• Firms want more private market products to offer clients and are willing to buy instead of build.
• Private credit firms with $30 billion to $70 billion in assets will be the firms to watch.
• While deals make sense on paper, firms might have to deal with potential culture clashes.

The trend in asset management is pretty clear — private markets are the new black.

"If you're not in private markets or private credit, you'll need to move in that direction, or you'll get left behind," PwC financial services deal leader Greg McGahan told Business Insider.

Asset managers who have traditionally relied on ETFs and mutual funds to make money are itching to expand into alternative assets to diversify their offerings and boost fee revenue, a new PwC report said. That demand and expectations that interest rates will continue to drop and incoming light-touch regulators mean asset managers are ready to dust off their dealmaking playbooks.

Private credit firms specifically are in demand, as shown by the blockbuster BlackRock deal announced last week. The asset management giant agreed to buy the private credit firm HPS Investment Partners for $12 billion.

And it's not just the traditional money managers. Private equity firms are also using acquisitions to strengthen their private credit capabilities and market presence. PwC sees increasing competition in private credit contributing to the consolidation of alternative asset managers.

McGahan said private credit firms with between $30 billion and $70 billion in assets under management will be the ones to watch. They will either need to make a deal to grow bigger or be snapped up themselves.

"Those types of shops potentially could be absorbed into other shops that are looking to grow their portfolios," he said. "It's either acquire or be acquired."

Deals in alternatives will also be driven by aging founders in the private markets space who are trying to figure out succession planning and capitalizing on the ability to monetize their investments.

For his part, McGahan is seeing his deals practice's work ticking up and "getting up to full capacity. We'll be at supersaturation levels pretty shortly. So, I think you're seeing that pent-up demand now manifest itself."

Questions of culture

While the marriage of firms operating in one investing discipline with another makes sense for diversification reasons, the actual integration of the two could be trickier.

Culture and compensation are very different between traditional firms and alternatives. A portfolio manager at a publicly traded mutual fund might receive cash compensation and equity stakes. If you're a private equity manager, you're paid with carried interest, or a percentage of profits generated from the firm's investments.

"Could you have within a large traditional manager basically an alternative platform where the PMs are earning multiples of the existing PMs on the traditional side? That's going to be a cultural challenge,' McGahan said. He added there are also operational differences and gave the example of a private credit firm using treasury functions daily versus a private equity firm that uses a couple times a month.

The question of cultural fit is top of mind at BlackRock when the asset manager makes acquisitions, according to the firm's CFO Martin Small. BlackRock has made several high-profile acquisitions this year, snapping up Global Infrastructure Partners in January in addition to HPS.

Small, who was part of many meetings with HPS's executive team to test the waters, said the cofounders shared important values with BlackRock CEO Larry Fink and firm president Rob Kapito.

"We all speak the same language," Small said at the Goldman Sachs Financial Conference in New York. "They're founders. Larry Fink and Rob Kapito are founders. We're client-centered firms. We believe in scale, we believe in global."

Integrating two firms successfully requires lots of important — if technical— work behind the scenes, Small added.

"People, platform, process — think about all the pedestrian things of the employee experience. You've got to be on the same email system, you've got to make sure people's laptops work, you've got to make their key cards work at the door, " he said. "All of that's done so we can just get to business on realizing the synergies and delivering for clients.

• BlackRock has agreed to buy private credit firm HPS Investment Partners.
• HPS is another major private markets deal for the $11.5 trillion money manager.
• BlackRock, known for its ETFs, is hoping a shift to private markets will drive growth.

Larry Fink is looking to close 2024 as he started it — by announcing a big acquisition that brings BlackRock closer to dominating private market investing.

BlackRock is set to buy HPS Investment Partners, a private credit behemoth managing $148 billion, in an all-stock deal worth around $12 billion, the firms announced Tuesday.

Fink, BlackRock's chief executive and cofounder, who built the world's largest asset manager with $11.5 trillion in assets by packaging public markets into cheap funds for the masses, has been very vocal about the firm's push into the profitable private markets.

This shift in strategy could lead to a more valuable BlackRock, which might just be enough for Fink, who turned 72 last month, to finally pass on the reins to his yet-to-be-named successor.

In January, the firm announced that it would buy private equity firm Global Infrastructure Partners, with about $170 billion in assets, for about $12.5 billion in cash and stock. The deal, its biggest one since it bought Barclays's asset management business in 2009, closed in October. In June it agreed to buy data giant Preqin, which it hopes will help bring some of these more complex private strategies to a broader audience.

In addition to the HPS talks, the FT has reported that BlackRock is eyeing a stake in Izzy Englander's $70 billion hedge fund Millennium Management.

BlackRock is not new to reshaping itself through acquisition. The Barclays deal gave the firm iShares and helped it become the passive investing giant it now is.

"I do not want us to be comfortable in our business model," Fink said during the firm's investor day last summer. "I want to make sure we're questioning our business model and we are focusing on how to best serve our clients, and if we truly believe there is some great need that we need to do, we are going to reimagine who we are in our business model."

Acquiring HPS could be another "transformational" deal for the company, helping it reach the same scale it has public equities and bonds in private markets. HPS will push its alternative assets to more than $600 billion.

BlackRock's private credit business will now have a combined $220 billion in client assets. The deal is expected to increase private market fee-paying assets under management by 40% and management fees by 35%, BlackRock said.

Meet HPS Investment

HPS was founded by CEO Scott Kapnick, Goldman Sachs' former head of investment banking, along with Scot French and Michael Patterson in 2007 as a unit within JPMorgan called Highbridge Capital Management. Principals from the firm bought it out in 2016 after the bank's appetite for high-risk loans waned.

The three will now join BlackRock's global executive committee and lead a new unit combining HPS and BlackRock's existing private credit business.

The secretive firm has been at the forefront of the private credit boom, which resulted from the 2008 financial crisis and banks' withdrawal from risky lending. Private players moved in to make loans to companies when Wall Street giants were reluctant to.

"Our competitors refer to us as the nerds of private credit and we take no offense," French told Bloomberg in an interview last November.

The firm, which was previously working toward an initial public offering, caters to mostly institutional investors and has more than 760 employees in offices around the world, according to its website.

How it fits with BlackRock's ambitions

BlackRock brought in more assets in the third quarter than ever before, mostly down to its index funds, but in its October earnings call the firm's leaders were already focused on its future growth engine — GIP.

GIP is expected to add $250 million in management fees in the fourth quarter alone.

"This is a revenue growth story," Martin Small, BlackRock's chief financial officer said during that call." Private equity and credit investments are much more expensive than BlackRock's usual roster of funds and are in high demand from institutions like pensions and endowments as well as ultra-wealthy investors.

While BlackRock has long had an alternatives investing unit, until recently, its private markets assets were meaningfully smaller than those of the main players in the space, such as Apollo and KKR.

It's tried growing through acquisition in this space in the past. In 2018, BlackRock bought a small credit manager, Tennenbaum Capital Partners, which at that time had about $9 billion in committed client capital, but saw a number of investment professionals exit.

BlackRock expects the private debt market to more than double to $4.5 trillion by 2030.

While private credit's high yields and returns have increasingly attracted wealth managers and institutions alike, the deal will likely strengthen relationships with insurance firms, which have a longer investing horizon.

Ana Arsov, Moody's Ratings global head of private credit said the acquisition is "catapulting" BlackRock into the ranks of the top 5 private credit managers and significantly advances its private-market growth goals.

"Blackrock's large installed base of insurance client assets offers a prime opportunity to cross-sell HPS's capabilities, Arsov said. "Additionally, BlackRock's extensive distribution network of institutional investors and wealth managers opens new markets for HPS."

• Apollo CEO Marc Rowan has transformed Apollo since he took over as CEO in 2021.
• Now, he's being floated as a potential Treasury Secretary under Donald Trump.
• Here's what could happen to Rowan's vision if he leaves and who might fill his shoes.

Since Marc Rowan took over Apollo Global Management in 2021, he's transformed the firm — sending the stock skyrocketing.

Now, the 62-year-old CEO is being floated as a potential candidate for Treasury Secretary under Donald Trump, raising questions about who could take his place, how his departure could impact the firm's ambitious growth plans, and how Apollo might benefit from the Trump White House.

Business Insider spoke to Chris Kotowski, a stock research analyst who covers Apollo for Oppenheimer. He said Rowan's five-year plan for Apollo, which includes doubling its lending business to $1.2 trillion by 2029, would proceed without him.

"I don't think that the vision changes any time soon if Rowan were to leave," Kotowkski told BI. "While Marc is in many ways the visionary leader, I think that APO is pretty institutionalized now and will get on fine without the founder," he said, referring to the company by its stock ticker.

Contenders to take over the top role, Kotowski said, include Apollo copresidents Scott Kleinman and Jim Zelter, as well as Grant Kvalheim, president of Apollo's insurance arm Athene, which has provided Apollo capital for its burgeoning lending business.

"The most likely outcome, in my view, is that the two copresidents, Scott Kleinman and Jim Zelter, would be made coCEOs," Kotowski told BI.

Representatives for Apollo didn't return a request for comment on Rowan's plans or the firm's succession plans.

Rowan is Apollo's second CEO since the firm was founded in 1990. Founder Leon Black ran the firm as CEO until he stepped down in 2021 amid a cloud over his relationship with Jeffrey Epstein. An independent investigation ordered by Apollo found Black had paid the convicted sex offender and financier $158 million in fees over the years for financial advice and tax planning (Black has previously told investors "I deeply regret" his involvement with Epstein).

Josh Harris, another founder, was also reportedly in the running for CEO, but Rowan got the job.

Black and Harris, owner of the Washington Commanders and other sports teams, remain large shareholders of Apollo with 7.5% and 6.0% stakes respectively. Rowan, also a founder, owns 6.1%.

Kotowski, however, ruled out any suggestion that either Black or Harris would reenter the picture should Rowan leave.

"Black and Harris are almost certainly not coming back," Kotowski said.

Representatives for both men declined to comment.

Since taking over the top job, Rowan's credit strategy has become the envy of the industry. Apollo's 2022 merger with Athene brought life insurance and retirement capital to Apollo's balance sheet, which it has leveraged to become the world's largest private lender.

This extra capital helped Apollo thrive during the last few years, stepping in to lend to corporate clients while banks and others took a back seat. Apollo has become the leader of an industry boom in private credit, which now makes up $598 billion of the firm's $733 billion of assets under management.

In a presentation to investors in October, Rowan unveiled plans to double down on the firm's lending business. More recently, he explained how the firm plans to attract more insurance dollars, which will fund the lending business, by expanding its annuity products for retirees.

Kleinman has worked at Apollo since 1996, and was named lead partner for private equity at the firm in 2009. Zelter, longtime leader of credit at Apollo, joined the company in 2006 after a long career at Citigroup where he rose to become CIO of alternative investments.

The men were named copresidents in 2018.

Kotowski called Kvalheim, president of Athene and CEO of Athene USA, a "dark horse" candidate, saying his "betting would generally be on Kleinman and Zelter."

Regardless of whether Rowan leaves or not, his vision could be helped by the Trump administration. Rowan often points to Australia's retirement model, which has been open to more private investment for decades and outperforms the American model, as a model that would boost Apollo's growth.

Trump previously opened up some 401(k) investing to private equity in 2020, and Rowan has signaled hope that it could expand further.

"Should we get access to 401(k) through broad-based reform or regulatory change or regulatory encouragement, I believe that would be upside not just for us, but for the entire industry," Rowan said earlier this month.

Of course, if Rowan were to leave, he likely would have to sell his 6.1% share in Apollo, worth nearly $6 billion, and have his assets put into a blind trust. It's unclear what that could do to the stock price, but given Apollo's recent stellar performance, it's not a bad time to divest.