Never Heard Of BlackRock? Well, You Should Have
September 18, 2020
This is a heck of a story. It gets a bit into the weeds, but leads you through how a company in the time period my career grew to manage over $7 trillion. I suspect if we have a President Biden, he might be inclined to choose the CEO of BlackRock as his Treasury Secretary. I'd argue this would be a step (or four) up from Mister Munchin (yeah, I know that is not how you spell his name!).
BlackRock, Inc. is an American global investment management corporation based in New York City. Founded in 1988, initially as a risk management and fixed income institutional asset manager, BlackRock is the world's largest asset manager, with $7.4 trillion in assets under management as of end-Q4 2019. BlackRock operates globally with 70 offices in 30 countries and clients in 100 countries. Due to its power, and the sheer size and scope of its financial assets and activities, BlackRock has been called the world's largest shadow bank.
BlackRock was founded in 1988 by Larry Fink, Robert S. Kapito, Susan Wagner, Barbara Novick, Ben Golub, Hugh Frater, Ralph Schlosstein, and Keith Anderson to provide institutional clients with asset management services from a risk management perspective. Fink, Kapito, Golub and Novick had worked together at First Boston, where Fink and his team were pioneers in the mortgage-backed securities market in the United States.
During Fink's tenure, he had lost $100 million as head of First Boston. That experience was the motivation to develop what he and the others considered to be excellent risk management and fiduciary practices. Initially, Fink sought funding (for initial operating capital) from Pete Peterson of The Blackstone Group who believed in Fink's vision of a firm devoted to risk management. Peterson called it Blackstone Financial Management. In exchange for a 50 percent stake in the bond business, initially Blackstone gave Fink and his team a $5 million credit line. Within months, the business had turned profitable, and by 1989 the group's assets had quadrupled to $2.7 billion. The percent of the stake owned by Blackstone also fell to 40%, compared to Fink's staff.
By 1992, Blackstone had a stake equating to about 35% of the company, and Schwarzman and Fink were considering selling shares to the public. The firm adopted the name BlackRock in 1992, and by the end of that year, BlackRock was managing $17 billion in assets. At the end of 1994, BlackRock was managing $53 billion.
In 1994, Blackstone Group's Stephen A. Schwarzman and Fink had an internal dispute over methods of compensation and over equity. Fink wanted to share equity with new hires, to lure talent from banks, unlike Schwarzman, who did not want to further lower Blackstone's stake. They agreed to part ways, so the BlackRock partners (Sue Wagner) orchestrated a deal to sell part of the company In June 1994, Blackstone sold a mortgage-securities unit with $23 billion in assets to PNC Bank Corp. for $240 million. The unit had traded mortgages and other fixed-income assets, and during the sales process the unit changed its name from Blackstone Financial Management to BlackRock Financial Management. Schwarzman remained with Blackstone, while Fink went on to become chairman and CEO of BlackRock Inc. In 1998, PNC’s equity, liquidity, and mutual fund activities were merged into BlackRock.
BlackRock went public in 1999 at $14 a shareon the New York Stock Exchange. By the end of 1999, BlackRock was managing $165 billion in assets. BlackRock grew both organically and by acquisition. In August 2004, BlackRock made its first major acquisition, buying State Street Research & Management's holding company SSRM Holdings, Inc. from MetLife for $325 million in cash and $50 million in stock. The acquisition raised BlackRock's assets under management from $314 billion to $325 billion. The deal included the mutual-fund business State Street Research & Management in 2005. BlackRock merged with Merrill Lynch Investment Managers (MLIM) in 2006, halving PNC's ownership and giving Merrill Lynch a 49.5% stake in the company. In October 2007, BlackRock acquired the fund-of-funds business of Quellos Capital Management.
The U.S. government contracted with BlackRock to help resolve the fallout of the financial meltdown of 2008. According to Vanity Fair, the financial establishment in Washington and on Wall Street believed BlackRock was the best choice for the job. In 2009, BlackRock first became the No. 1 asset manager worldwide. In April 2009, BlackRock acquired R3 Capital Management, LLC and took control of the $1.5 billion fund. On 12 June 2009, Barclays sold its Global Investors unit (BGI), which included its exchange traded fund business, iShares, to BlackRock for US$13.5 billion. Through the deal, Barclays attained a near-20% stake in BlackRock.
In 2010, Ralph Schlosstein, the CEO of Evercore Partners and a BlackRock founder, called BlackRock "the most influential financial institution in the world." On 1 April 2011, due to Sanofi's acquisition of Genzyme, BlackRock replaced it on the S&P 500 index.
In 2013, Fortune listed BlackRock on its annual list of the world's 50 Most Admired Companies. In 2014, The Economist said that BlackRock's $4 trillion under management made it the "world's biggest asset manager", and it was larger than the world's largest bank, the Industrial and Commercial Bank of China with $3 trillion. In May of the same year, BlackRock invested in Snapdeal.
By June 30, 2015, BlackRock had US$4.721 trillion of assets under management. On August 26, 2015, BlackRock entered into a definitive agreement to acquire FutureAdvisor, a digital wealth management provider with reported assets under management of $600 million. Under the deal, FutureAdvisor would operate as a business within BlackRock Solutions (BRS).
BlackRock announced in November 2015 that they would wind down the BlackRock Global Ascent hedge fund after losses. The Global Ascent fund had been its only dedicated global macro fund, as BlackRock was "better known for its mutual funds and exchange traded funds." At the time, BlackRock managed $51 billion in hedge funds, with $20 billion of that in funds of hedge funds.
In March 2017, the Financial Times announced that BlackRock, after a six-month review led by Mark Wiseman, had initiated a restructuring of its $8bn actively-managed fund business, resulting in the departure of seven portfolio managers and a $25m charge in Q2, replacing certain funds with quantitative investment strategies. In May 2017, BlackRock increased its stake in both CRH plc and Bank of Ireland.
By April 2017, iShares business accounted for $1.41tn, or 26 percent, of BlackRock's total assets under management, and 37 percent of BlackRock’s base fee income. In April 2017, BlackRock backed the inclusion of mainland Chinese shares in MSCI's global index for the first time.
Between October and December 2018, BlackRock's assets dropped by US$468bn and fell below $6tn. It was the largest decline between quarters since September 2011.
As of 2019, BlackRock holds 4.81% of Deutsche Bank, making it the single largest shareholder. This investment goes back to at least 2016.
In May 2019, BlackRock received criticism for the environmental impact of its holdings. It is counted among the top three shareholders in every oil "supermajor" except Total, and it is among the top 10 shareholders in 7 of the 10 biggest coal producers.
In his 2020 annual open letter, CEO Fink announced environmental sustainability as core goal for BlackRock's future investment decisions. BlackRock disclosed plans to sell US$500 million in coal investments.
In August 2020, BlackRock received approval from the China Securities Regulatory Commission to set up a mutual fund business in the country. This makes BlackRock the first global asset manager to get consent from China to start operations.
For the fiscal year 2017, BlackRock reported earnings of US$4.970 billion, with an annual revenue of US$12.491 billion, an increase of 12.0% over the previous fiscal cycle. BlackRock's shares traded at over $414 per share, and its market capitalization was valued at over US$61.7 billion in October 2018. As of 2018, BlackRock ranked 237 on the Fortune 500 list of the largest United States corporations by revenue.
BlackRock's largest division is iShares, a family of over 800 exchange-traded funds (ETFs) that comprises more than $1 trillion in assets under management. iShares is the largest provider of ETFs in the U.S. and in the world.
In 2000, BlackRock launched BlackRock Solutions, the analytics and risk management division of BlackRock, Inc. The division grew from the Aladdin System (which is the enterprise investment system), Green Package (which is the Risk Reporting Service) PAG (portfolio analytics) and AnSer (which is the interactive analytics). BlackRock Solutions (BRS) serves two roles within BlackRock. First, BlackRock Solutions is the in-house investment analytics and “process engineering” department for BlackRock which works with their portfolio management teams, risk and quantitative analysis, business operations and every other part of the firm that touches the investment process. Second, BlackRock Solutions (BRS) and the three primary divisions are services that offered to institutional clients. As of 2013, the platform had nearly 2,000 employees.
BlackRock differentiates itself from other asset managers by claiming its risk management is not separate. Risk management is the foundation and cornerstone of the firm's entire platform. Aladdin keeps track of 30,000 investment portfolios, including BlackRock's own along with those of competitors, banks, pension funds, and insurers. According to The Economist, as at December 2013, the platform monitors almost 7 percent of the world’s $225 trillion of financial assets.
BlackRock Solutions was retained by the U. S. Treasury Department in May 2009 to manage the toxic mortgage assets (i.e. to analyze, unwind, and price) that were owned by Bear Stearns, AIG, Inc., Freddie Mac, Morgan Stanley, and other financial firms that were affected in the 2008 financial crisis.
In 2017, BlackRock expanded its presence in sustainable investing and environmental, social and corporate governance (ESG) with new staff and products both in USA and Europe with the aim to lead the evolution of the financial sector in this regard.
BlackRock started using its weight to draw attention to environmental and diversity issues by means of official letters to CEOs and shareholder votes together with activist investors or investor networks like the Carbon Disclosure Project, which in 2017 backed a successful shareholder resolution for ExxonMobil to act on climate change. In 2018, it asked Russell 1000 companies to improve gender diversity on their board of directors if they had less than 2 women on them.
After discussions with firearms manufacturers and distributors, on April 5, 2018, BlackRock introduced two new exchange-traded funds (ETFs) that exclude stocks of gun makers and large gun retailers, Walmart, Dick’s Sporting Goods, Kroger, Sturm Ruger, American Outdoor Brands Corporation, and Vista Outdoor, and removing the stocks from their seven existing environmental, social and corporate governance (ESG) funds, in order “to provide more choice for clients seeking to exclude firearms companies from their portfolios.”
Contributions to global warming
Despite BlackRock's attempts to model itself as a sustainable investor, one report shows that BlackRock is the world’s largest investor in coal plant developers, holding shares worth $11 billion among 56 coal plant developers.
Another report shows that BlackRock owns more oil, gas, and thermal coal reserves than any other investor with total reserves amounting to 9.5 gigatonnes of CO2 emissions – or 30 percent of total energy-related emissions from 2017.
Concerned about global warming, environmental groups including the Sierra Club, and Amazon Watch launched a campaign called BlackRock's Big Problem in September 2018. In this campaign, these groups assert that BlackRock is the "biggest driver of climate destruction on the planet", due in part to its refusal to divest from fossil fuel companies. On January 10th, 2020 a group of climate activists rushed inside the Paris offices of Black Rock France painting walls and floors with warnings and accusations on the responsibility of the company in the current climate and social crises.
On January 14, 2020, BlackRock CEO Laurence Fink declared that environmental sustainability would be a key goal for investment decisions. BlackRock announced that it would sell $500 million worth of coal-related assets, and create funds that would avoid fossil-fuel stocks, two moves that would drastically shift the company's investment policy. Environmentalist Bill McKibben called this a "huge, if not final, win for activists."
In his 2018 annual letter to shareholders, BlackRock CEO Laurence D. Fink stated that other CEOs should be aware of their impact on society. Anti-war organizations were discontent with Fink’s statement, because BlackRock is the largest investor in weapon manufacturers through its iShares U.S. Aerospace and Defense ETF.
In May 2018, anti-war organizations held a demonstration outside the annual BlackRock shareholder’s meeting in Manhattan, New York.
Common ownership of large corporations
By investing clients' 401(k)s and other investments, BlackRock is a top shareholder in many competing publicly traded companies. For example, see the percentage of shares held by BlackRock in: Apple (NasdaqGS: 6.34%) and Microsoft (NasdaqGS: 6.77%)Wells Fargo & Co (NYSE: 4.30%) and JPMorgan Chase & Co (NYSE: 4.41%). This concentration of ownership has raised concerns of possible anticompetitive behavior.
A 2014 study titled "Anticompetitive Effects of Common Ownership" analyzed the effects of this type of common ownership on airline ticket prices. The study found that 'Prices go up and quantity goes down when the airlines competing on a given route are more commonly owned by the same set of investors.'The authors note that this price increase does not necessarily imply conscious collusion among the common owners, but could perhaps be that these firms are now 'too lazy to compete' with themselves.
Similar to other large publicly traded investment management firms, BlackRock is primarily owned by other institutional investors (84.87% owned by institutional investors as of July, 2020 (NYSE)). For example, the percentage of BlackRock's shares owned by PNC Financial Services Group, Inc. was 22.04% (NYSE: July, 2020). However, BlackRock is also a top shareholder in PNC, owning 6.48% of its shares (NYSE: July, 2020)[ BlackRock is also a top shareholder in many other institutional investors which own it. This is chain of ownership is similar to circular ownership structures which have been identified in the United Kingdom, for example. These types of ownership structures make it difficult to determine the true beneficial owners of a company. As it is not required by law, BlackRock does not make public a detailed breakdown of the people who own/control the largest shares within the 'institutional investors' ownership category.
· Laurence D. Fink – Founder, Chairman & CEO
· Blake Grossman, former Vice Chairman
· Robert S. Kapito – Founder & Co-President
· Susan Wagner – Founder, member of the Board of Directors