December 6, 2024 • 32 mins
Katie and Matt discuss whether index funds are illegal, whether ESG investing leads to cartel-like profits, whether jury duty for index fund investors is a good idea and whether we are in a golden age for selling private credit firms.
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Speaker 1 (00:03):
Bloomberg Audio Studios, Podcasts, radio News. Here we go, Hello,
and welcome to The Money Stuff Podcast, your weekly podcast
where we talk about stuff related to money. I'm Matt
Levigne and I write the Moneys Doff column for Bloomberg Opinion.
Speaker 2 (00:23):
And I'm Katie Greifeld, a reporter for Bloomberg News and
an anchor for Bloomberg Television.
Speaker 1 (00:28):
What are you talking about today, Katie?
Speaker 2 (00:30):
We're going to talk about ESG and whether index funds
are illegal. We're going to talk about maybe an answer
to shareholder voting, and then we're going to talk about
Blackrock HPS. It finally happened. Blackrock finally bought HPS. But
let's start with ESG. Turns out, at least according to Texas,
(00:53):
that's an anti trust violation.
Speaker 1 (00:56):
It's been writing for almost ten years. Our index fund's illegal,
and I didn't invent that idea, but I feel like
I've done a lot to popular has it, and within
the next few years it might become the case that
index funds are illegal. So Texas and some other states,
but some states, led by Texas, sued what do we
in the business called the Big three asset managers, so
(01:16):
Vanguard Blackrock, and State Street for an alleged anti trust
conspiracy where they allegedly all got together and pressured coal
companies to cut the production of coal to raise the
price of coal, and that is the anti trust conspiracy. Now,
(01:37):
there's a long running theory that these big diversified asset
managers like Blackrock and Vanguarden, State Street, but also like
some of the smaller less INDEXI managers, because they kind
of own every company in an industry, they have a
desire for the companies in that industry to get together,
cut production, not compete with each other too hard, raise prices,
(01:57):
and like earn outsized margins because they are not competing
the way they would if they were all owned by
separate owners. This is like a long running theory. It's
very controversial, and one reason it's controversial is that no
one really thinks that those meetings happen, you know, so
the classic examples airlines, no one really thinks that like
(02:18):
Blackrock sends people to the CEOs of airlines and says
you need to stop competing with other airlines on your
roots because we want you to raise ticket prices and
earn more profits, and we want everyone else to raise
ticket prices are and more profits too, and no one
really thinks that the airline executives would listen to those conversations.
So there's just not like a lot of evidence that
(02:41):
these index fund companies, these big investors get together and
actually explicitly tell companies to cut production and raise prices.
So that's like the problem with a lot of these
anti trustee theories that like, oh, look, these index funds
own every company, so isn't that a weird anti trust problem.
The huge exception to that is esg. The huge exception
(03:02):
to that is that the big asset managers really did
sign on to statements saying we want companies to achieve
net zero emissions. And that is all well and good
when you're talking about consulting companies trying to fly less
or whatever. But when you talk about coal companies, talking
about a coal company lowering its emissions is very similar
(03:23):
to talking about a coal company lowering its production of coal.
And so if all of the big shareholders of all
the big coal companies get together and say to the
coal companies, you should lower your production of coal, and
the coal companies go out and say, we have lowered
our production of coal in order to meet ESG goals. Then, like,
I don't know, that kind of looks like the owners
of all the companies getting together and saying we're going
to lower production to raise prices. And so you have
(03:44):
this lawsuit saying not only that Black Rock and Vanguard
signed on to net zero pledges and then urged companies
to lower their emissions, but also that these coal companies
cut production of coal into rising demand for coal and
the price of coal sort, and these coal companies made
quote cartel like profits. So I don't know, it's kind
(04:05):
of a cool lawsuit.
Speaker 2 (04:07):
If I were Black Rock or Vanguard or State Street,
could I defend myself on the emissions point saying we
didn't mean for you to lower production, We didn't mean
for you to stop mining coal, just do it in
a more green way. Does that hold any water?
Speaker 1 (04:24):
I don't know. That's like kind of hard, Like I
think there are a lot of defenses here, and this
is like a creative lawsuit more than it is like
a slam dunk lawsuit. Even if the story was we
just wanted them to mind in a greener way and
that raised the cost of mining or like you know,
delayed mining, like that would still be sort of a
production cut. But it's also like obviously the case that
if you are generically an ESG investor, thermal coal is
(04:48):
kind of your least favorite thing. And so yeah, there
is some amount of pressure on companies to shift away
from thermal coal mining. And like the lawsuit, you don't
see like explicit statements from like Blackrock saying coal companies
shouldn't mind coal anymore. It's more like statements like we're
going to engage with companies about their climate goals and
try to really understand how they see the future of
(05:11):
the market for thermal coal. It's all vague statements, but
it is all suggestive of the idea that the people
writing those statements are not big believers in increasing the
production of thermal coal.
Speaker 2 (05:23):
Something that I feel like I've asked you before, but
I'll ask you again is whether or not intent matters
when it comes to antitrust. Like, surely, when you know,
putting together these ESG flavored proposals for these coal companies,
Blackrock wasn't trying to like boost their margins and line
the pockets of these coal companies.
Speaker 1 (05:45):
So a couple of points of that one the lawsuit
says It doesn't matter that they think they were doing
this for the good of the world. If you have
a conspiracy to restrain trade, if you have a conspiracy
to lower production that has the effect of raising prices,
the fact that you were doing it or some outside
benefit is not a really good anti trust defense. On
the other hand, it's a very weird claim because like
(06:06):
the lawsuits, they are anti trust lawsuits, and so they
are arguing that Blackrock and Vanguard were ganging up to
have cartel like profits in the coal industry, which is
a strange claim for a couple of reasons. One is
like most of the time when politicians complain about ESG,
what they say is Blackrock is usually the punching bag.
(06:27):
Blackrock is not being a fiduciary for its investors. It's
not trying to get the highest returns for investors. It's
not putting profits first. Instead, it's putting its own moral
interest in climate change or whatever ahead of the financial
interests of its investors. But this lawsuit says no, no, no, Actually,
BlackRock's ESG stuff is making cartelig profits right Like the
(06:50):
ESG stuff is incredibly lucrative for these big asset managers,
which is just a strange claim. It's not really a
claim that Blackrock would make, right. I mean, I think
a lot of ESG investors would say, this is actually
in the long term financial interest of our investors. But
they're not saying, oh, we're making cartel like profits by
cutting down the minor coal. But it's also not something
that like the Attorney General of Texas would say in
(07:12):
any context outside of this lawsuit, right, Like the attorney
general texts say, oh, Blackrock is not putting its investors'
interests first, except here it is here it's making a
lot of money for investors. So that's like a funny
little claim. The other thing that's weird is that the
coal companies are not defendants, right. Yeah, if you're worried
about anti trust conspiracy in which the coal companies are
earning cartel like profits by all agreeing to cut back
(07:34):
on production, like why aren't you seeing the coal companies,
and again the answer is political, right, The answer is like,
it would be weird for the Attorney General of Texas
to sue all the big coal companies, but to sue Blackrock.
Speaker 2 (07:43):
Is finn Yeah, that is so funny. I mean you
mentioned that Blackrock is often the punching bag here. I
thought that.
Speaker 1 (07:50):
Much more so than State Street and found here mostly
because they've put out more cablic statements. One way or
the other.
Speaker 2 (07:55):
That's true. And I mean Vanguard is just a passive beast,
just passive animal.
Speaker 1 (08:01):
But that's not entirely. They're much less like public about it,
and they are much more Their heritage is much more
index funds versus Blackrock, like owns a lot of index funds,
but it is also like you know, has more of
a heritage an active bond manager.
Speaker 2 (08:14):
But yeah, you're right. You know, the conversation I've had
with Vanguard as well that they're also in on the
active game.
Speaker 1 (08:23):
Active I don't mean active investment. I mean like intentional
stewardship of even their passive holdings. Right, if you are
a massive index fund manager, you have to think about
how you vote your shares, and you have to think about,
you know, whether and how you engage with companies. And
I think Vanguard does not say we do none of that, right,
I mean, I think they have some sort of some
of the same sorts of stewardship thoughts that like blackrockers.
Speaker 2 (08:45):
I do think it's interesting that something that's brought up
in this lawsuit is the fact that the Big Three
are part of these like various climate groups, some of
them that are named or the Climate Action one hundred plus.
There's also the Net Zero Asset Managers and NICHE. I mean,
that's pointed to as proof that they formed a syndicate
and agreed to use their collective holdings of publicly traded
(09:06):
coal companies to introduce industry wide output reductions. For several
of these groups. I mean, State Street, for example, quit
a CAA one hundred plus in February. Vanguard left the
Net Zero Asset Manager's Initiative in twenty twenty two. Was
never a part of the previous group as well, and
that's also acknowledged in the lawsuit that at least for
(09:29):
several of these collectives, they're not even part of these anymore.
But I don't know, it's a weird thing to point
to as proof of something, and also I just don't
know how much teeth is involved.
Speaker 1 (09:40):
I agree with that. I mean, I think the lawsuit
has to mention this because one anti trust claim you
could make is that Blackrock itself or you know, one
of these three managers just by itself because it owns
big stakes in all of these public companies, it has
some incentive and some power to make those companies colude together.
So like Blackrock itself could go to meetings at all
the coal companies say cut to like boost the price
(10:01):
of the other coal companies, and maybe that's an anti
trust violation, but that is less compelling because Blackrock is
a you know, passive minority shareholder and all these it's
less compelling than saying, well, between them, the Big three
owned thirty percent of all these coal companies, and so
they have enormous power. And the fact is that for
a while, the Big three asset managers all sort of
made similar statements about being interested in ESG and being
(10:23):
concerned about climate disclosure and talking to portfolio companies about
how they think about climate change. And it's possible that
those statements were all independent. Right, It's possible that if
you're a coal company, you have a lot of shareholders
who are separate, unrelated shareholders who are all interested in
climate change and who're all worried about ESG issues, and
(10:44):
so as a coal company CEO, you have to respond
to your various shareholders who all care about ESGA or
many of whom care about escha. But that's not an
anti trust problem, right, Like, if all of your shareholders
independently worry about climate change because it's like a fact
in the world, then that's not an antrust problem. The
a interrust problem is if they all get together in
a group, right, And so that's why the lawsuits mentioned
(11:07):
these groups. I agree with you, these groups don't seem
like they have a ton of teeth, right, Like these
are not literally like backroom meetings of the heads of
Black Rock and Vanguard and States. She's saying, oh, that's
got coal production, right, But like they are a group
that you can point to where they all sort of
got together and signed on to the same statement.
Speaker 2 (11:21):
Let's also talk about what they're trying to achieve, because
this line caught my eye, and I think it leads
in nicely to what we're going to be talking about next.
So the States are asking the court to bar the
three largest US investment firms from using their stock in
coal companies to vote on shareholder resolutions, which I don't know,
that doesn't seem very healthy and good. Just to remove
(11:45):
the voting power of specifically these three altogether, I.
Speaker 1 (11:49):
Think a lot of people, not just that idea ischi
people find it weird that so much of the voting
power of stocks is controlled by literally Larry think right by,
like the people in charge of stewardship at these three companies.
And this is not the first suggestion I've seen that, oh, actually,
(12:10):
just index ones shouldn't be able to vote. That would
solve all the problems. I agree that it's a weird solution.
I don't know that it solves all the problems. But
saying these big firms shouldn't be allowed to vote their
shares is not an uncommon proposed solution. Actually, it sort
of crudely gets at the issue of like, hey, it's
weird that they control so many votes, and they have
(12:31):
sort of different motivations from other shareholders because they do
own every company, and they do sort of represent a
lot of passive investors who maybe don't supervise their voting
choices that closely.
Speaker 2 (12:44):
Yeah, I mean, you tweet anything about Blackrock, or if
you spend even five minutes on Twitter at least the
circles that I run in, and you'll find a lot
of conspiracy theories immediately.
Speaker 1 (12:55):
But they truly lend themselves to conspiracy theories, right. I mean,
they're like a multi trillion dollar company that controls every company.
Like if you're like, oh, there's a company that like
is the biggest shareholder for every company in the world, Like, ooh,
that's a good conspiracy. That's a good starting sentence for
a conspiracy. And so they do attract a lot of conspiracy.
Speaker 2 (13:31):
We have a novel solution that's been proposed to sort
of solve some of these issues. Do you think we
should talk about it?
Speaker 1 (13:38):
We should talk about it.
Speaker 2 (13:40):
Okay.
Speaker 1 (13:41):
It's a proposal from Oliver Hart, Helene Landimore and Luigi's
and Galas in Bloomberg Weekend about how to implement shareholder
democracy using shareholder assemblies.
Speaker 2 (13:51):
Yeah, so this is interesting. We kind of compare it
to basically a jury where you select a sample of
the shareholders. It's like a sampling sort of technique and
a bond index fund. Well, it's more like a lottery,
but sure a lottery. Well, I mean it reminds you
of a sampling technique just because you're not going to
get all of the bonds in your index. So the
(14:15):
hope is to pick a sample that sort of accurately
represents the demographics or whatever. But you're right, they are
picking randomly.
Speaker 1 (14:22):
Right. The idea is like there's like a million you know,
shareholders and a mutual fund or whatever, and you give
them each one lottery ticket for each share of the
fund that they own, and then you choose you know,
one hundred and fifty lottery tickets, and so you collect
one hundred and fifty people who are in some sense
representative investors in the fund, and then you get them
together in a big room and they talk about what
(14:42):
the funds voting policies should be, so that instead of
like Larry think, deciding how Blackrock will vote its shares
in coal companies, you have like, you know, some people
in a room who are like ultimately the direct investors
in like the Blackrock index fund, and they get together
and they decide have Black Action vote its shares and
then their decision, you know, after deliberation and consultation, is
(15:06):
the new policy for Blackrock.
Speaker 2 (15:08):
And this is specific to mutual funds. And they do
propose that you know, if you have a larger investment,
you would have a higher chance of being drawn, but
everyone would have an equal voice once actually in the assembly,
which I also don't know how to think about that. Obviously,
with a jury, that makes sense. But if you own
(15:30):
a ton of shares in a mutual funds, shouldn't you
have a bigger vote?
Speaker 1 (15:35):
Well, but most of the people who own the shares the
mutual fund of zero voted in this propessal Right, it's
not like a direct democracy. It's it's a random temple
to get some people who seem vaguely representative and they
hash out something that seems like it might be workable
for everyone. Like, my impression is that there's like a
lot of overstatement of the importance of shareholder voting. Like
I don't think that like Blackrock is influential or that
(15:58):
ESG is important because of how black Rock votes on
shareholder proposals at coal companies, Like I don't think that's
the thing that is driving anything, right, Like these shareholder
proposals are frequently sort of symbolic, non binding proposals, and
so it's nice for a company to win the votes
against the sheralfter's proposal. That doesn't Like it's an annoying
embarrassment to fight over these things, But it's not like
(16:21):
the driving force behind Like you know, how the CEO
lives her life or is paid or anything like that. Right,
Like the thing that matters is, you know, voting in
contested proxy fights and mergers. But it's also like the
soft power of Vanguard coming in or of black Rock
coming in and having a meeting and saying, hey, we'd
really like you to dig up less coal or whatever.
And I think that like what that means is that
(16:44):
the sort of explicit voting policies are less important than
the informal meetings and engagement that these firms can have.
And you can only really have these assemblies to set
the explicit voting policies, right, Like you have these meetings
to say we will vote in favor of shareholder proposals
to like disclose more about climate change or whatever, or
(17:05):
against them or whatever. You know, like the people will
get together into alot, but you can't have the assemblies
show up at the meetings with the companies. Right. Like
that's going to be the Blackrock Stewardship team, right, And
like those people are going to continue to be those people,
and they're going to be They're going to have the
sort of professional biases that those people have, and the
(17:27):
voting policy will be a sort of marginal change rather
than like a real change in like how Blackrock operates itself.
Now people really care about the voting stuff, right, and
like there's a lot of like focus on you know,
Blackrock is like a number of these funds, these big
fund firms are like experimenting with pass through voting, where
like the shareholders, the ultimate beneficiaries of the fund can
(17:47):
vote their shares or they can choose from a menu
of policies that will drive the votes, so they can
be like a little bit more responsive to like the
ultimate beneficiary's interests, And this is another way to do that.
I just I just don't know how much any of
this matters. Like the voting stuff is the sort of
like showy, visible stuff, but I'm not sure how much
(18:08):
it matters.
Speaker 2 (18:08):
And I'm sure there's people that would disagree. But the
pass through voting doesn't seem like a terrible solution, especially
when you consider sort of the logistical problems that would
come with these shareholder or investor assemblies, Like.
Speaker 1 (18:20):
Well, the pastor voting is very logistically problematic. It's like
because yeah, you have to vote, Like I think the
way I actually implement it is like you choose from
a menu of like three different voting policies and then
they do the voting for you. It's not actually pass
through voting in the sense that like, you know, yeah,
black guy gets like a thousand proxy statements and you
get to choose how you vote your little shares on
each one of them.
Speaker 2 (18:41):
Yeah. In terms of though, what is being proposed by
these three professors, they talk about, you know, gathering one
hundred and fifty people in a room, and it sounds
like a pretty intense process. And they say, you know,
since participation would be voluntary, participants should be adequately paid,
provided with child care, et cetera. Like that seems like
(19:03):
quite quite an uphill battle.
Speaker 1 (19:05):
I don't know, man, that's a drop in the bucket
compared to running trillions and trillions of dollars of money,
and also like dropping the bucket compared to running trillions
of dollars of money and getting in trouble with politicians
because you're voting in a way that's different from if
you have like a good way to sort of point at,
like we have a good process.
Speaker 2 (19:21):
But just in terms of like who would actually agree
to do that, Like who would take time because their
life could participate? Yeah, exactly. They propose that to make
people who.
Speaker 1 (19:32):
Participate in CHERYLD they're ready anyway, So it's like.
Speaker 2 (19:34):
Fun, that's true, that's true, but self selection obviously would
still be a big problem here.
Speaker 1 (19:40):
I will say it reminds me of a paper by
John Coates, the Harvard law professor. It's called the Problem
of twelve, which is a great title. It's about the
idea that like, like he says twelve, many people now
say three. But there's some small number of asset managers
who will end up controlling most of the votes at
most of the companies in America. And one thing he
writes about is like they've gotten to that position sort
(20:04):
of like by accident, and there's no thought given to
how they exercise that power. And we're now increasingly see
people thinking about how they exercise that power. And one
thing he proposed is like there's like all these rules
of administrative law for how like US federal agencies should
have to like make decisions, how they should like make
new rules or they should make enforcement decisions. There's just
(20:26):
a lot of like process around how federal agencies make decisions.
And like, obviously the big asset managers have some process
around how they make decisions, but like it's all internal,
it's all voluntary. It's like, you know, their companies, and
they make decisions however they want to make decisions. There's
this idea that they shouldn't be completely free to make
decisions on their own. They're like now like a sort
(20:48):
of quasi public function, and so there should be some
public process. There should be some like way for citizens
or like investors to like come in and give them
some feedback and tell them how to make decisions so
that they're not just like making unconstrained decisions. It reminds
you of like the Facebook oversight board, where Facebook is
like we don't know how to moderate our contents, so
we're going to have like some you know, official supreme
(21:09):
court of moderation. This is like one more proposal of
like how to do that, of how to get like
some sort of process and public input into how these
asset managers make decisions. And I think it's like not
quite right for like how they actually influence companies, but
it's a gesture in that direction.
Speaker 2 (21:25):
Yeah. I mean, ultimately, I feel like if you're a
public company, your stock price is going to be the
ultimate sounding board. If you make a bad decision, your
stock price will probably go down eventually, Like if you
make enough bad decisions that they outweigh the good decisions,
et cetera. But obviously that's more indirect.
Speaker 1 (21:42):
Yeah, I mostly agree with that, and I think the
stock price is the main disciplining mechanism. Shareholder votes is
a secondary disciplining mechanism, right, Like you could imagine a
company performing perfectly well financially, but like annoying enough if
it's like locked up index investors, that someone raises a
(22:03):
proxy fight and gets management kicked out. Like that's a
little bit what happened with Exxon and engine number one.
They didn't management didn't get kicked out, but they did
lose a proxy fight, not because investors were particularly disgruntled
with the financial performance, but because like a small activist
fund was able to kind of get support from big
indexy investors to change some policies. So like like it's
(22:26):
mostly stock prices what matters, and so like all this
stuff is like a second tier thing, but like there's
a little bit of this stuff can affect how companies
actually operate.
Speaker 2 (22:47):
Matt, I think we should keep talking about black Rock.
Oh yeah, it's the world's biggest asset manager, and they're
trying to get a lot bigger, specifically in the months. Well,
they'd like to get a lot bigger, and they'd like
to be leader in private markets. And boy are they
spending a lot of money to get there, are they?
Speaker 1 (23:05):
I guess they are.
Speaker 2 (23:06):
Well, they spent another twelve billion on HPS. They spent
like twelve and a half billion right on a GIP
about a year ago, and I forget how much they
spent on prequein but that was mostly about data. But HPS,
I mean, we've been this has been written about and
speculated on for a while now, and they finally came
(23:27):
out and announced that they're buying HPS.
Speaker 1 (23:30):
Yeah, it feels like we're in a really white hot
time for private credit.
Speaker 2 (23:34):
And a golden age, a golden age.
Speaker 1 (23:37):
For private credit, and golden ages always feel like. Golden
age is like until like for the last moment, and
HPS seems very smart. Like they did a very smart
job here where they made a lot of noises about
it and like went pretty far down the road of
going public and talking about a very high valuation for
their IPI and they made a lot of noise about it.
(24:00):
Like went far down the road of like raising big
minority stakes from like Middle East sovereign wealth funds. So
there's a lot of like talk about we're gonna have
some mark where the thing is worth ten or twelve
billion dollars. And then they were able to use that
kind of public pressure to get Blackrock, which was pretty
obviously pretty desperate to buy a big private credit fund
(24:21):
and like HPS was kind of like the biggest target.
They were able to use that, like all those marks
to get Blackrock to pay twelve billion dollars for hps's business.
And you know, like you get the sense they think
that's kind of a rich valuation. Mm hmmm, and a're
very happy what they're doing.
Speaker 2 (24:38):
Yeah, I imagine. So, but as you write about recently
in money stuff, they're not sailing into the sunset. They
are going to continue to work. And I mean that's
important because you can, like there's.
Speaker 1 (24:50):
Like a bunch of articles in Bloomberg about how like
there's a huge incentive compensation package to keep all the
HPS people and like they're getting all these big retention
bonuses and they are take all their money in Blackrock
stock and they're keeping billions of dollars of like their
pas in like HPS funds. You're saying all of that
because because it's surprising, right, You're saying all of that,
(25:11):
because you need to say all of that, right, Like, yes,
they are not just cashing at and selling off into
the sunset, but it's like it feels like such a
good and rich and timely exit that you know you
have to be like, no, it's not an excent. We're fine,
We're still here.
Speaker 2 (25:27):
Yeah. Yeah, Well, I mean you think about all the
sell side notes that have been written about this deal
talking about concerns about culture, et cetera. And you highlighted
the best one which got at it pretty directly from Evercore,
talking about how this does come with execution risk. This
is a people led business and assets go up and
(25:47):
down the elevator every single day, so they need to
come out with these sort of noises.
Speaker 1 (25:54):
Yeah. As I say, like, you can obviously see the
appeal to HPS, right besides the twelve dollars, they are
a big private credit fund, but this is a business
that has gone from being like a kind of like
weird niche business to being a huge institutional business. And like,
if you want to get really big as a private
credit fund. You kind of need a really big platform
(26:16):
at this point, and like a platform to go ahead
and market to big institutions. And you know, HPS is
like largely a high yieldy direct lending e firm, and
plausibly the next wave of private credit is more like
investment credit private credit, and to build that out. It's
just seems like it would obviously be helpful to have
like Blackrocks enormous size and client base.
Speaker 2 (26:40):
M I mean, I don't know what to say to that,
other than God, I wish I was being bought by Blackrock,
and so I'm like, it is interesting. I don't know,
it's just it's so it's so Blackrock the way that
they've approached this for I don't know, a couple of months,
it's like, oh, Blackrocks trying to catch up in the
the private markets, and now it's like when this closes,
(27:03):
what they're going to be managing like six hundred billion
in alternatives and now they're you know, close to the
top of the leader board.
Speaker 1 (27:10):
Yeah. I mean it's funny to me, like you think
about like the giant gasset managers. Black Rock comes from
a place of you know, being a bond manager eventually
being an excepent manager, and like Blackstone, Apollo, KKR come
from places of like being LBO shops, and the convergence
(27:33):
is in this like private credit world where it sort
of is like being a public credit investor because yeah,
it's like credit stuff, and it's increasingly like investment grade
credit stuff, and it's sort of like being an LBO
investor because it's like a lot of it as financing LBS.
But so like you can come to it from either
direction and it is like that sort of vast middle
(27:55):
ground where like you know, if you're running a giant
private credit strateg now you're talking about like, oh we
talked to investment grade companies, We're like you kind of
look like a bond manager when you say Blackrock has
six hundred billion dollars of alternatives, like they're not doing LBS,
Like yeah, alternative, Like there's a range of what alternatives
(28:15):
can mean, and it's like it's fixed income credit stuff now.
Speaker 2 (28:19):
Yeah, another point I wanted to make just about like
this being so Blackrock. I love ETFs, as everyone knows,
and you think about how Blackrock became Blackrock. In ETFs,
they bought Barkley's Global Investors for thirteen and a half billion.
I think that was announced in June two thousand and nine,
(28:39):
and now you look like fifteen years later and they
manage close to four trillion globally. They are the biggest
in ETFs and that was also in organic growth. They
just bought a business and then built and built and built.
So I don't know, it's a similar playbook to what
they always do.
Speaker 1 (28:57):
Yeah, it's funny, like Blackrock is like the you know,
it's like synonymous with being a giant ATF provider, but
it's you know, yeah, But like I come from a
place of thinking of them as a like you know,
active fixed income manager, because that's like ultimately their heritage, right,
But like private kind of feels a little different because
like it doesn't feel especially winner or take all. Right,
(29:20):
this is the sort of thing where everyone's gonna have
to have a private credit business, and because they're a
big company, they had to have a big one, and
so they went out and got a big one. But like,
I don't know, they're not gonna be like the provider
of private credit. They're gonna be one of you know,
a dozen.
Speaker 2 (29:34):
I can't wait to talk about this in fifteen years.
Speaker 1 (29:37):
I don't want to just flatter you because you're an
ETF person, but like ETFs like revolutionized areas.
Speaker 2 (29:41):
Of finance, you're so right say more.
Speaker 1 (29:45):
I think in five years, private credit is gonna be
like bank wut. It's gonna be like yeah, think in
the pitch bock. It's gonna be like another way of
financing deals. I think that like, ultimately, people are not
going to talk about private credit as this thing from
public credit in the way that they do now, because
it like still feels kind of new and interesting now,
whereas ETFs like, really are you know, different from like
the mutual fans that came before.
Speaker 2 (30:07):
Yeah, I agree with you there. I also was not
paying attention to ETFs in two thousand and nine, and like,
I would love to just go back in time and
see how that moment felt, you know, like when Blackrock
made that splash, a thirteen and a half billion dollars
purchase for ey shares, Like what did that feel like?
I wonder how that was greeted. And I don't know,
(30:27):
maybe I'll do that in my spare time, because I
don't know. I talked to a lot of like people
who've been in the ETF industry for like two decades,
and like you hear them talk and they're like, yeah,
we used to be like toiling away in the dark.
You know, we were just like obscure and no one
really cared about us. And now we're, you know, at
the center of the world.
Speaker 1 (30:45):
So I thought of this episode about BlackRock's private creditfiicials
turn into just combi to ETFs. It's just like that.
Speaker 2 (30:52):
How could it not?
Speaker 1 (30:54):
Everything comes back to ETFs, especially.
Speaker 2 (30:56):
It does when you're a hammer. Everything's a nail.
Speaker 1 (31:00):
We're considering during an other mailbag episode. So if you
have good questions for the Money Stuff podcast, please send
them to money pod at Bloomberg dot net and if
they're good, we'll answer them in another mailbag episode.
Speaker 2 (31:13):
We look forward to hearing from you.
Speaker 1 (31:16):
And that was the Money Stuff Podcasts.
Speaker 2 (31:18):
I'm Matt Levian and I'm Katie Greifeld.
Speaker 1 (31:21):
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Bloomberg Audio Studios, Podcasts, radio News. Here we go, Hello,
and welcome to The Money Stuff Podcast, your weekly podcast
where we talk about stuff related to money. I'm Matt
Levigne and I write the Moneys Doff column for Bloomberg Opinion.
Speaker 2 (00:23):
And I'm Katie Greifeld, a reporter for Bloomberg News and
an anchor for Bloomberg Television.
Speaker 1 (00:28):
What are you talking about today, Katie?
Speaker 2 (00:30):
We're going to talk about ESG and whether index funds
are illegal. We're going to talk about maybe an answer
to shareholder voting, and then we're going to talk about
Blackrock HPS. It finally happened. Blackrock finally bought HPS. But
let's start with ESG. Turns out, at least according to Texas,
(00:53):
that's an anti trust violation.
Speaker 1 (00:56):
It's been writing for almost ten years. Our index fund's illegal,
and I didn't invent that idea, but I feel like
I've done a lot to popular has it, and within
the next few years it might become the case that
index funds are illegal. So Texas and some other states,
but some states, led by Texas, sued what do we
in the business called the Big three asset managers, so
(01:16):
Vanguard Blackrock, and State Street for an alleged anti trust
conspiracy where they allegedly all got together and pressured coal
companies to cut the production of coal to raise the
price of coal, and that is the anti trust conspiracy. Now,
(01:37):
there's a long running theory that these big diversified asset
managers like Blackrock and Vanguarden, State Street, but also like
some of the smaller less INDEXI managers, because they kind
of own every company in an industry, they have a
desire for the companies in that industry to get together,
cut production, not compete with each other too hard, raise prices,
(01:57):
and like earn outsized margins because they are not competing
the way they would if they were all owned by
separate owners. This is like a long running theory. It's
very controversial, and one reason it's controversial is that no
one really thinks that those meetings happen, you know, so
the classic examples airlines, no one really thinks that like
(02:18):
Blackrock sends people to the CEOs of airlines and says
you need to stop competing with other airlines on your
roots because we want you to raise ticket prices and
earn more profits, and we want everyone else to raise
ticket prices are and more profits too, and no one
really thinks that the airline executives would listen to those conversations.
So there's just not like a lot of evidence that
(02:41):
these index fund companies, these big investors get together and
actually explicitly tell companies to cut production and raise prices.
So that's like the problem with a lot of these
anti trustee theories that like, oh, look, these index funds
own every company, so isn't that a weird anti trust problem.
The huge exception to that is esg. The huge exception
(03:02):
to that is that the big asset managers really did
sign on to statements saying we want companies to achieve
net zero emissions. And that is all well and good
when you're talking about consulting companies trying to fly less
or whatever. But when you talk about coal companies, talking
about a coal company lowering its emissions is very similar
(03:23):
to talking about a coal company lowering its production of coal.
And so if all of the big shareholders of all
the big coal companies get together and say to the
coal companies, you should lower your production of coal, and
the coal companies go out and say, we have lowered
our production of coal in order to meet ESG goals. Then, like,
I don't know, that kind of looks like the owners
of all the companies getting together and saying we're going
to lower production to raise prices. And so you have
(03:44):
this lawsuit saying not only that Black Rock and Vanguard
signed on to net zero pledges and then urged companies
to lower their emissions, but also that these coal companies
cut production of coal into rising demand for coal and
the price of coal sort, and these coal companies made
quote cartel like profits. So I don't know, it's kind
(04:05):
of a cool lawsuit.
Speaker 2 (04:07):
If I were Black Rock or Vanguard or State Street,
could I defend myself on the emissions point saying we
didn't mean for you to lower production, We didn't mean
for you to stop mining coal, just do it in
a more green way. Does that hold any water?
Speaker 1 (04:24):
I don't know. That's like kind of hard, Like I
think there are a lot of defenses here, and this
is like a creative lawsuit more than it is like
a slam dunk lawsuit. Even if the story was we
just wanted them to mind in a greener way and
that raised the cost of mining or like you know,
delayed mining, like that would still be sort of a
production cut. But it's also like obviously the case that
if you are generically an ESG investor, thermal coal is
(04:48):
kind of your least favorite thing. And so yeah, there
is some amount of pressure on companies to shift away
from thermal coal mining. And like the lawsuit, you don't
see like explicit statements from like Blackrock saying coal companies
shouldn't mind coal anymore. It's more like statements like we're
going to engage with companies about their climate goals and
try to really understand how they see the future of
(05:11):
the market for thermal coal. It's all vague statements, but
it is all suggestive of the idea that the people
writing those statements are not big believers in increasing the
production of thermal coal.
Speaker 2 (05:23):
Something that I feel like I've asked you before, but
I'll ask you again is whether or not intent matters
when it comes to antitrust. Like, surely, when you know,
putting together these ESG flavored proposals for these coal companies,
Blackrock wasn't trying to like boost their margins and line
the pockets of these coal companies.
Speaker 1 (05:45):
So a couple of points of that one the lawsuit
says It doesn't matter that they think they were doing
this for the good of the world. If you have
a conspiracy to restrain trade, if you have a conspiracy
to lower production that has the effect of raising prices,
the fact that you were doing it or some outside
benefit is not a really good anti trust defense. On
the other hand, it's a very weird claim because like
(06:06):
the lawsuits, they are anti trust lawsuits, and so they
are arguing that Blackrock and Vanguard were ganging up to
have cartel like profits in the coal industry, which is
a strange claim for a couple of reasons. One is
like most of the time when politicians complain about ESG,
what they say is Blackrock is usually the punching bag.
(06:27):
Blackrock is not being a fiduciary for its investors. It's
not trying to get the highest returns for investors. It's
not putting profits first. Instead, it's putting its own moral
interest in climate change or whatever ahead of the financial
interests of its investors. But this lawsuit says no, no, no, Actually,
BlackRock's ESG stuff is making cartelig profits right Like the
(06:50):
ESG stuff is incredibly lucrative for these big asset managers,
which is just a strange claim. It's not really a
claim that Blackrock would make, right. I mean, I think
a lot of ESG investors would say, this is actually
in the long term financial interest of our investors. But
they're not saying, oh, we're making cartel like profits by
cutting down the minor coal. But it's also not something
that like the Attorney General of Texas would say in
(07:12):
any context outside of this lawsuit, right, Like the attorney
general texts say, oh, Blackrock is not putting its investors'
interests first, except here it is here it's making a
lot of money for investors. So that's like a funny
little claim. The other thing that's weird is that the
coal companies are not defendants, right. Yeah, if you're worried
about anti trust conspiracy in which the coal companies are
earning cartel like profits by all agreeing to cut back
(07:34):
on production, like why aren't you seeing the coal companies,
and again the answer is political, right, The answer is like,
it would be weird for the Attorney General of Texas
to sue all the big coal companies, but to sue Blackrock.
Speaker 2 (07:43):
Is finn Yeah, that is so funny. I mean you
mentioned that Blackrock is often the punching bag here. I
thought that.
Speaker 1 (07:50):
Much more so than State Street and found here mostly
because they've put out more cablic statements. One way or
the other.
Speaker 2 (07:55):
That's true. And I mean Vanguard is just a passive beast,
just passive animal.
Speaker 1 (08:01):
But that's not entirely. They're much less like public about it,
and they are much more Their heritage is much more
index funds versus Blackrock, like owns a lot of index funds,
but it is also like you know, has more of
a heritage an active bond manager.
Speaker 2 (08:14):
But yeah, you're right. You know, the conversation I've had
with Vanguard as well that they're also in on the
active game.
Speaker 1 (08:23):
Active I don't mean active investment. I mean like intentional
stewardship of even their passive holdings. Right, if you are
a massive index fund manager, you have to think about
how you vote your shares, and you have to think about,
you know, whether and how you engage with companies. And
I think Vanguard does not say we do none of that, right,
I mean, I think they have some sort of some
of the same sorts of stewardship thoughts that like blackrockers.
Speaker 2 (08:45):
I do think it's interesting that something that's brought up
in this lawsuit is the fact that the Big Three
are part of these like various climate groups, some of
them that are named or the Climate Action one hundred plus.
There's also the Net Zero Asset Managers and NICHE. I mean,
that's pointed to as proof that they formed a syndicate
and agreed to use their collective holdings of publicly traded
(09:06):
coal companies to introduce industry wide output reductions. For several
of these groups. I mean, State Street, for example, quit
a CAA one hundred plus in February. Vanguard left the
Net Zero Asset Manager's Initiative in twenty twenty two. Was
never a part of the previous group as well, and
that's also acknowledged in the lawsuit that at least for
(09:29):
several of these collectives, they're not even part of these anymore.
But I don't know, it's a weird thing to point
to as proof of something, and also I just don't
know how much teeth is involved.
Speaker 1 (09:40):
I agree with that. I mean, I think the lawsuit
has to mention this because one anti trust claim you
could make is that Blackrock itself or you know, one
of these three managers just by itself because it owns
big stakes in all of these public companies, it has
some incentive and some power to make those companies colude together.
So like Blackrock itself could go to meetings at all
the coal companies say cut to like boost the price
(10:01):
of the other coal companies, and maybe that's an anti
trust violation, but that is less compelling because Blackrock is
a you know, passive minority shareholder and all these it's
less compelling than saying, well, between them, the Big three
owned thirty percent of all these coal companies, and so
they have enormous power. And the fact is that for
a while, the Big three asset managers all sort of
made similar statements about being interested in ESG and being
(10:23):
concerned about climate disclosure and talking to portfolio companies about
how they think about climate change. And it's possible that
those statements were all independent. Right, It's possible that if
you're a coal company, you have a lot of shareholders
who are separate, unrelated shareholders who are all interested in
climate change and who're all worried about ESG issues, and
(10:44):
so as a coal company CEO, you have to respond
to your various shareholders who all care about ESGA or
many of whom care about escha. But that's not an
anti trust problem, right, Like, if all of your shareholders
independently worry about climate change because it's like a fact
in the world, then that's not an antrust problem. The
a interrust problem is if they all get together in
a group, right, And so that's why the lawsuits mentioned
(11:07):
these groups. I agree with you, these groups don't seem
like they have a ton of teeth, right, Like these
are not literally like backroom meetings of the heads of
Black Rock and Vanguard and States. She's saying, oh, that's
got coal production, right, But like they are a group
that you can point to where they all sort of
got together and signed on to the same statement.
Speaker 2 (11:21):
Let's also talk about what they're trying to achieve, because
this line caught my eye, and I think it leads
in nicely to what we're going to be talking about next.
So the States are asking the court to bar the
three largest US investment firms from using their stock in
coal companies to vote on shareholder resolutions, which I don't know,
that doesn't seem very healthy and good. Just to remove
(11:45):
the voting power of specifically these three altogether, I.
Speaker 1 (11:49):
Think a lot of people, not just that idea ischi
people find it weird that so much of the voting
power of stocks is controlled by literally Larry think right by,
like the people in charge of stewardship at these three companies.
And this is not the first suggestion I've seen that, oh, actually,
(12:10):
just index ones shouldn't be able to vote. That would
solve all the problems. I agree that it's a weird solution.
I don't know that it solves all the problems. But
saying these big firms shouldn't be allowed to vote their
shares is not an uncommon proposed solution. Actually, it sort
of crudely gets at the issue of like, hey, it's
weird that they control so many votes, and they have
(12:31):
sort of different motivations from other shareholders because they do
own every company, and they do sort of represent a
lot of passive investors who maybe don't supervise their voting
choices that closely.
Speaker 2 (12:44):
Yeah, I mean, you tweet anything about Blackrock, or if
you spend even five minutes on Twitter at least the
circles that I run in, and you'll find a lot
of conspiracy theories immediately.
Speaker 1 (12:55):
But they truly lend themselves to conspiracy theories, right. I mean,
they're like a multi trillion dollar company that controls every company.
Like if you're like, oh, there's a company that like
is the biggest shareholder for every company in the world, Like, ooh,
that's a good conspiracy. That's a good starting sentence for
a conspiracy. And so they do attract a lot of conspiracy.
Speaker 2 (13:31):
We have a novel solution that's been proposed to sort
of solve some of these issues. Do you think we
should talk about it?
Speaker 1 (13:38):
We should talk about it.
Speaker 2 (13:40):
Okay.
Speaker 1 (13:41):
It's a proposal from Oliver Hart, Helene Landimore and Luigi's
and Galas in Bloomberg Weekend about how to implement shareholder
democracy using shareholder assemblies.
Speaker 2 (13:51):
Yeah, so this is interesting. We kind of compare it
to basically a jury where you select a sample of
the shareholders. It's like a sampling sort of technique and
a bond index fund. Well, it's more like a lottery,
but sure a lottery. Well, I mean it reminds you
of a sampling technique just because you're not going to
get all of the bonds in your index. So the
(14:15):
hope is to pick a sample that sort of accurately
represents the demographics or whatever. But you're right, they are
picking randomly.
Speaker 1 (14:22):
Right. The idea is like there's like a million you know,
shareholders and a mutual fund or whatever, and you give
them each one lottery ticket for each share of the
fund that they own, and then you choose you know,
one hundred and fifty lottery tickets, and so you collect
one hundred and fifty people who are in some sense
representative investors in the fund, and then you get them
together in a big room and they talk about what
(14:42):
the funds voting policies should be, so that instead of
like Larry think, deciding how Blackrock will vote its shares
in coal companies, you have like, you know, some people
in a room who are like ultimately the direct investors
in like the Blackrock index fund, and they get together
and they decide have Black Action vote its shares and
then their decision, you know, after deliberation and consultation, is
(15:06):
the new policy for Blackrock.
Speaker 2 (15:08):
And this is specific to mutual funds. And they do
propose that you know, if you have a larger investment,
you would have a higher chance of being drawn, but
everyone would have an equal voice once actually in the assembly,
which I also don't know how to think about that. Obviously,
with a jury, that makes sense. But if you own
(15:30):
a ton of shares in a mutual funds, shouldn't you
have a bigger vote?
Speaker 1 (15:35):
Well, but most of the people who own the shares the
mutual fund of zero voted in this propessal Right, it's
not like a direct democracy. It's it's a random temple
to get some people who seem vaguely representative and they
hash out something that seems like it might be workable
for everyone. Like, my impression is that there's like a
lot of overstatement of the importance of shareholder voting. Like
I don't think that like Blackrock is influential or that
(15:58):
ESG is important because of how black Rock votes on
shareholder proposals at coal companies, Like I don't think that's
the thing that is driving anything, right, Like these shareholder
proposals are frequently sort of symbolic, non binding proposals, and
so it's nice for a company to win the votes
against the sheralfter's proposal. That doesn't Like it's an annoying
embarrassment to fight over these things, But it's not like
(16:21):
the driving force behind Like you know, how the CEO
lives her life or is paid or anything like that. Right,
Like the thing that matters is, you know, voting in
contested proxy fights and mergers. But it's also like the
soft power of Vanguard coming in or of black Rock
coming in and having a meeting and saying, hey, we'd
really like you to dig up less coal or whatever.
And I think that like what that means is that
(16:44):
the sort of explicit voting policies are less important than
the informal meetings and engagement that these firms can have.
And you can only really have these assemblies to set
the explicit voting policies, right, Like you have these meetings
to say we will vote in favor of shareholder proposals
to like disclose more about climate change or whatever, or
(17:05):
against them or whatever. You know, like the people will
get together into alot, but you can't have the assemblies
show up at the meetings with the companies. Right. Like
that's going to be the Blackrock Stewardship team, right, And
like those people are going to continue to be those people,
and they're going to be They're going to have the
sort of professional biases that those people have, and the
(17:27):
voting policy will be a sort of marginal change rather
than like a real change in like how Blackrock operates itself.
Now people really care about the voting stuff, right, and
like there's a lot of like focus on you know,
Blackrock is like a number of these funds, these big
fund firms are like experimenting with pass through voting, where
like the shareholders, the ultimate beneficiaries of the fund can
(17:47):
vote their shares or they can choose from a menu
of policies that will drive the votes, so they can
be like a little bit more responsive to like the
ultimate beneficiary's interests, And this is another way to do that.
I just I just don't know how much any of
this matters. Like the voting stuff is the sort of
like showy, visible stuff, but I'm not sure how much
(18:08):
it matters.
Speaker 2 (18:08):
And I'm sure there's people that would disagree. But the
pass through voting doesn't seem like a terrible solution, especially
when you consider sort of the logistical problems that would
come with these shareholder or investor assemblies, Like.
Speaker 1 (18:20):
Well, the pastor voting is very logistically problematic. It's like
because yeah, you have to vote, Like I think the
way I actually implement it is like you choose from
a menu of like three different voting policies and then
they do the voting for you. It's not actually pass
through voting in the sense that like, you know, yeah,
black guy gets like a thousand proxy statements and you
get to choose how you vote your little shares on
each one of them.
Speaker 2 (18:41):
Yeah. In terms of though, what is being proposed by
these three professors, they talk about, you know, gathering one
hundred and fifty people in a room, and it sounds
like a pretty intense process. And they say, you know,
since participation would be voluntary, participants should be adequately paid,
provided with child care, et cetera. Like that seems like
(19:03):
quite quite an uphill battle.
Speaker 1 (19:05):
I don't know, man, that's a drop in the bucket
compared to running trillions and trillions of dollars of money,
and also like dropping the bucket compared to running trillions
of dollars of money and getting in trouble with politicians
because you're voting in a way that's different from if
you have like a good way to sort of point at,
like we have a good process.
Speaker 2 (19:21):
But just in terms of like who would actually agree
to do that, Like who would take time because their
life could participate? Yeah, exactly. They propose that to make
people who.
Speaker 1 (19:32):
Participate in CHERYLD they're ready anyway, So it's like.
Speaker 2 (19:34):
Fun, that's true, that's true, but self selection obviously would
still be a big problem here.
Speaker 1 (19:40):
I will say it reminds me of a paper by
John Coates, the Harvard law professor. It's called the Problem
of twelve, which is a great title. It's about the
idea that like, like he says twelve, many people now
say three. But there's some small number of asset managers
who will end up controlling most of the votes at
most of the companies in America. And one thing he
writes about is like they've gotten to that position sort
(20:04):
of like by accident, and there's no thought given to
how they exercise that power. And we're now increasingly see
people thinking about how they exercise that power. And one
thing he proposed is like there's like all these rules
of administrative law for how like US federal agencies should
have to like make decisions, how they should like make
new rules or they should make enforcement decisions. There's just
(20:26):
a lot of like process around how federal agencies make decisions.
And like, obviously the big asset managers have some process
around how they make decisions, but like it's all internal,
it's all voluntary. It's like, you know, their companies, and
they make decisions however they want to make decisions. There's
this idea that they shouldn't be completely free to make
decisions on their own. They're like now like a sort
(20:48):
of quasi public function, and so there should be some
public process. There should be some like way for citizens
or like investors to like come in and give them
some feedback and tell them how to make decisions so
that they're not just like making unconstrained decisions. It reminds
you of like the Facebook oversight board, where Facebook is
like we don't know how to moderate our contents, so
we're going to have like some you know, official supreme
(21:09):
court of moderation. This is like one more proposal of
like how to do that, of how to get like
some sort of process and public input into how these
asset managers make decisions. And I think it's like not
quite right for like how they actually influence companies, but
it's a gesture in that direction.
Speaker 2 (21:25):
Yeah. I mean, ultimately, I feel like if you're a
public company, your stock price is going to be the
ultimate sounding board. If you make a bad decision, your
stock price will probably go down eventually, Like if you
make enough bad decisions that they outweigh the good decisions,
et cetera. But obviously that's more indirect.
Speaker 1 (21:42):
Yeah, I mostly agree with that, and I think the
stock price is the main disciplining mechanism. Shareholder votes is
a secondary disciplining mechanism, right, Like you could imagine a
company performing perfectly well financially, but like annoying enough if
it's like locked up index investors, that someone raises a
(22:03):
proxy fight and gets management kicked out. Like that's a
little bit what happened with Exxon and engine number one.
They didn't management didn't get kicked out, but they did
lose a proxy fight, not because investors were particularly disgruntled
with the financial performance, but because like a small activist
fund was able to kind of get support from big
indexy investors to change some policies. So like like it's
(22:26):
mostly stock prices what matters, and so like all this
stuff is like a second tier thing, but like there's
a little bit of this stuff can affect how companies
actually operate.
Speaker 2 (22:47):
Matt, I think we should keep talking about black Rock.
Oh yeah, it's the world's biggest asset manager, and they're
trying to get a lot bigger, specifically in the months. Well,
they'd like to get a lot bigger, and they'd like
to be leader in private markets. And boy are they
spending a lot of money to get there, are they?
Speaker 1 (23:05):
I guess they are.
Speaker 2 (23:06):
Well, they spent another twelve billion on HPS. They spent
like twelve and a half billion right on a GIP
about a year ago, and I forget how much they
spent on prequein but that was mostly about data. But HPS,
I mean, we've been this has been written about and
speculated on for a while now, and they finally came
(23:27):
out and announced that they're buying HPS.
Speaker 1 (23:30):
Yeah, it feels like we're in a really white hot
time for private credit.
Speaker 2 (23:34):
And a golden age, a golden age.
Speaker 1 (23:37):
For private credit, and golden ages always feel like. Golden
age is like until like for the last moment, and
HPS seems very smart. Like they did a very smart
job here where they made a lot of noises about
it and like went pretty far down the road of
going public and talking about a very high valuation for
their IPI and they made a lot of noise about it.
(24:00):
Like went far down the road of like raising big
minority stakes from like Middle East sovereign wealth funds. So
there's a lot of like talk about we're gonna have
some mark where the thing is worth ten or twelve
billion dollars. And then they were able to use that
kind of public pressure to get Blackrock, which was pretty
obviously pretty desperate to buy a big private credit fund
(24:21):
and like HPS was kind of like the biggest target.
They were able to use that, like all those marks
to get Blackrock to pay twelve billion dollars for hps's business.
And you know, like you get the sense they think
that's kind of a rich valuation. Mm hmmm, and a're
very happy what they're doing.
Speaker 2 (24:38):
Yeah, I imagine. So, but as you write about recently
in money stuff, they're not sailing into the sunset. They
are going to continue to work. And I mean that's
important because you can, like there's.
Speaker 1 (24:50):
Like a bunch of articles in Bloomberg about how like
there's a huge incentive compensation package to keep all the
HPS people and like they're getting all these big retention
bonuses and they are take all their money in Blackrock
stock and they're keeping billions of dollars of like their
pas in like HPS funds. You're saying all of that
because because it's surprising, right, You're saying all of that,
(25:11):
because you need to say all of that, right, Like, yes,
they are not just cashing at and selling off into
the sunset, but it's like it feels like such a
good and rich and timely exit that you know you
have to be like, no, it's not an excent. We're fine,
We're still here.
Speaker 2 (25:27):
Yeah. Yeah, Well, I mean you think about all the
sell side notes that have been written about this deal
talking about concerns about culture, et cetera. And you highlighted
the best one which got at it pretty directly from Evercore,
talking about how this does come with execution risk. This
is a people led business and assets go up and
(25:47):
down the elevator every single day, so they need to
come out with these sort of noises.
Speaker 1 (25:54):
Yeah. As I say, like, you can obviously see the
appeal to HPS, right besides the twelve dollars, they are
a big private credit fund, but this is a business
that has gone from being like a kind of like
weird niche business to being a huge institutional business. And like,
if you want to get really big as a private
credit fund. You kind of need a really big platform
(26:16):
at this point, and like a platform to go ahead
and market to big institutions. And you know, HPS is
like largely a high yieldy direct lending e firm, and
plausibly the next wave of private credit is more like
investment credit private credit, and to build that out. It's
just seems like it would obviously be helpful to have
like Blackrocks enormous size and client base.
Speaker 2 (26:40):
M I mean, I don't know what to say to that,
other than God, I wish I was being bought by Blackrock,
and so I'm like, it is interesting. I don't know,
it's just it's so it's so Blackrock the way that
they've approached this for I don't know, a couple of months,
it's like, oh, Blackrocks trying to catch up in the
the private markets, and now it's like when this closes,
(27:03):
what they're going to be managing like six hundred billion
in alternatives and now they're you know, close to the
top of the leader board.
Speaker 1 (27:10):
Yeah. I mean it's funny to me, like you think
about like the giant gasset managers. Black Rock comes from
a place of you know, being a bond manager eventually
being an excepent manager, and like Blackstone, Apollo, KKR come
from places of like being LBO shops, and the convergence
(27:33):
is in this like private credit world where it sort
of is like being a public credit investor because yeah,
it's like credit stuff, and it's increasingly like investment grade
credit stuff, and it's sort of like being an LBO
investor because it's like a lot of it as financing LBS.
But so like you can come to it from either
direction and it is like that sort of vast middle
(27:55):
ground where like you know, if you're running a giant
private credit strateg now you're talking about like, oh we
talked to investment grade companies, We're like you kind of
look like a bond manager when you say Blackrock has
six hundred billion dollars of alternatives, like they're not doing LBS,
Like yeah, alternative, Like there's a range of what alternatives
(28:15):
can mean, and it's like it's fixed income credit stuff now.
Speaker 2 (28:19):
Yeah, another point I wanted to make just about like
this being so Blackrock. I love ETFs, as everyone knows,
and you think about how Blackrock became Blackrock. In ETFs,
they bought Barkley's Global Investors for thirteen and a half billion.
I think that was announced in June two thousand and nine,
(28:39):
and now you look like fifteen years later and they
manage close to four trillion globally. They are the biggest
in ETFs and that was also in organic growth. They
just bought a business and then built and built and built.
So I don't know, it's a similar playbook to what
they always do.
Speaker 1 (28:57):
Yeah, it's funny, like Blackrock is like the you know,
it's like synonymous with being a giant ATF provider, but
it's you know, yeah, But like I come from a
place of thinking of them as a like you know,
active fixed income manager, because that's like ultimately their heritage, right,
But like private kind of feels a little different because
like it doesn't feel especially winner or take all. Right,
(29:20):
this is the sort of thing where everyone's gonna have
to have a private credit business, and because they're a
big company, they had to have a big one, and
so they went out and got a big one. But like,
I don't know, they're not gonna be like the provider
of private credit. They're gonna be one of you know,
a dozen.
Speaker 2 (29:34):
I can't wait to talk about this in fifteen years.
Speaker 1 (29:37):
I don't want to just flatter you because you're an
ETF person, but like ETFs like revolutionized areas.
Speaker 2 (29:41):
Of finance, you're so right say more.
Speaker 1 (29:45):
I think in five years, private credit is gonna be
like bank wut. It's gonna be like yeah, think in
the pitch bock. It's gonna be like another way of
financing deals. I think that like, ultimately, people are not
going to talk about private credit as this thing from
public credit in the way that they do now, because
it like still feels kind of new and interesting now,
whereas ETFs like, really are you know, different from like
the mutual fans that came before.
Speaker 2 (30:07):
Yeah, I agree with you there. I also was not
paying attention to ETFs in two thousand and nine, and like,
I would love to just go back in time and
see how that moment felt, you know, like when Blackrock
made that splash, a thirteen and a half billion dollars
purchase for ey shares, Like what did that feel like?
I wonder how that was greeted. And I don't know,
(30:27):
maybe I'll do that in my spare time, because I
don't know. I talked to a lot of like people
who've been in the ETF industry for like two decades,
and like you hear them talk and they're like, yeah,
we used to be like toiling away in the dark.
You know, we were just like obscure and no one
really cared about us. And now we're, you know, at
the center of the world.
Speaker 1 (30:45):
So I thought of this episode about BlackRock's private creditfiicials
turn into just combi to ETFs. It's just like that.
Speaker 2 (30:52):
How could it not?
Speaker 1 (30:54):
Everything comes back to ETFs, especially.
Speaker 2 (30:56):
It does when you're a hammer. Everything's a nail.
Speaker 1 (31:00):
We're considering during an other mailbag episode. So if you
have good questions for the Money Stuff podcast, please send
them to money pod at Bloomberg dot net and if
they're good, we'll answer them in another mailbag episode.
Speaker 2 (31:13):
We look forward to hearing from you.
Speaker 1 (31:16):
And that was the Money Stuff Podcasts.
Speaker 2 (31:18):
I'm Matt Levian and I'm Katie Greifeld.
Speaker 1 (31:21):
You can find my work by subscribing to the Money
Stuff newsletter on Bloomberg dot com.
Speaker 2 (31:25):
And you can find me on Bloomberg TV every day
on Open Interest between nine to eleven am Eastern.
Speaker 1 (31:31):
We'd love to hear from you. You can send an
email to Money pod at Bloomberg dot net. Ask us
a question and we might answer it on the air.
Speaker 2 (31:38):
You can also subscribe to our show wherever you're listening
right now and leave us a review. It helps more
people find the show.
Speaker 1 (31:44):
The Money Stuff Podcast is produced by Ana Maserakus and
Moses and On.
Speaker 2 (31:48):
Our theme music was composed by Blake Maples.
Speaker 1 (31:50):
Brandon Francis Nunnim is our executive producer.
Speaker 2 (31:53):
And Stage Bauman is Bloomberg's head of Podcasts.
Speaker 1 (31:55):
Thanks for listening to The Money Stuff Podcast. We'll be
back next week with more stuff.
Speaker 2 (32:14):
Thanks for listening to The Money Stuff Podcast. If you
never want to miss a story, become a bloomberg dot
com subscriber today. Check out our special intro offer right
now at bloomberg dot com slash podcast offer, or click
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