Q&A: BlackRock’s Michael Dennis

Q: What is the scale of BlackRock’s private investment activity in Asia?

A: We taken a big step forward in terms of our investment footprint in Asia. Between 2018 and 2020, we were investing USD 1bn per year – equity and credit – from a private markets perspective. We are looking to grow to USD 3bn this year. We participate through global pools of capital and through Asia franchises in areas such as liquid credit, private credit, and real estate. We have USD 14bn in these solutions with dedicated Asia exposure, and most of that is liquid credit, where we are one of the market leaders. There has been a significant investment in talent in the last three years and our team has nearly doubled in size to around 180 alternatives professionals in the region. Within private equity, we have four areas of focus: direct investment, co-investment, secondaries, and primaries. We used to be heavy on primary fund-of-funds, but now it’s much more about the other three. Our global private equity AUM is 45bn and co-investment forms the largest part, followed by direct and then secondaries.

Q: How is appetite for co-investment evolving?

A: We have the ability to deliver a far more diversified set of investments than any one manager, and a lot of clients are interested in having that conversation – more so than in the previous cycle. In 2018, it was very much about ramping up in Asia Pacific. Now, clients are asking how they can play across managers. And they want co-investment with expertise, someone to hold their hand through that journey. In addition to diversification, they get double the due diligence because our teams run diligence on transactions done by different managers and compare them. In a climate of macro uncertainty, that works well for us.

Q: To what extent are co-investments sourced through relationships with GPs where there is a primary fund commitment?

A: We have relationships with more than 400 GPs and that doesn’t necessarily mean we are LPs in their funds. Our co-investment business has evolved over the last 20 years, and we have expertise in different types of transaction. It’s not about collecting LP rights around co-investment; the role we play is more like that of a partner and the GP brings us into the conversation because what we bring to the table has tangible benefits for underlying companies. We can follow a company through its lifecycle, providing capital in different forms, thanks to the growth of private debt and traditional bond businesses. Especially in this cycle, many issuers are looking for multifaceted relationships, so co-investment can be a stepping stone to broader conversations.

Q: How big a cheque can you write for a co-investment, and do you always look to co-underwrite transactions?

A: We are flexible on size. We have a healthcare-specific co-investment business where we are doing USD 20m-USD 25m, and then we have a more TMT thematic where it’s USD 200m-USD 300m. We do see situations where it is an auction process and the GP works to certain timetables and requirements, but we do more proprietary transactions, especially in the mid-cap space and in growth deals, where it can take time to build a consortium. We want to leverage our capabilities around different sectors and take a view on opportunities, rather than be a transaction taker.

Q: Would you avoid large buyouts?

A: We move between different deal types depending on the point in the cycle. Last year, we did less in growth investment and more with traditional buyout managers. We felt that valuations were getting extended in the growth space, especially for internet-based companies. We pulled back from B2C and focused on B2B, working with GPs we thought would add value operationally, where we see a reasonably steady-state portfolio.

Q: BlackRock’s name used to pop up in various growth-stage technology deals…

A: Those are often different pools of capital. We have a very large mutual fund business that makes long-only type investments, and sometimes it steps into pre-IPO rounds. There is a large technology-focused platform in our fundamental equities business, and it has certain products that take private risk alongside public risk.

Q: Have geopolitical and regulatory issues put you off investing in China?

A: Whatever the market, geopolitical and regulatory risks are top investment considerations. The main reason deal flow in China is slower is that there are still sellers and founders looking for valuations at 2021 levels. Public markets in general have taken significant drawdown across the board and private markets haven’t done the same. That’s not necessarily China-specific – we see the same in India and Southeast Asia. We need to be selective in growth-stage investments, but we continue to raise money across numerous vehicles that have Asia, including China, in their broader remit.

Q: How do direct investments differ from co-investments in terms of stage and sector?

A: We have a perpetual direct vehicle that partners with founders without the pressure of a 4–5-year exit. One of the best-known investments is probably Authentic Brands Group [the parent company of Sports Illustrated; BlackRock became the largest shareholder in 2019]. More recently, we launched Decarbonisation Partners with Temasek. That’s an example of how we are trying to build portfolios around key themes that we think are on trend and where we can add value.

Q: What is behind the thematic approach?

A: We are tailoring to what we see as an evolving client appetite around private equity. We are focusing on long-term structural trends – decarbonisation, digitisation, decentralisation – and staying tight to them. In infrastructure, we launched the Climate Finance Partnership for emerging markets renewables. We have a large energy transition fund and a large climate fund. We are trying to take a different approach to alternatives within a broader portfolio: it’s not about doing aggregate buyout funds and multiple vintages of those, but taking a more thematic-driven approach, which is what clients are now looking for. Go back 10 years, there would be traditional buyout funds and venture capital in most portfolios. Now, some of our clients have private equity allocations of up to 40% of their portfolios and they are looking for diversification of risk. In our offering, rather than have a single fund that captures everything, we have defined teams following defined themes at defined levels of the risk curve. That is an important lens on how we think about private equity generally.

Q: What trends are you seeing in demand for alternatives from investors in Asia?

A: Asian LPs contribute 15%-20% of our total global alternatives assets, and there are some interesting trends in the region. In Japan, investors are still fairly underinvested in alternatives, so we see continued demand. There has been a pickup in conversations, especially regarding private credit and infrastructure. In Australia, private equity and infrastructure are already widely used by major funds. We see credit becoming more widely adopted, for the lack of volatility and diversification it brings. There is also real demand for customised access and more thought about the role individual investors can play in that customisation. It is very different to where Japan is right now. The rest of Asia is somewhere in between. At one end, depending on the institution and level of sophistication, there is a desire for real partnerships. At the other, groups like insurers are adding private exposure as quickly as they can to bring diversification and reduce volatility in their overall portfolios to match up against liabilities. We work with clients on their multi-year views against a backdrop of massive volatility in currency and rates, which is being felt across Asia in different ways.

Q: Currency depreciation has been flagged as a concern by Japanese LPs. How often does it feature in your discussions with investors?

A: Issues like energy security and portfolio diversification come up in every client discussion; they appear to be more pressing than shorter-term considerations like currency. What have been traditionally conservative organisations are becoming more proactive in how they think about portfolio development. Maybe their exposure to alternatives is 5% and they are asking what 20% looks like in the long term. That is reflected in actual commitments, not just in teach-ins or educational discussions.

Q: What challenges do Asian investors face when ramping up exposure to alternatives?

A: One of the biggest challenges is how they can get the most capital to be invested as quickly as possible. We have significant fund-of-funds businesses in hedge funds and in infrastructure, and we see huge demand for those because there’s faster deployment and portfolio-type approach with a level of customisation. We also offer multi-alternatives asset solutions, and we are having a lot of discussions around that in terms of overall portfolio construction. The natural draw of alternatives was higher returns. Now, people are talking about getting high single-digit or low double-digit returns at scale within their portfolios.

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• Topics
• North Asia
• South Asia
• Southeast Asia
• Australasia
• Greater China
• GPs
• LPs
• Fundraising
• BlackRock
• Asia
• Co-investment
• Direct investment