income. Charitably exclude all deferred and performance-based compensation and focus on the $17.9 billion that BlackRock paid up-front in cash and stock. In that case, the combined earnings represent a return on investment of just 4.5%, roughly half the buyer’s weighted average cost of capital, which Morningstar estimates at 8.7%. To close the gap, Fink would need the two purchases to generate around $760 million more in income.

To be fair, BlackRock should be able to tap some growth-juicing synergies. For example, finance chief Martin Small says the asset manager could perhaps move 10% of the $700 billion it manages for insurers over to HPS’s private credit machine. BlackRock only extracts fees of about 0.1% on that hoard right now. HPS’s fee rate is more like 0.8%, implying the shift could deliver nearly $490 million of extra revenue. At a margin of 50% and a tax rate of about 15%, that’s roughly $200 million in additional post-tax earnings.

The big growth area in credit, however, is asset-based finance, like slicing up cashflows backed by anything from student loans to Taco Bell franchise royalties. This is the opportunity that has Blackstone, Apollo and KKR KKR.N proclaiming a market size in the tens of trillions of dollars. HPS’s footprint here is small, and the hope is that its new parent’s sheer scale helps it grow quickly and achieve BlackRock’s promised 16% internal rate of return on its investment. This calculation implies that, after accounting for the initial $9 billion outlay and $3 billion deferred payout due in five years’ time, HPS’s annual earnings growth and likely long-term value at the end of that period will be worth it.

Shareholders could see quicker benefits. BlackRock currently trades at about 21 times analysts’ earnings estimates, according to LSEG, well below Blackstone’s 31 times. Yet Fink’s firm will soon have $600 billion in private assets under management, rivaling KKR, producing $3 billion a year in revenue. Add in another $2 billion of expected revenue for technology services, now souped up by Preqin, and about a fifth of the enlarged BlackRock’s business comes from private markets or related services.

In this sense, Fink’s latest deal spree represents a big move into private markets, in the same way that his acquisition of BGI in 2009 beefed up the company’s exposure to passive funds. This time, however, Fink is not buying from a distressed seller.

Making this gamble pay off will be a big challenge. It has also sharpened the perennial question of Fink’s succession. Top BlackRock executive Mark Wiedman, often tipped as an heir, abruptly announced his departure earlier this month. The deals have brought in talented outsiders including Ogunlesi and HPS co-founders Scott Kapnick, Scot French and Michael Patterson, to complement internal candidates like Small. If Fink hands one of them the reins, they would be taking over a half-constructed work in progress.

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(Editing by Peter Thal Larsen and Pranav Kiran)

((For previous columns by the author, Reuters customers can click on GUILFORD/ Jonathan.Guilford@thomsonreuters.com))