BlackRock v Blackstone

THE two most successful entrepreneurs on Wall Street of the past two decades work on opposite sides of Park Avenue. Larry Fink, 65, is a Democrat whose hand is glued to a Starbucks cup and who runs BlackRock from 52nd Street. Stephen Schwarzman, 70, is a Republican who wears striped shirts with plain collars and runs Blackstone from between 51st and 52nd. The two are ex-colleagues, but have sharply opposing views on investment and management. Their trajectories illustrate how finance is changing. Mr Fink, once the underdog, is on top.

His firm, BlackRock, is the world’s largest asset manager, with $6trn of assets. It stands for computing power, low fees and scale, and is booming. Mr Schwarzman’s firm, Blackstone, is the largest “alternative” manager, focused on private equity and property, with $387bn of assets. It stands for a time-honoured formula of brain power, high fees and specialisation. Lately, it has trod water.

When Mr Fink was a securities trader in his 30s he joined Blackstone, co-founded by Mr Schwarzman, to set up its bond-investment business. This was named BlackRock, and became a separate company in 1995. As late as 2007 the two firms had similar market values. Yet they have taken diametrically different approaches to investment and to their own control structures.

BlackRock mainly sells passive funds (including exchange-traded-funds, or ETFs) to institutions and to the masses. It has been a leader in the shift away from conventional asset managers. Its fees are wafer-thin: it makes 0.2 cents of revenue a year for every dollar it manages. Blackstone, meanwhile, uses leverage and changes the management of firms in order to try to outperform. Its fees are 1.8 cents. Its clients are institutions and the rich.

The structure of Mr Fink’s firm is simple; one share, one vote. He owns only 0.66% of it (the largest shareholder is PNC, a bank, with a stake of 22%). This gave BlackRock the flexibility to issue shares to buy Barclays’ fund-management arm in 2009. Mr Schwarzman, by contrast, has tightly hugged control of his partnership. Outside shareholders have no vote at Blackstone, and its accounting is as baffling as Kanye West or the works of Hegel.

Both firms pay out a handsome portion of their sales to staff—between 30% and 40%—but their cultures vary greatly. Blackstone’s bill is spread over 2,240 workers, who earn on average $1m a year, three times the average of BlackRock’s 13,000 staff.

Which strategy has been the best route to world domination? Passive money run by a simple firm, or active money run by a complex one? Schumpeter has devised a five-part Wall Street “tycoon test”. It gauges the firms’ size, the bosses’ personal wealth, the wealth created for clients and also for shareholders, and the influence the two men wield beyond their own companies.

Mr Schwarzman wins only one of the five tests (albeit hands down). His fortune is $13bn, according to Bloomberg; Mr Fink is worth less than $1bn. When it comes to size, BlackRock is ahead. Its market value of $86bn is double that of its original parent. Measured by sales, profits and cash returns to shareholders, it is, on average, 31% larger. It has raised seven times the amount of net client money cumulatively over the past decade.

There is no very satisfactory way to compare how each firms’ clients have done. But an extremely crude yardstick is that BlackRock’s clients have made roughly $2.9trn of profits over the past decade, compared with $202bn for Blackstone’s clients. For each firm the gain is equivalent to about 80% of average assets under management over the period. Both firms have benefited from soaring markets; it is not clear that Blackstone’s active management and use of leverage have delivered much better results.

Both have created wealth for their shareholders, but, again, BlackRock is ahead, with a boost of $50bn-70bn (depending on the method and including cash returned to shareholders) against $32bn at Blackstone over the past decade. Mr Fink’s achievement is in the same range as that of acclaimed entrepreneurs such as Reed Hastings at Netflix or Elon Musk at Tesla. BlackRock is valued on 25 times profits, versus 11 for Blackstone, suggesting that investors prefer its simple structure and think it will grow faster.

The final test is power. Mr Schwarzman has sway over a narrow group of businesses his firm controls, and he is a champion networker. But Mr Fink’s firm probably has more overall clout: it owns 5-7% of most big listed companies in the Western world, giving it enormous influence. Mr Fink has used this platform to urge bosses to invest more. BlackRock votes against the advice of the managers of the firms it invests in about 10% of the time.

Scoring three or four out of five, Mr Fink comes out on top. And yet BlackRock has lots to worry about. A stockmarket dip might sour the public’s love affair with passive funds, whose value would slump. A crash might destabilise the inner workings of ETFs, which operate a bit like giant derivatives. Fierce competition could push down fees. And the more BlackRock uses its power to influence other firms, the more regulators will scrutinise it.

Mr Schwarzman’s firm, meanwhile, has a hidden strength: $92bn of “dry powder”, or unspent funds. But it will struggle to catch up. Although its funds have made internal rates of return (a performance measure) of about 15% since the 1990s, asset prices are high, making it hard to crank out good returns on new money invested. The best way for Mr Schwarzman to serve his shareholders would be to convert Blackstone from a fiddly partnership to a normal firm, which would command a higher valuation.

Slumming on Park Avenue

Great fortunes on Wall Street are the result of technology waves and investment trends as well as personal drive and charisma. Mr Fink has played a good hand very well. Yet the rise of both men is also evidence that Wall Street’s pecking order is never stable. If Mr Schwarzman passes Mr Fink on Park Avenue he should congratulate his former colleague—and remind him that somewhere, someone young and hungry is plotting his downfall.