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