BlackRock Finance Inc (BLK) — Q1 2021 Earnings Call Transcript

Thank you. Good morning, everyone. I'm Chris Meade, the General Counsel of BlackRock. Before we begin, I'd like to remind you that during the course of this call we may make a number of forward-looking statements. We call your attention to the fact that BlackRock's actual results may, of course, differ from these statements. As you know, BlackRock has filed reports with the SEC, which list some of the factors that may cause the results of BlackRock to differ materially from what we say today. BlackRock assumes no duty and does not undertake to update any forward-looking statements. So, with that, I'll turn it over to Gary.

Thanks, Chris, and good morning everyone. I hope everyone and their families are remaining safe and healthy. It's my pleasure to present results for the first quarter of 2021. Before I turn it over to Larry to offer his comments, I'll review our financial performance and business results. While our earnings release discloses both GAAP and as adjusted financial results, I will be focusing primarily on our as adjusted results. BlackRock's platform has been built over time to help clients meet their objectives regardless of market environment or risk appetite. We've invested for years to develop industry-leading franchises in high growth areas, such as ETFs, private markets, technology, and more recently sustainable investing, so we can help clients construct resilient, whole portfolios that leverage both active and index capabilities. While few of us could have predicted that we would still be confronting the human and economic challenges of the COVID-19 pandemic a year later, the events of the past year have only strengthened our resolve to continue to invest for future growth in order to evolve our business, live our purpose and meet the needs of all of our stakeholders, including clients, employees, shareholders, and the communities in which we operate. The investments BlackRock has consistently made to build a best-in-class investment in technology platform centered around a fiduciary mindset, where clients always come first, in a collaborative and unifying one BlackRock culture that encourages emotional ownership are driving incredible momentum across our entire business. BlackRock generated record net inflows of $172 billion in the first quarter, our fourth consecutive quarter with over $100 billion in quarterly inflows, representing 8% annualized organic asset growth and 14% annualized organic base fee growth. Strong performance from our entire active franchise once again contributed to this quarter's robust organic fee growth. Over the last 12 months, our broad-based platform pairing diverse investment capabilities with best-in-class technology and rigorous risk management has now generated over $525 billion of total net inflows, representing 14% organic base fee growth, well in excess of our 5% long-term target. First quarter revenue of $4.4 billion increased 19% year-over-year, while operating income of $1.5 billion rose 21% and reflected the impact of approximately $180 million of costs associated with the launch of the nearly $5 billion BlackRock Innovation and Growth Trust, our largest closed-end fund ever in late March. Earnings per share of $7.77 was up 18% compared to a year ago, also reflecting lower non-operating income and a higher effective tax rate, partially offset by a lower diluted share count in the current quarter. Non-operating results for the quarter included $8 million of net investment income as gains in our co-investment portfolio were largely offset by the mark-to-market impact of our minority stake in Envestnet. Our as adjusted tax rate for the first quarter was approximately 21% and included $39 million of discrete tax benefits related to stock-based compensation awards that vest in the first quarter of each year. We continue to estimate 23% is a reasonable projected tax run rate for the remainder of 2021, so the actual effective tax rate may differ as a consequence of non-recurring or discrete items or potential changes in tax legislation during the year. First quarter base fee and securities lending revenue of $3.6 billion was up 18% year-over-year, primarily driven by strong organic base fee growth and the positive impact of market beta and foreign exchange movements on average AUM, partially offset by higher discretionary money market fee waivers, lower securities lending revenue, the effect of one less day in the current quarter, and strategic pricing investments over the last year. Sequentially, base fee and securities lending revenue was up 6%. On an equivalent day count basis, our effective fee rate was essentially flat compared to the fourth quarter, a strong organic base fee growth driven by our higher fee active businesses more than offset higher discretionary money market fee waivers and lower securities lending revenue in the current quarter. Performance fees of $129 million were up significantly from a year ago, reflecting strong performance in our liquid alternative and long-only investment platforms and the impact of COVID related market volatility a year ago. Quarterly technology services revenue increased 12% from a year ago. Annual contract value, or ACV, increased 16% year-over-year, reflecting particularly strong growth from the first quarter of 2020, which was impacted by slower sales and contracting disruption in the early days of the pandemic. We remain committed to low to mid-teens growth in ACV over the long term. Aladdin's resilience has been a key differentiator throughout the COVID crisis, and client demand remains strong. As Larry will discuss in more detail, we see tremendous opportunity to continue building out Aladdin's climate and sustainability risk analytics and data capabilities, making it central to constructing sustainable portfolios of the future. Advisory and other revenue was down $33 million year-over-year, primarily reflecting the absence of PennyMac equity method earnings following the charitable contribution of our remaining equity stake in the first quarter of 2020, as well as lower transition management revenue in the current quarter. Total expense increased 17% versus the year-ago quarter, driven primarily by higher compensation, direct fund and non-core G&A expense. Employee compensation and benefit expense was up 24%, primarily reflecting higher incentive compensation driven by higher operating income and performance fees, and higher deferred compensation, reflecting additional grants and the mark-to-market impact of certain deferred compensation programs relative to depressed levels a year ago. Approximately 80% of the increase in our compensation to revenue ratio year-over-year was attributable to this mark-to-market impact on certain deferred compensation programs. Direct fund expense increased 16% year-over-year, primarily reflecting higher average index AUM. G&A expense was up $32 million year-over-year, and the $111 million sequentially reflecting approximately $180 million of previously disclosed closed-end fund launch costs. Recall that we exclude the impact of these product launch costs when reporting our as adjusted operating margin. Year-over-year G&A comparisons were also impacted by approximately $155 million of non-core G&A expense in the first quarter of 2020, which included closed-end fund launch costs, contingent consideration fair value adjustments, and costs related to certain legal matters. On a core basis, quarterly G&A expense was essentially flat year-over-year, as higher portfolio services and technology expense was offset by lower T&E, marketing spend, and professional fees. Quarterly G&A expense also benefited from a delay in planned spending in a number of areas, which we expect to incur over the remainder of the year. And tangible amortization expense increased $9 million year-over-year as a result of the acquisition of Aperio, which closed on February 1st. Our first quarter as adjusted operating margin of 44.4% was up 270 basis points from a year ago, benefiting in part from a significantly lower level of non-core G&A expense versus a year ago and the delayed timing of certain investment spends in the current quarter. As we stated in January, our business has never been better positioned to take advantage of the opportunities before us, and we remain committed to optimizing organic growth in the most efficient way possible. We continue to see numerous opportunities to invest for growth, including sustainable investing, private markets, technology, and China, and intend to pursue these opportunities responsibly. Our capital management strategy remains first to invest in our business and then to return excess cash to shareholders through a combination of dividends and share repurchases. We continue to invest through prudent use of our balance sheet to best position BlackRock for continued success, through seed and co-investments to support organic growth and through tactical M&A and strategic minority investments to accelerate our growth ambitions. During the first quarter, we closed our acquisition of Aperio, and as Larry will discuss in more detail, announced a partnership with Temasek to co-invest in innovative decarbonization technology. We previously announced a 14% increase in our quarterly dividend to $4.13 per share of common stock and also repurchased $300 million worth of common shares in the first quarter. While we will remain opportunistic with respect to additional share repurchases during the year, there is no change to the minimum repurchase guidance we provided to you earlier this year. As you'll also hear from Larry, BlackRock has never been better positioned to deliver for clients as we leverage our unique insights, guidance, and solutions to help them meet their long-term investment needs. Record net inflows of $172 billion in the first quarter, including $133 billion of long-term flows reflect the strength of our broad-based franchise with positive flows across every asset class, investment style, client channel, and region. Our iShares and BlackRock ETFs generated net inflows of $68 billion, representing 10% annualized organic asset and base fee growth. Results highlight the diversity of the product segments within our ETF franchise with growth led by continued strength in core equity and sustainable ETFs. We also saw strong flows into our higher feed liquid markets driven by precision exposures, as clients continued to rerisk, particularly in international equities and tactically position their portfolios for the reopening of economies worldwide. First quarter fixed income ETF flows of $1.6 billion reflected demand for shorter term and floating rate bond exposures, which was largely offset by outflows from longer duration ETFs, especially LTV as investors reacted to the most significant steepening in the yield curve since 2013. These inflows, even with the drag from longer duration products, speak to the diversity of our fixed income ETF franchise, which will continue to benefit from strong long-term secular growth. Record retail net inflows of $37 billion, representing 17% annualized organic asset growth and 25% annualized organic base fee growth were positive in both the U.S. and internationally and across all major asset classes, including fixed. Inflows reflected broad-based strength across the entirety of our top performing active platform, which is well-positioned to capture resurging demand for active equities and investor appetite for yield, where our diversified fixed income range, including unconstrained high yield, international, and broad market strategies are positioned to meet client demand in any rate environment. BlackRock's institutional active franchise generated $17 billion of net inflows led by continued growth into our LifePath target date and alternatives platforms. Institutional index net inflows of $11 billion once again reflected equity net outflows, which were more than offset by fixed income net inflows, as clients rebalanced portfolios after significant equity market gains or sought to immunize portfolios through LDI strategies. As previously discussed in January, we expect a large U.S. public pension client to transition approximately $55 billion of low fee index assets to another investment manager. This transition is likely to occur during the second quarter of 2021 and will have a de minimis impact on our organic base fee growth for the year. Across our retail and institutional client businesses, we generated a record $21 billion of active equity net inflows, representing our eighth consecutive quarter of positive flows in this category. Flows were led by top performing franchises in technology and Midcap growth, which benefited from the previously mentioned launch of the BlackRock Innovation and Growth closed-end fund. We remained well-positioned for future growth in our active businesses with over 80% of fundamental active equity, scientific active equity, and taxable fixed income assets performing above their respective benchmarks or peer median for the trailing five-year period. Demand for alternatives were also continued, with nearly $9 billion of net inflows into liquid and illiquid alternative strategies during the quarter, driven by infrastructure, private equity solutions, and liquid alternative funds. Fundraising momentum remains strong, and we have approximately $27 billion of committed capital to deploy for institutional clients in a variety of alternative strategies, representing a significant source of future base and performance fees. Finally, BlackRock's cash management platform continued to grow and outperform peers, generating almost $40 billion of net inflows in the first quarter and topping $700 billion in assets under management for the first time. During the first quarter, we incurred approximately $78 million of gross discretionary yield support waivers, and expect such discretionary fee waivers to persist for the near term, especially in light of the recent growth in our U.S. government fund franchise and the supply-demand dynamics in the short-dated U.S. treasury and repo markets. Future levels of discretionary fee waivers will be impacted by several factors, including the level of AUM and funds with existing waivers, gross yields, and competitive positioning. Our strong performance over the last 12 months is a testament to our purpose, the strong execution of our strategy, the competence our clients place in us, and the hard work commitment and resilience of our employees. Our relationships with clients have never been deeper, and we will continue to invest responsibly from a position of strength to meet the needs of all of our stakeholders over the coming years. With that, I'll turn it over to Larry.

Thanks, Gary. Good morning to everyone. And I want to thank all of you for joining the call. I hope you and your loved ones are continuing to stay healthy and safe. We are reporting earnings today from our headquarters in New York City, and I'm incredibly energized by being all together as a group, as a team, as partners. I'm cautiously optimistic for a return to normalcy in the coming months as vaccinations rollout. And I'm looking forward to seeing all of our stakeholders in person again. The strong results BlackRock saw this quarter are the outcome of a multiyear investments we've made in our asset management and technology platform to better serve our clients worldwide. More than ever before, we are seeing the benefits of these long-term investments resonating. We have stronger results and deeper relationships with the clients across their entire portfolios. We generated $527 billion of net inflows and a record 14% organic base fee growth over the last 12 months, including a very strong 2021. Over a decade ago, we acquired iShares based on our conviction in the value proposition of ETFs. Our continuous investments in our platform since then to help more clients use ETFs to build better portfolios have fueled iShares growth from $385 billion during the acquisition to more than $2.8 trillion today. We began expanding our alternative platform more than five years ago, and today, we manage nearly $200 billion in these strategies for all our clients. Our leadership in alternatives has only just begun, and we're seeing momentum accelerate, as we scale our offerings, as we source our capabilities and our integration of data and technology into the management of private markets assets. We've been investing in all aspects of our Aladdin Technology to better serve our client's needs. We saw demand for a unified whole portfolio of technology, and we enhanced Aladdin with eFront to offer portfolio construction and risk analytics capability in one view across all public and private markets. We created an end-to-end platform that enables straight-through processing between the asset owners, the asset managers, and the custodians through Aladdin provider. We created Aladdin Wealth to help financial advisors build better portfolios for millions of clients around the world. We recognize the growing impact of sustainability risks and the opportunities on our client's portfolios. As I will discuss in more detail later on, we are investing to systematically integrate climate and broader sustainable factors across all our investment offerings and risk management processes. We manage over $200 billion in long-term sustainable assets today. More recently as well, clients increasingly focus on the importance of after-tax returns in their investment, we acquired Aperio to enhance BlackRock's ability to meet these clients' needs. The investments we made and continue to make in our platform enables BlackRock to have a holistic perspective and a voice that resonates with our stakeholders. More clients than ever before are turning to BlackRock for insights and guidance. They want to hear from us on topics such as how to position their portfolio for rising interest rates and inflation, how should they think about the U.S. deficits, and how to think about the potential opportunities from new infrastructure policies, and how to invest for a net-zero world? We're vocal on issues that are important to our stakeholders, like cultural issues that impact our employees and policies that impact our communities. We speak loudly and work for all our stakeholders. The benefits of BlackRock's differentiating approach are clear in the strength and consistency of our results. As Gary told you, our total net inflows of $172 billion in the first quarter were diversified across all client types, asset classes, investment styles, and regions, and represented an 8% annualized organic asset growth and a record 14% annualized organic base fee growth. As the COVID-19 vaccine rollout continues and restrictions are eased, a significant acceleration of economic activity is anticipated, despite the consistently high numbers of cases around the world and now the introduction of many new variants. Investors are navigating their portfolios through uncertainty, such as the strength of the reopening, structural changes to the economies, and fiscal policy and the consequences for growth in inflation when activity is more fully restored. Interest rates coming off, historically lower levels have put pressure on fixed income assets and led to a rotation within equity from growth to value. Unlike the taper tantrum of 2013, however, the reason rising rates being gradual as investors look for greater compensation for holding longer duration bonds, and investor appetite for risk assets remains very strong. There is a lot of money in motion today. The level of fiscal support we have seen over the past year is four times that of a global financial crisis, but many investors continue to keep significant amounts of cash on the sidelines. To reach their investment goals, they will need to deploy that money in solutions that provide yield and preservation of their assets. BlackRock has deliberately built our industry-leading fixed income business to meet client's needs regardless of the rate environment. Changing rates manifest in rotating within fixed income, and BlackRock's diversified platform and strong active performance with 84% of our taxable fixed assets above benchmark or peer medium for three-year period was well-positioned for the demand. We saw $17 billion in net inflows and active fixed income driven by unconstrained total return, municipals, international, and high yield bond funds. Client demand for active strategies continues to accelerate at BlackRock. BlackRock generated $59 billion of active net inflows across asset classes in the first quarter, including another record quarter for active equities. Strong active flows included the nearly $5 billion launch of the BlackRock Innovation and Growth Trust, the second largest ever closed-end fund launch in the United States by innovating and product structure, generating strong investment performance and offering strategies aligned with the needs of our clients. We are leading the turnaround of the closed-end fund IPO market. BlackRock strong active performance and flows are a direct result of these investments that I spoke about to build a platform with collaborative intelligence, advanced data, and technologies in a whole portfolio approach. We have never been better positioned to deliver durable alpha for our clients, and I am confident we will continue to capture more demand for active strategies as we further strengthen our platform and invest in our platform. In liquid alternatives, we are seeing the magnitude of client flows increase every year. In the first quarter, we generated a record $11 billion of inflows and commitments. Results span from private credit to infrastructure, to private equity solutions, including the final close of inaugural $3 billion private equity secondary fund. Infrastructure investments will be a key component of long-term returns in client portfolios as governments launch long overdue infrastructure products and projects to restart their economies and build for a more resilient future. The $2 trillion infrastructure plan in the United States will create significant opportunities for putting capital to work in this asset class. Within infrastructure, renewables represent more than 50% of the transactions globally, and BlackRock is well-positioned with one of the industry's largest renewable power franchises. We recently closed the third vintage of our global renewable power fund, raising nearly $5 billion, which is more than the first and second vintage combined. iShares and BlackRock ETFs generated $68 billion of net inflows in the first quarter, the strongest start to a year in our history. Importantly, flows reflect the diversity of our ETF platform and the benefits of strategic investments we made over time to support the adaptation of ETFs. The evolution of new uses, the reduction in barriers like emissions and growth in areas such as model portfolios, the work we are doing to expand our sustainable iShares business is a great example of how we continue to innovate ahead of our client's needs. We generated $17 billion of net inflows in the quarter across the sustainable iShares spectrum from screens to thematic strategies. We recently crossed $100 billion of AUM in this category, up from $26 billion just a year ago. The global transition to a net-zero economy will impact every company's growth prospects, and BlackRock believes that they are adapting and pivoting their strategies and business models ahead of this tectonic shift that will outperform over the long term. Every investor will need to position their portfolios accordingly, and BlackRock is investing to provide clients with more choice as we become a leader in sustainable and climate-aware investing. We launched two low-carbon transition readiness ETFs last week, raising a total of nearly $2 billion, representing the largest ETF launch in U.S. history. Traditionally, climate products have been backward-looking really focused on reported greenhouse gas emissions. Using advanced data and analytics and research driven by insights, BlackRock developed a forward-looking active climate investments strategy and a transparent active ETF vehicle. These active ETFs are the first of their kind and a great example of how BlackRock is innovating to expand access to sustainable strategies for more investors worldwide. In total, BlackRock manages $353 billion in sustainable investments, including cash. We believe this category will grow to more than $1 trillion by 2030. Sustainable investing presents opportunities for BlackRock, not only in terms of AUM growth but in the demand for industry-leading technology and data. As sustainability becomes a critical building block in portfolios, investors need a clear understanding of how sustainable related risks and opportunities impact their portfolio. One of the newest opportunities for BlackRock is powering portfolios to a new sustainable standard with Aladdin, because climate risk is investment risk. Our ambition is to make Aladdin Climate the standard for assessing this risk with investors' portfolios and helping clients navigate and capture investment opportunities presented by the transition to a net-zero economy. Investments we have made in Aladdin over the years to serve more clients with better risk analytics, end-to-end operating systems, and the benefited scale drove a 12% year-over-year growth in technology services revenues. We consistently hear from clients that poor quality or availability of ESG data and analytics is the biggest barrier to deeper and broader implementation of sustainable investing. That is why we're evolving Aladdin sustainability to help clients better assess their exposures and their positions across all their portfolios. Our minority investment in Clarity AI will integrate analytics and data covering 30,000 companies and nearly 200 companies within Aladdin. Our partners who have rep risks will give clients the ability to identify ESG risk exposures in private investments and create a holistic view of risk across their portfolios. Advancing towards a net-zero economy by 2050 will require more than better data and analytics; it will require transformational innovation in carbon reduction and elimination technologies. BlackRock has partnered with Temasek to establish decarbonization partners to invest in innovative decarbonization solutions to help accelerate global efforts. This initiative will provide clients with an opportunity to participate in a net-zero transition by complementing BlackRock's existing renewable power and energy infrastructure investment platform. In line with our strategic focus on technology and sustainability, we nominated Hans Vestberg, Chairman and CEO of Verizon, to our Board of Directors for his deep experience in international markets, technology, and sustainability. At the same time, I want to thank Mathis Cabiallavetta for his passion and his dedication to BlackRock and its shareholders over the last 13 years. He will not stand for reelection at BlackRock Annual Meeting next month, and he will be missed by our entire board and by me and the entire leadership team at BlackRock. Our results and the speed of our forward momentum underscore the importance of BlackRock's fiduciary approach and culture. I truly believe our culture is what sets BlackRock apart. It drives our performance. It pushes us to innovate. It pushes us to stay ahead of our clients' needs. It guides our decisions, and it influences our behaviors. Critical to our culture is building an environment of inclusivity, belonging, trust, and creating a safe environment. More than ever before at BlackRock, the leadership team and I are focused on instilling this culture with all of our 16,700 employees around the world. The strength of our first quarter results across iShares, private markets, technology, and active and sustainable strategies is more broad-based today than at any point in our history. Our global scale and our unique client interactions give us greater ability to invest in our client's future and ultimately for the benefit of our shareholders. I see tremendous opportunities ahead for BlackRock, focusing on embracing change, investing for the long term, so we could best serve all our stakeholders. I look forward to executing on our ambitious plans in the years ahead. With that operator, let's please open it up for questions.

Great.

Hey, Brian.

Thank you, and good morning. Congratulations on another fantastic quarter. I have a two-part question regarding sustainable investing. First, I want to confirm some numbers. I heard $353 billion in sustainable assets under management and also thought I heard $200 billion. Can you clarify those figures? Additionally, in the first quarter flows, we have $17 billion in iShares. What other flows can we expect for other sustainable products? Lastly, regarding the Temasek partnership and the broader topic of carbon transition, it's clearly a rapidly evolving area. How do you see the total addressable market for asset management in this space, and how do you plan to address it not just through this partnership but also with the ETFs you have launched and other products?

Well, first I apologize that we created any confusion. So, let's start. We do have $200 billion in sustainable long-term assets.

Okay.

The difference is we have a broad cash management space that is becoming more and more sustainable. So, if you add the cash side or the short-term cash, it comes up to that $300 billion number. I hope I answered that question properly now.

Yeah.

Two, I think the opportunity in transition is amazing. It is estimated we need to spend $50 trillion to have a decarbonized world, and to do that is investing in new technologies. And we are very pleased to have a partner in Temasek, and we have had many conversations with them related to how can we bring the world closer to a decarbonized world without a premium or without a green premium. And this is specifically so relevant, not just in the United States, but it's so relevant in the emerging world. The emerging world is still growing and still has a greater need for electricity and a greater need for building. The emerging world is just at the beginning of its economic growth. And so, if we are going to get to a net-zero world, the need for innovation and investing for green hydrogen to bring that premium down to zero for biofuels, for sequestering carbon at a very inexpensive price, all of these are going to require new technologies for agriculture. Agriculture produces close to 15% of the carbon footprint related to that. And so, we have many areas where it is going to require new technologies. I truly believe we are going to have many young people instead of going into data and technology related to the social side of technology. I believe many, many innovations that are going to come from young startup innovative companies. But I would also say I am very bullish on our traditional hydrocarbon and chemical companies as they pivot. I've had conversations recently with a CEO of a very large oil and gas company. Just yesterday I had a conversation with a CEO of a very large chemical company, and we're actually talking to them about how can BlackRock invest with them side by side on technologies for decarbonization. I mean, the science and technology that are existing companies in terms of understanding carbon and the science of transforming it to a more decarbonized world is great. And so, we are very encouraged about investing in startups, and that's what the Temasek BlackRock decarbonization fund is for. But we actually are having many conversations about investing with our infrastructure teams, with our private teams, and with our debt teams to finance this. We've had numerous conversations with companies related to biofuels. So, when our employees are flying around the world, we could have a footprint that is net zero. All of these are great opportunities for us and the investors worldwide.

And Brian, it’s Gary. Just to quickly capture what Larry was discussing regarding long-term and total metrics, the flow number for sustainable strategies this quarter was $24 billion in the long-term category. This included $17 billion in ETFs and $7 billion in what we refer to as active investments. I would say that this was very diverse across the platform, primarily in equities but also in fixed income and multi-asset, which on a long-term basis represents approximately a 50% annualized organic growth rate for inflows.

Thanks. Good morning. Larry, I was hoping that you could expand upon the institutional backdrop today in terms of risk profile. And how those conversations are evolving with the rate backdrop and what's going on with fixed income, and how we should think about kind of rerisking or derisking in this kind of backdrop.

Thank you, Dan. There's no single consistent conversation happening across institutions. Currently, discussions around inflation and whether deficits matter are significant among our fixed income investors. Some are looking to reduce risk by shifting to low duration or unconstrained strategies, while others are seeking more credit or higher returns to accept that duration risk. We still observe demand in high yield, as indicated by our flows. I wouldn't pinpoint one specific trend, but the topics of inflation and deficits are increasingly central to our discussions. There are many inquiries about equity valuations, especially regarding whether the shift from growth to value is overdone, particularly if vaccination efforts take longer than expected. These are likely the main topics of discussion. Nonetheless, as we mentioned in our prepared remarks, there are substantial amounts of cash waiting on the sidelines. Clients are still sitting on large pools of money and remain under-invested. With rising rates in the 10-year treasury, our liabilities feel less constraining. If the 10-year rate continues to rise, the urgency to extend duration diminishes. The conversations are lively now, with many clients allocating more to private investments and alternatives. Additionally, there's an acceleration in the use of ETFs for active exposures. While there's no dominant topic in any single conversation, one consistent theme is sustainability. Every institutional client is inquiring about how to approach climate risks and transition risks. We want our clients to focus on the opportunities presented by transition, rather than just the fears or challenges it poses. This involves utilizing investment technologies to address concerns about the green premium or ensuring that the net-zero vision is attainable, especially in developing regions. This reflects the strengths of capitalism and capital markets, as clients are increasingly preparing for this long-term trend. Many are questioning how their portfolios can align with these long-term objectives.

Good morning. Thank you for the question. I wanted to revisit some of the comments made about investment spending. Could you provide more detail on your investment strategy and the specific areas you're focusing on? Additionally, how would you compare the pace of investment spending in 2021 to the previous couple of years? Is there an acceleration in response to the market improvements? How are you planning to manage this pacing?

Thanks, Mike. As we mentioned before, we are definitely increasing our investment spending in 2021. This is due to a few factors. Firstly, it's important to look back at our results, not just for this quarter but also the momentum from the past year. Our consistent spending has allowed us to stay ahead of client needs and drive significant flows and organic base fee growth. We believe, as Larry has stated, that our business is well positioned to capitalize on opportunities in areas like sustainable investing, private markets, technology, and China, and we plan to pursue these responsibly. That said, we remain mindful of our margins and continue to manage our overall discretionary expenses. We are dedicated to optimizing growth in the most efficient manner. Our increased spending this year reflects the opportunities we see and the fact that we did not spend as much as planned in 2020. We committed to not reducing our headcount, which proved beneficial as workloads increased throughout the year. We only resumed hiring in the latter half of last year. A lot of our actions this year are about catching up to where our business needs to be. We started the year with a specific budget for discretionary spending, including hiring and general expenses, and we have not altered this budget since our last discussion. We are currently ahead of where we anticipated in terms of business growth, but we intend to maintain our original spending plan throughout the year. We did have a slower start regarding tech and marketing spending, but we expect an uptick in travel and expenses later in the year, and we are fully committed to executing our plans for the year.

Hi, Craig.

Hey, good morning, Larry. My question is on Aladdin. So, if we look at the 16% year-on-year growth in annual contract revenues, can you talk about the components of the growth between the core operating system platform provider Aladdin and Aladdin for wealth? I also wanted to hear how the portfolio analytics and risk management tools are now encompassing ESG and helping investors to build better portfolios across factors like sustainability.

So, I'll start with the first part and then I'll let Larry discuss our investments in sustainability analytics and our current initiatives. We mentioned that we achieved 12% year-over-year revenue growth. The majority of our technology services revenue still comes from what we refer to as the institutional Aladdin segment. We also have other offerings, such as Aladdin Wealth, accounting, and various other products, but the key growth is primarily linked to the institutional business on a year-over-year basis. Some areas that we anticipate growth in are still in their early stages. As we expand products like Aladdin Climate, which is just beginning, we expect that to have a more substantial effect on our year-over-year growth. We strongly believe that the demand for integrated and resilient investment management technology is on the rise. The pandemic has highlighted the importance of technology. We are witnessing industry consolidation, changes in product use, and regulatory demands that require more comprehensive and adaptable solutions. Our pipeline for the rest of the year looks robust, and we remain optimistic about that segment, especially when considering our overall portfolio across public and private markets.

I would just add that considering the growth of Aladdin from a platform that initially analyzed bonds to its current state, the demand from our clients for a comprehensive operating system has significantly increased. This system is not only connected to their custodial bank like Aladdin provider, but also integrates an operating risk management system that encompasses both public and private markets. We have developed these platforms based on our clients' needs to enhance their experience and deliver better outcomes. The necessity of Aladdin has become even more apparent during times when we worked remotely. Our clients around the world are now more enthusiastic about how Aladdin supports and enhances their businesses. We believe that Aladdin genuinely contributes to their performance, and research from third parties indicates that those using Aladdin tend to achieve superior financial outcomes. Considering climate risk and transition risk, this encompasses everything from cash to long-dated private investments across all products and regions. The demand for Aladdin Climate, which provides essential data and analytics to rationalize investments, is crucial. As fiduciaries, we are obligated under the Department of Labor rule to prove that climate risk constitutes an investment risk. Now more than ever, I believe Aladdin is well-positioned due to our efforts to create an end-to-end solution that serves custodians, wealth managers, and addresses both public and private needs. Additionally, sustainability is central to the resilience of our operating system, enabling us to engage in deeper conversations with more clients.

Good morning, Alex.

Hey, Larry. Good morning. Good morning everybody. I was hoping we could spend a minute on BlackRock initiatives in private markets specifically. And I guess looking back over the last couple of months, you guys raised a $3 billion secondary fund. I think I saw a $5 billion renewable power fund. What else is in the fundraising pipeline over the next call it 12 to 18 months? What areas, I guess, within private markets, do you want to lean into more, both organically and inorganically given that space continues to experience a pretty significant growth?

So, we've had a focus on our alternatives business for the last several years. While we haven't raised $20 billion in one fund, we've raised $2 billion in 10 funds, and those continue to grow. Our current focus will be on credit, which is where our clients are looking to invest. As Larry mentioned in sustainable, we're looking at renewable energy, which we just raised one very large fund. We will be following very closely the infrastructure bill and figure out how we can raise assets that we can deliver to our clients for infrastructure, which for many of our clients who would like long-duration type assets, infrastructure fits very well. So, we'll probably go in that direction a bit more. And then, simply seeing how the private equity market evolves and where our clients can earn alpha, drove our secondary and liquidations fund as some older vintages come due from some of the stable private equity companies that are looking to start new funds but liquidate what is left in the older funds. What we're trying to do is really have a very careful eye on where we think the next value chain is and cannot be described both in a liquid form and an alternatives of funds. Our general theme is that alternatives are going to become less alternative. We are following that very carefully, and currently we are very focused on how that compares with what our team thinks about sustainability and ESG going forward and how we combine the two.

Great. Thanks for joining. I hope everyone is doing well. I'm interested to know how you are considering clients' perspectives on digital assets—not just cryptocurrencies, but how you're viewing digital assets as a potential new investment class. Additionally, will we see Aladdin digital featured in two years during these calls?

Well, it’s all digital. In our discussions with clients, they are inquiring about the role of crypto and digital assets in their portfolios. As you mentioned, it is seen as a potential new asset class, perhaps akin to commodities or gold. We do not see it as a replacement for currency; however, I believe we will witness the digitization of currencies. It’s a topic of conversation. We are exploring how we can develop various products in response to client demand related to crypto. To frame it, one of the reasons for our success with clients over the past 33 years has been our consistent focus on long-term investing. It’s not about market trends or fluctuations. A lot of the discussion today revolves around events like GameStop and Reddit, with influences from TikTok and day trading. We are intrigued by Bitcoin and other cryptocurrencies as more people become interested, but much of this is centered on trading and market dynamics. In our global conversations with clients, crypto is not a predominant topic. It’s not a major discussion on how it fits into their portfolios. The question of whether it aligns with their long-term investment strategies is present, but overall, discussions about trading products and navigating new asset classes are not significant in our current conversations. In fact, we are having more conversations about sustainability than we did last time we spoke to you. The opportunities in sustainability are much larger than considering crypto assets as long-term investments. I don’t want to downplay crypto or digital innovations; I find them intriguing, and I believe there will be substantial opportunities, but we should wait and see.

Thank you for joining us this morning and for your continued interest in BlackRock. Our first quarter results reflect our unwavering commitment to serving our clients. We are focused on positioning our firm to anticipate client needs, ensuring we are the first conversation they have. I believe we are meeting this need within the financial services industry by consistently focusing on long-term goals rather than short-term market fluctuations. Our attention is directed towards areas such as retirement, sustainability, and stakeholder capitalism. These focuses strengthen both BlackRock’s business model and the long-term wealth of our clients. Our mission is to create a better future for our clients by facilitating savings, simplifying investing, making investments more affordable, advancing sustainable investing, and contributing to resilient communities. Our first quarter results highlight our strong position with clients and in the community. We are gaining more mindshare and wallet share with our clients than ever before. We will continue to invest in our future and stay attuned to our clients' needs. Have a good quarter, and we’ll speak again soon.