BlackRock spreads its wings

NEW YORK — BlackRock Inc. is poised to venture into alternative investments and the defined contribution businesses, relatively uncharted waters for the $1 trillion money manager.

With the Oct. 2 official close of its acquisition of Merrill Lynch Investment Managers, BlackRock now has a global stage to distribute a more diverse platform of fixed-income and equity strategies, a major and widely known reason it sought the deal. But the acquisition also gives the New York-based megamanager the opportunity to further develop itself in some lesser acknowledged areas, like alternative investments, where the "old" BlackRock had only a moderate presence.

Overall, the combined BlackRock/MLIM entity now has an asset mix of roughly 43% fixed income; 34% equity and balanced investments not already included in fixed income; 19% cash management; 3% alternatives; and roughly 1% real estate.

Combined, the company has slightly more than 4% of its assets in non-traditional asset classes.

While the total dollar amount managed in alternatives is significant — $42 billion — it is still small relative to BlackRock's overall business. Barbara Novick, vice chairwoman and managing director, expects that BlackRock's alternative assets (including real estate) will grow "disproportionately" to its other asset classes because of the room for growth and the continued institutional demand for alternative strategies, including hedge funds and hedge funds of funds.

MLIM's single-strategy hedge fund team, which managed just less than $2 billion, and BlackRock's team, which managed more than $6 billion, were left untouched when the two companies integrated their investment personnel earlier this year. The hedge fund-of-funds teams, which managed $1.5 billion at MLIM, have been consolidated with BlackRock's, which ran about $1 billion, said Ms. Novick. The new team is led by managing director Howard Berkowitz, previously the head of BlackRock's fund-of-funds group.

In addition to the hedge fund offerings, BlackRock's alternatives menu now includes more private equity and debt strategies, real estate equity and debt, absolute return and collateralized debt obligation/structured products.

Ms. Novick added BlackRock will take advantage of its new global footprint and will look to expand global real estate offerings in Europe and Japan. The firm plans to send people to Tokyo soon to start a new global real estate office. BlackRock already has offices in London and continental Europe.

BlackRock will continue to evaluate how it will develop products and strategies in its new alternatives platform. While Ms. Novick did not rule out a smaller acquisition in alternatives or real estate, she said BlackRock is focusing on distributing its existing offerings and will listen to its clients to determine if it needs to add or develop new capabilities.

Multiple investment banking sources said they had not heard that BlackRock is shopping for any real estate and other alternatives firms at the moment, but several said they expect the firm to be active in evaluating real estate opportunities, particularly real estate investment trusts.

In addition to alternatives, BlackRock also is better positioned to capitalize on the growing defined contribution market now that the deal has closed, said Ms. Novick. "Defined contribution is where the world is going. The defined benefit pool is shrinking; we have to go where our clients are going."

Of BlackRock's $1 trillion in assets, roughly $55 billion are from defined contribution plans — with $30 billion coming from the MLIM side and $25 billion from BlackRock.

With slightly more than 5% of its assets in defined contribution plans, the company has identified this as a critical new channel with significant room for growth.

BlackRock will more than double the number of mutual fund strategies used in 401(k) plans through the Merrill acquisition, and the expanded footprint will give it a more diverse platform of equity, fixed-income and asset allocation strategies.

BlackRock will also likely add new strategies, including several lifecycle funds. It recently developed a new asset allocation fund, an actively managed strategy that was designed to provide investors with broad diversification and exposure to both the equity and fixed-income markets.