Why BlackRock is shelling out $12bn for private credit shop HPS

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

HPS Investment Partners could hardly be more different than its suitor, BlackRock. Whereas BlackRock, an $11.5tn powerhouse, is best known for investing clients’ funds across huge swaths of public markets, HPS has earned a windfall on targeted bets in the private lending sector.

BlackRock’s more than $12bn deal for HPS earlier this month comes as the world’s biggest asset manager is seeking to compete with groups such as Blackstone and Apollo, which are already deeply entrenched in a market widely seen as one of the next major battlegrounds in finance. 

BlackRock’s planned acquisition of HPS, which forms a part of its near $30bn private markets M&A spree this year, could quickly shift the power balance in private credit, where pension funds, insurers and other investors finance everything from corporate acquisitions to consumer loans — an area that was previously dominated by the traditional banking sector. 

“[HPS] really pioneered these markets,” BlackRock chief financial officer Martin Small said at a conference earlier this month. 

HPS has made a name for itself by taking big and often risky wagers, which have been at the centre of its business since it was founded in 2007 by former Goldman Sachs banker Scott Kapnick.

The New York-based private credit firm, which was carved out of JPMorgan Chase in 2016, has minted billions of dollars by stumping up funds for private equity buyouts. The group specialises in “junior capital”, in which it provides funding for deals, that comes with a higher risk than senior capital which receives preferential treatment when a debtor goes belly up. 

In the event a company goes under, HPS risks large losses — as it did when Chicken Soup for the Soul filed for bankruptcy earlier this year. But more often than not, its wagers provided juicy returns that are closer to what buyout firms earn, compared with the more limited payouts typically available to debt-focused funds. 

At the time of HPS’s founding, only a handful of firms competed with it at scale, including Goldman’s merchant bank and Blackstone’s credit arm GSO Capital Partners.

An HPS adviser noted that the group was prepared to “take on more risk to get better returns on their debt.” They added: “When you’re a [private equity] sponsor and you’re stuck in a deal and you’re trying to win and you’re tapped out on your debt financing and you don’t want to give more equity away they will come in, and it’s not cheap.” 

HPS earlier this year scored big gains when private equity firm Madison Dearborn sold insurance broker NFP to Aon in a $13bn deal, according to people familiar with the matter. HPS had invested in NFP’s equity and also in some of the group’s debt offerings.

They are the kind of deals that attracted BlackRock, which wants to turbocharge its own direct lending franchise — it manages roughly $90bn of private debt already. BlackRock paid what some analysts and investors in the space saw as a high price for the group, underscoring the importance the company saw in private markets.

Goldman estimates the price, including future potential payouts, was worth roughly 34.9 times the earnings HPS will generate in 2025, well above the average for alternative investment firms it tracks.

HPS’s junior capital investment business is one of its flagship strategies, alongside so-called direct lending — where it writes loans directly to businesses — and together they account for more than three-quarters of the firm’s private credit assets under management.

The tie up is key to BlackRock’s broader ambitions as the firm positions itself for a world where more companies raise funds in both private and public markets, with the likes of chipmaker Intel, cloud storage provider Dropbox and energy group EQT all turning directly to asset managers in recent years.

The shift has been fuelled by the structuring capabilities by individual asset managers such as Apollo, which are able to slice up the cash flows on investments in assets like manufacturing plans and data centres. The higher-quality portions of these structured deals are designed to earn investment-grade credit ratings, which allows risk-averse insurers to funnel billions of dollars into them. 

Top HPS executives had already been looking to expand into higher grade investments, following its own recent deal with annuity provider Guardian Life. It is expected to work closely with BlackRock once the takeover is completed in 2025 to pitch big companies on its own structured offerings.

“BlackRock is probably the biggest shareholder in 4,000 companies in the US. They are huge in cash management and so you are in every dialogue,” one HPS executive said.

BlackRock has said that the opportunity to sell private credit to insurers played a pivotal role in its pursuit of HPS and the logic behind the deal, as it pitches clients on the higher returns of private, asset-backed credit deals. “The biggest opportunity we have in putting public and private fixed income together . . . is really with insurance company general accounts,” Small told analysts on the call announcing the deal.

It nonetheless brings new risks as HPS pushes further beyond its core junior capital and direct lending franchises. Insiders say the firm is nonetheless well placed, given its long investment record, including in higher-grade assets. 

HPS is “in that relatively tight group of five or six people that really dominate the upper end of the [direct lending] market based on scale and track record, but that’s a linear story,” a person that knows the firm well said. “Over the next decade, being successful in [investment grade private credit] will define who the big globally relevant players are.”