By Michael Allison, CFA
It’s widely understood that the business model of private equity firms is more profitable than traditional asset managers, but the Chart of the Week really struck me.
At first glance, the numbers in the Chart seem quite puzzling. BlackRock manages an eye-popping $11.5 trillion in assets as of Q3 2024—ten times Blackstone's $1.1 trillion. Yet, Blackstone’s market cap ($187 billion) outstrips BlackRock’s ($140.7 billion). What’s going on here? Why does the market value private equity firms like Blackstone so much higher relative to their assets under management (AUM) compared to traditional asset managers like BlackRock?
Fee Structures: It’s All About Margins
BlackRock, as a traditional asset manager, generates much of its revenue through management fees tied to AUM. These fees are often razor-thin, especially in the passive investing space dominated by their flagship iShares ETFs. A typical fee for an index fund might be a fraction of a percentage point—say, 0.05%. It’s the ultimate high-volume, low-margin business.
Blackstone, on the other hand, operates in the high-margin world of private equity. The “2 and 20” model is legendary: 2% management fees and 20% performance fees (carried interest) on profits above a certain threshold. These performance fees can dwarf management fees, especially when private equity funds hit home runs with their investments. Higher margins mean higher profits per dollar of AUM, which the market rewards with a premium valuation.
Predictability vs. Upside
BlackRock’s revenue is highly predictable—it’s essentially a machine that hums along, clipping small fees off trillions of dollars in assets. While this predictability is valuable, it limits upside. Blackstone, however, thrives on less predictable (but often spectacular) outcomes. The market loves optionality, and Blackstone’s business model is built on it. If a private equity deal doubles or triples in value, those performance fees can skyrocket.
Asset Liquidity: A Double-Edged Sword
BlackRock’s AUM consists largely of liquid, publicly traded securities that investors can buy or sell any time they choose. This liquidity is great for clients but not necessarily for the firm’s valuation. Liquid assets mean money can flow out just as quickly as it flows in. Blackstone’s AUM, by contrast, is often locked up in illiquid investments like private companies, real estate, or infrastructure. Investors commit capital for years, giving Blackstone a more stable revenue stream and higher confidence in future cash flows.
Perception of Growth and Differentiation
Growth is another key factor. The passive investment industry, where BlackRock dominates, has seen fee compression due to intense competition. Blackstone operates in a space perceived as having more growth potential. Alternative investments, like private equity, real estate, and private credit, are increasingly in demand from institutional investors hunting for higher returns. This growth narrative adds to Blackstone’s premium.
Complexity and Risk Appetite
Finally, there’s an element of complexity—and the market’s appetite for it. Blackstone’s business is intricate, involving bespoke deals and creative financial engineering. The market values complexity (and the specialists who navigate it) in ways that don’t always apply to simpler, index-based investing.
Wrapping Up
The valuation discrepancy boils down to profitability, growth potential, and the market’s preference for the private equity business model. BlackRock may manage ten times more assets, but Blackstone’s ability to extract higher fees, lock in client capital, and chase outsized returns makes it the market’s favorite in terms of valuation.
Sources:
“BlackRock: A Financial Giant’s Dominance in Asset Management,” Investopedia.
“Private Equity Explained: Why 2 and 20 Still Reigns,” Harvard Business Review.
“The Rise of Alternative Investments,” McKinsey & Company.
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