In Asia Pacific, nowhere are the stakes in BlackRock's $13.5 billion acquisition of Barclays Global Investors bigger than in Japan. BlackRock will be buying a franchise that is the biggest manager of corporate pension money, as well as a significant manager of public fund assets. BGI's business model, however, is generic and already replicated by domestic trust banks, which can be expected to pounce on BGI's clients.
But if it succeeds in creating genuine synergies, the deal could have a transformational impact on the structure of Japan's asset management industry. It comes at a time when Citi is shopping around its stake in Nikko Asset Management, and together the deals raise questions about the role of independent asset managers in Japan.
"The BGI sale raises questions as to whether banks and securities companies really need to also own an asset management company," says one CEO at a domestic money management firm.
But first, the deal itself. The BGI franchise in Japan is amazing, but there is a real possibility that BlackRock has acquired a business at its peak in this market.
How big is BGI? It is the largest global fund manager in Asia Pacific, according to AsianInvestor magazine. As of September, BGI sourced $204 billion of assets from clients in the region, both retail and institutional, a figure that is likely to be smaller today. Only two Japanese firms raise more assets from the region, Mitsubishi UFJ Trust & Banking and Nomura Asset Management, thanks to their powerhouse distribution in Japan.
And like those other two firms, most of BGI's business is from Japanese institutions, which are big users of passive investment strategies, which is BGI's forte. Although BGI likes to talk about its active and quant capabilities, and has enjoyed growth in Asia ex-Japan and in its ETF business, Japan still accounts for around 9% of its global business, versus only 1% or so for the rest of Asia. And that business is mostly managing money for either the Government Pension Investment Fund (GPIF), the massive $1.5 trillion public fund, or for corporate defined-benefit schemes.
The GPIF currently allocates 70-80% of its investments to passive exposures.
According to Hong Kong-based Japan Pensions Industry Database, BGI runs $145 billion of Japanese DB assets as of March 2008, which makes it as big as the next three players (Nomura, Diam and Tokio Marine Asset Management).
Although the institutional market in Japan is shrinking, providers of passive investment services are doing well. Corporate plan sponsors are removing risk post-Lehman Brothers collapse by shifting to passive, particularly as they rebalance asset allocation back towards their strategic policy levels (which means buying equities). A lot of active fund houses are getting fired as a result, with trust banks the main beneficiaries.
Although there have been plenty of mergers among Japanese banks, they tend to leave existing teams in place, to the point that entire systems and processes go untouched. Although this doesn't make big Japanese banks efficient, the stability of client interfacing is a competitive advantage. Plan sponsors get nervous when foreign houses engage in M&A because they don't know who's working for them anymore. It is a sure bet that domestic trust banks will use the BlackRock/BGI deal as an excuse to try to wean some of those passive mandates. Even if the new entity (to be called BlackRock Global Investors) successfully defends its turf, what are the limits to market share it can continue to win over, say, a three-to-five year horizon?
As for the GPIF, it is slated for reform, with the government planning to break it up into smaller groups that compete among one another, which should produce better returns. Part of the GPIF may be recast as a sovereign wealth fund. This implies some passive mandates will be cancelled over time.
Nonetheless, even if BGI loses some business, this is still a big deal for the industry in Japan. BlackRock already sources around $50 billion in assets from this market, mostly from institutions.
