By Arasu Kannagi Basil and Davide Barbuscia

(Reuters) -BlackRock will buy private credit firm HPS Investment Partners for about $12 billion in an all-stock deal, the companies said on Tuesday, as the world’s largest asset manager seeks to expand in a red-hot market.

Private credit, or lending to companies by institutions other than banks, has grown rapidly in recent years as stricter regulations made it more expensive for traditional lenders to finance riskier loans.

The asset class is expected to grow to $2.6 trillion by 2029 from $1.5 trillion at the end of 2023, according to Preqin data.

“Together we will deliver income solutions for our clients that blend both the best of the public markets and the best of the private markets in an organized, unified fashion,” BlackRock CEO Larry Fink said on Tuesday.

He has previously outlined private credit to be a “primary growth driver” within alternatives for BlackRock in coming years.

HPS was founded in 2007 as a division of Highbridge Capital Management, the hedge fund unit of JPMorgan’s asset management arm. In 2016, top HPS executives acquired the firm from JPMorgan.

Since then, the New York-based company has become a massive private credit player, with assets under management vaulting to about $148 billion as of September from $34 billion in 2016.

HPS originally aimed to do an initial public offering, but was approached by a number of parties including BlackRock, a source familiar with the matter said.

HPS did not immediately return a request for comment.

BlackRock, which manages $11.5 trillion in assets, has an existing $85 billion private credit platform as of Sept. 30.

A new private financing solutions business unit will be formed, which will be led by the HPS leadership team.

BlackRock will pay roughly 9.2 million shares upon deal close that are worth about $9.4 billion as of Monday’s close. Nearly 2.9 million shares will be paid in about five years, subject to certain conditions.

As part of the deal, which is expected to close in mid-2025, BlackRock will retire for cash or refinance about $400 million of existing HPS debt.

“The HPS deal positions BlackRock to offer comprehensive alternative asset management portfolio services to the largest institutions in the world … significantly advancing its private-market growth goals,” said Ana Arsov, global head of private credit at Moody’s Ratings.

BlackRock’s stock was last up 1.7% on Tuesday.

“This is a really good move for them to try and bolster their higher fee areas,” said Eric Kuby, chief investment officer at North Star Investment Management Corp, which holds BlackRock shares.

PRIVATE MARKETS PUSH

BlackRock has been on an acquisition spree this year, splurging roughly $28 billion as it positions itself as a comprehensive platform for investors by integrating public and private markets.

In October, the New York-based firm finalized its $12.5 billion acquisition of infrastructure investment firm Global Infrastructure Partners and anticipates completing the $3.2 billion purchase of private markets data provider Preqin by year-end.

“GIP gave them infrastructure, but they still didn’t really have a meaningful presence in private credit … I think they’ve plugged the gap,” said Kyle Sanders, an analyst at Edward Jones.

The source familiar with the situation said a private equity firm could be BlackRock’s next major acquisition.

BlackRock declined comment.

Edward Jones’ Sanders said private equity is an area where BlackRock remains smaller than some of the largest firms, although it is a more mature product with likely less growth potential than infrastructure and private credit.

This year’s deals aim to strengthen BlackRock’s foothold in infrastructure investments and private markets, both pivotal growth areas. Fink on Tuesday said he expected a “dramatic expansion” of private capital in backing infrastructure investments.

BlackRock manages roughly $450 billion in alternative assets post-GIP acquisition.

HIGHER FEES

The HPS deal, which will create a private credit franchise with about $220 billion in client assets, will also increase BlackRock’s private markets fee-paying assets under management and management fees by 40% and about 35%, respectively.

Recent acquisitions will bolster BlackRock fees when compared to “razor thin margins” coming from passive investment, said Cathy Seifert, an analyst at CFRA Research. Private assets carry much higher fees than exchange-traded funds, which is BlackRock’s main business.

Still, BlackRock’s rival alternative asset managers Apollo Global Management, Blackstone and Ares Management have made bigger strides in private credit.

Apollo manages $598 billion in credit assets and Ares $335 billion as of Sept. 30. Blackstone manages $432 billion in assets across its entire credit platform.

The HPS deal comes amid speculation BlackRock’s long-time boss Fink may eventually step down from leading the firm.

Speaking at a New York event in October, Fink said the growth of private markets could mitigate the economic impact of wide U.S. deficits and high government debt levels. He also said at the time he was not thinking about retiring.

In an op-ed he wrote for the Wall Street Journal in November, Fink said private investments in infrastructure projects such as data centers could help boost U.S. economic growth.

(Reporting by Arasu Kannagi Basil in Bengaluru, Davide Barbuscia, Carolina Mandl and Lewis Krauskopf in New York, Andres Gonzalez Estebaran in London. Editing by Shilpi Majumdar, Marguerita Choy, Sriraj Kalluvila, Jonathan Oatis and Deepa Babington)

---