In my recent Carried Interest Is A Hidden Gem post, I include an excerpt from Bruce Flatt's (CEO of Brookfield Corporation) February 13, 2025 Letter To Shareholders in which he explains Carried Interest and why it is a hidden gem.
Coincidentally, on February 14 2025, BlackRock (BLK) communicated its Board's decision (see Form 8-K) to modify Larry Fink's (Chairman and CEO) compensation package starting with his 2024 year-end total compensation package. Fink is now entitled to receive a percentage of the carry distributions generated from a composite of BLK's flagship private markets investment funds that had fundraising activity in 2024. The rationale for this carry incentive is that it further aligns CEO compensation to the:
- evolution of BLK's private markets platform and associated creation of long-term shareholder value; and
- corresponding expansion of Fink’s executive responsibilities.
The additional comp incentive comes following BLK's aggressive expansion into rapidly growing private markets through several 2024 acquisitions. BLK spent ~$25B on infrastructure investment fund Global Infrastructure Partners ('GIP') and private credit business HPS Investment Partners ('HPS').
On June 30, 2024, BLK announced its intent to acquire Preqin ('PRQ') for ~$3.2B cash;the UK Competition and Markets Authority has very recently approved this acquisition. BLK can now finalize its purchase of the private market data firm thus enabling it to offer indexes for private markets.
Is The Special Treatment Of Carried Interest About To Change?
Trump wants to end the special treatment of 'carried interest' from which private equity and hedge fund firms greatly benefit. While Trump intensifies his talks over a broad tax cut bill that is core to his domestic economic agenda, this sets up a potential clash with America's wealthiest financiers - the same group that publicly expressed their support for him.
Lobbying fights in Washington regarding the special tax treatment of carried interest have gone on for the past 2 decades. Many Republican and some Democrat politicians have resisted efforts to change the tax treatment of carried interest; this helps the private equity industry maintain the status quo.
Early in Biden's presidency, an attempt to make changes failed. Trump also failed in 2017. The 2017 tax bill, however, extended the number of years an investment must be held (from 1 to 3) before the preferential treatment kicks in. If the complete elimination of the preferential treatment is unsuccessful, it is quite possible a compromise may be reached wherein the 3 year investment holding period is extended.
Valuation
I last reviewed BLK in this January 18, 2025 post. At that time, shares traded at ~$1006. Using this share price and the broker forward adjusted diluted EPS estimates, the following were the forward adjusted diluted PE levels:
- FY2025 – 17 brokers – mean of $48.21 and low/high of $46.08 – $54.97. Using the mean estimate: ~20.9.
- FY2026 – 15 brokers – mean of $54.09 and low/high of $51.25 – $59.28. Using the mean estimate: ~18.6.
- FY2027 – 8 brokers – mean of $60.37 and low/high of $51.84 – $67.40. Using the mean estimate: ~16.7.
- FY2028 – 1 broker – mean of $59.97 and low/high of $47.20 – $59.87. Using the mean estimate: ~16.8.
Using BLK's current ~$974 share price and current broker forward adjusted diluted EPS estimates, the forward adjusted diluted PE levels are:
- FY2025 – 15 brokers – mean of $47.46 and low/high of $46.08 – $50.17. Using the mean estimate: ~20.5.
- FY2026 – 14 brokers – mean of $54.05 and low/high of $51.25 – $59.28. Using the mean estimate: ~18.
- FY2027 – 7 brokers – mean of $61.59 and low/high of $55.52 – $67.40. Using the mean estimate: ~15.8.
While BLK may not currently be 'on sale', relatively recent GIP, HPS, and PRQ acquisitions greatly expand the company's ability to significantly increase future earnings.
Final Thoughts
America's wealthiest financiers are in business to make money and in prior posts, I suggest we 'follow the money'.
Changes in the treatment of carried interest is inevitable but I anticipate pushback from Wall Street titans. Any changes, therefore, may be 'watered down'.
BLK was my 18th largest holding at the time of my 2024 Year End FFJ Portfolio Review. On February 14 I acquired 20 shares @ $972.56 in a 'Core' account within the FFJ Portfolio bringing my exposure to 180 shares.
I intend to opportunistically continue to increase my BLK exposure.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
