BlackRock Finance Inc (BLK) — Q2 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 lists 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.

Thank you Chris and good morning everyone. It’s my pleasure to present results for the second 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'll be focusing primarily on our as adjusted results. Last month at our 2021 Investor Day, we highlighted how the investments we have consistently made to support growth have enabled us to execute on our framework for shareholder value. We have invested and evolved over time to create a globally integrated investment and technology platform that enables clients to construct resilient whole portfolios that meet their objectives regardless of market environment or risk appetite. And we continue to invest in our industry-leading high growth franchises such as ETFs, private markets and technology and are accelerating investments to drive growth in our ESG traditional active and solutions capabilities. The combination of our comprehensive and integrated investment platform with global and local distribution capabilities once again delivered strong results for the quarter, and we remain very well-positioned to continue delivering differentiated organic growth in the future. BlackRock generated total net inflows of $81 billion in the second quarter, representing 4% annualized organic asset growth. As previously disclosed, second quarter net inflows included the full impact of a $58 billion low fee institutional index redemption from a large U.S. public pension client. Strong net inflows from ETFs and our entire active franchise once again contributed to this quarter's robust 10% annualized organic base 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 generated over $500 billion of total net inflows, representing 13% organic base fee growth well in excess of our 5% long-term target. Second quarter revenue of $4.8 billion increased 32% year-over-year and operating income of $1.9 billion rose 37%. Earnings per share of $10.03 was up 28%, also reflecting lower non-operating income and a higher effective tax rate compared to a year ago. Strong year-over-year comparisons benefited in part from significant improvements in equity market conditions versus a year ago. Non-operating results for the quarter included $145 million of net investment income, primarily driven by mark-to-market gains in our private equity coinvestment and unhedged seed capital portfolios. Our as adjusted tax rate for the second quarter was approximately 24%. We now estimate that 24% is a reasonable projected tax run rate for the remainder of 2021, primarily reflecting an increase in certain tax state tax rates though 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. Second quarter base fee and securities lending revenue of $3.8 billion was up 27% year-over-year, primarily driven by the positive impact of market beta on average AUM and strong organic base fee growth, partially offset by higher discretionary money market fee waivers, lower securities lending revenue and strategic pricing investments over the last year. Sequentially base fee and securities lending revenue was up 5%. However, our effective fee rate was down 0.3 basis points, as strong organic base fee growth driven by our higher fee active businesses and the impact of one additional day in the current quarter were more than offset by higher discretionary money market fee waivers and the impact of divergent equity beta in the quarter. During the second quarter, we incurred approximately $165 million of gross discretionary yield support waivers driven in part by continued strong flows into our U.S. government money market funds. While the Fed's recent technical adjustments to the IOER and RRP have modestly helped, we still expect discretionary fee waivers to persist at or around current levels for the near term. However, future levels of discretionary fee waivers may also be impacted by several additional factors, including the level of AUM and funds with existing waivers, gross yields and competitive positioning. Performance fees of $340 million were up significantly from a year ago, reflecting strong performance across our entire investment platform, including liquid and illiquid alternatives and long-only strategies. Quarterly technology services revenue increased 14% from a year ago, while annual contract value or ACV increased 16% year-over-year, and continued to reflect strong growth from the second quarter of 2020, which was impacted by slower sales and extended contracting in the early days of the pandemic. We remain committed to low to mid-teens growth in ACV over the long-term. Total expense increased 29% versus the year ago quarter, driven primarily by higher compensation, direct fund and G&A expense. Employee compensation and benefit expense was up 34%, primarily reflecting higher incentive compensation driven by higher operating income and performance fees and higher deferred compensation, reflecting the impact of additional grants associated with prior year compensation and certain compensation arrangements related to a previous acquisition. Direct fund expense increased 30% year-over-year, primarily reflecting higher average index AUM. G&A expense was up $73 million or 19% year-over-year, primarily driven by higher technology portfolio services and marketing spend. Sequentially, G&A expense was down $124 million, reflecting the impact of approximately $180 million of product launch costs incurred in the first quarter, partially offset by higher technology and marketing spend. Intangible amortization expense increased $10 million year-over-year as a result of our Aperio acquisition. Our second quarter as adjusted operating margin of 44.9% was up 120 basis points from a year ago, benefiting in part from significant equity market improvements over the last year. BlackRock 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. Our capital management strategy remains first to invest in our business, including through prudent use of our balance sheet, and then to return excess cash to shareholders. We see incredible opportunity to make Aladdin the language of all portfolios and are investing to evolve Aladdin for its next leg of growth. As Larry will discuss in more detail, during the second quarter, we announced a partnership with Baringa, including the acquisition of their industry-leading climate change scenario model, which will enhance Aladdin Climate's capabilities and set a new standard for climate analytics. In addition, yesterday we announced a minority investment in SpiderRock Advisors, a tech enabled asset manager, focused on providing professionally managed option overlay strategies. This investment adds incremental product capabilities to our recent acquisition of Aperio and extends our market leading personalized SMA franchise. We also repurchased an additional $300 million worth of shares in the second quarter and stand by previous guidance as it relates to share repurchases for the remainder of the year. As we discussed at Investor Day, our strong and resilient platform has never been better positioned to deliver for clients as we leverage our scale, unique insights and solutions orientation to meet their long-term investment needs. Quarterly net inflows of $81 billion reflected continued momentum across our entire investment business, especially in our ETF and active platforms. Our ETFs generated net inflows of $75 billion in the second quarter, representing 11% annualized organic asset and base fee growth. We also crossed $3 trillion in assets globally for the first time. Core equity and higher fee precision ETFs continued to generate strong inflows, particularly in international equities. However, most of our growth this quarter came from the strategic category led by continued strength in our sustainable ETFs and renewed strength in fixed income, as well as steady positive flows into factor and thematic ETFs. Retail net inflows of $21 billion representing 9% annualized organic asset growth and 10% annualized organic base fee growth were positive in both the U.S. and internationally and across all major asset classes. Inflows continued to reflect broad-based strength across the entirety of our active platform, and we remain well-positioned to capture demand for both active equities and investor appetite for yield where our diversified fixed income range, including unconstrained high yield international and broad market strategies is equipped to meet client demand in any rate environment. BlackRock's institutional active net inflows of $43 billion were led by $35 billion of multi-asset net inflows, largely driven by a significant outsource CIO mandate from a U.K. pension client. As Larry will also discuss, BlackRock is uniquely positioned to deliver customized whole portfolio solutions by capitalizing on our global scale, expertise, investment technology in risk management and a focus on sustainability. During the second quarter, we also saw continued demand for active fixed income and the liquid alternatives and LifePath target date offerings. Institutional index net outflows of $80 billion were impacted by the previously mentioned single client redemption during the quarter. Outflows from index equities were partially offset by inflows into fixed income as clients rebalanced portfolios after significant equity market gains sought to immunize portfolios through LDI strategies. Despite overall asset net outflows across BlackRock's institutional franchise for the quarter, annualized organic base fee growth was 6% as net inflows into higher fee active and alternative strategies more than offset the de minimis base fee impact of low fee index equity outflows. Overall, BlackRock generated approximately $63 billion in quarterly active net flows across the platform, notching our ninth consecutive quarter of positive active equity flows. Demand for alternatives also continued, with nearly $7 billion of net inflows into liquid and illiquid alternative strategies during the quarter, driven by single strategy hedge funds, fund of hedge funds solutions, real assets, private credit, and private equity solutions. Fundraising momentum remains strong, and we have approximately $31 billion of committed capital to deploy for institutional clients and a variety of alternative strategies, representing a significant source of future base and performance fees. Finally, BlackRock's cash management platform continued to grow, generating $23 billion of net inflows in the second quarter, driven by both prime and U.S. government money market funds. Despite facing net zero returns in both the U.S. and Europe, client demand for cash strategies remained strong, given the significant liquidity in the financial system, and by helping clients manage their cash, we are building broader and deeper strategic relationships. Our continued strong performance is a direct result of a thoughtful growth strategy that has been well executed by a talented group of purpose-driven employees who live the one BlackRock culture each day. We are thankful for their tremendous effort and contributions to our success over these last 18 months. We will continue to embrace change and invest responsibly for the future, so that we can meet the needs of all of our stakeholders. With that, I'll turn it over to Larry.

Thank you, Gary. Good morning everyone and thank you for joining the call. We are once again reporting earnings today from our headquarters in New York City, and I'm happy to see more and more of our colleagues in the office in recent weeks and I remain cautiously optimistic for a gradual return to having people back in the office and a little normalcy. After more than a year of virtual meetings, I spent the last few weeks meeting with clients in-person again. I also spoke at the G20 in Venice on Sunday about sustainability and climate change, and it was great to be back on the road. Our business is built on listening to the people we serve and understanding their needs. And there is no substitute for meeting face-to-face with people to hear directly from them about their investment challenges, their opportunities, and what lies ahead for them. It is through these conversations that we're able to build a deeper relationship with our clients across their whole portfolio and to ensure BlackRock is always evolving and staying current and staying in front of their needs. This longstanding client-centric approach is powering consistently strong results for the benefit of all our stakeholders. Total net inflows of $81 billion in the second quarter, representing a 10% organic base fee growth were driven by continued momentum in strategic growth areas. We saw client demand in our ETF and illiquid alternatives, our active and sustainable strategies, as well as our scaled cash management solutions. We developed 14% year-over-year growth in technology services revenues, as clients increasingly turned to Aladdin. We have now delivered organic base fee growth in excess of our 5% target for five consecutive quarters, including 13% over the last 12 months from over $500 billion of net inflows. This is driving strong financial performance, and I'm very confident that we have significant room to grow, as we are partnering with more clients on larger and more comprehensive mandates than ever before in our history. The global economic restart continues to broaden in the second quarter as vaccinations were rolled out and some countries are gradually reopening. With significant amounts of cash still on the sidelines, markets are anticipating continued growth near-term, despite the potential for various restrictions in certain regions, certain countries due to the variant. We have seen equity markets rally year-to-date, with most indexes up over 10% for the first half of the year and hitting record highs. We look ahead to the remainder of the year and beyond. Inflation concerns are top of mind for investors who need to assess the potential impact on their portfolios. Debate remains as to whether this inflation will be transitory or structural and central banks will need to balance their monetary policy decisions alongside expansive fiscal policy by so many governments. In this environment, clients are looking for scaled partners who have a deeper understanding of the global picture and a platform that can construct portfolios tailored for their needs and for their future goals. They are turning to BlackRock to help them navigate uncertainty. They are turning to BlackRock to invest more opportunistically and they are turning to BlackRock to help them plan for their future and our deliberate investment over many years to build a resilient and scaled asset management and technology platform is helping them in their needs. And we are delivering for them. Building on what we laid out at our Investor Day last month, we remain focused on consistently improving and investing ahead of our client's needs and the biggest growth areas of the future. In ETFs, the benefit of our investments over time are showing up through accelerated momentum across the franchise. In June, client assets in our ETF passed $3 trillion globally, driven by second quarter net inflows of $75 billion. It took 15 years for iShares to get to $1 trillion in assets. It took iShares only five years to get to $2 trillion in assets. And it just most recently took iShares only two years to get to $3 trillion. Importantly, the majority of this growth at each milestone has been organic, as more investors are using ETFs in more ways. They are using the built whole portfolios. They are using iShares to invest beyond traditional market cap weighted indexes, and they are using iShares more than ever before to access the bond markets efficiently. Our ETFs grew across each of our core, our strategic, and precision product categories, with more than half of our net inflows coming from our strategic categories, led by fixed income and sustainable ETFs. We saw more than $22 billion of net inflows into our fixed income ETFs as investors sought more efficient ways to access fixed income and turn to us for a broader range exposure, including Chinese bonds, multi-sector municipal bonds, inflation-linked ETFs. We now manage more than $700 billion in fixed income ETFs and continue to believe that this category will grow to a $1 trillion by 2024 as fixed income ETFs modernize the $100 trillion bond market. Momentum in sustainable ETFs remained strong, with another $14 billion of net inflows in the second quarter. Including the launches of our low carbon transition readiness ETF, we have seen $30 billion in net inflows into sustainable ETFs in the first half of 2021 compared to $46 billion in all of 2020. With nearly $120 billion of sustainable ETFs, BlackRock has four times the size of the next sustainable ETF player. And we are incredibly well-positioned for the future for our client's needs in this fast growing category. Demand for sustainable strategies is accelerating from investors worldwide in both index and active. Within active sustainable strategies, we saw $4 billion of net inflows in this second quarter. Sustainable investments offer significant opportunities to generate alpha for clients. And we are focused on innovating ahead of their needs. For example, we announced last week the first close for the Climate Finance Partnership, which will invest in climate infrastructure across emerging markets. This strategy is a great example of how public and private sectors can come together to deliver positive environmental and social impact for communities and attractive risk-adjusted returns for clients, including global institutional investors, governments, and philanthropies. BlackRock's broader active platform is playing an increasingly important role in our client's portfolios. And we're seeing the benefits of our investment in our growth and our investment performance. We generated $63 billion of active net inflows in the second quarter across equities, fixed income, multi-assets, and alternative strategies. This growth is outpacing that of the $70 trillion active management industry, as we continue to capture active market share. Long-term investment performance is strong with over 85% of our fundamental active equities, systematic active equities, and taxable fixed income assets outperforming the benchmark or peer medians over the past five years. By delivering durable alpha for clients, we remain well-positioned to continue to generate growth in active strategies. More clients are looking to outsource their entire portfolio, as regulations intensify, operating costs rise, and investing grows more complex. They want customized solutions, spanning active index alternatives powered by sophisticated technology and risk management. The breadth of BlackRock's investment platform, our portfolio construction expertise and our Aladdin technology uniquely positions us to meet these client's needs. We are honored to be entrusted to manage over $30 billion of pension assets for British Airways in the second quarter, through the creation of a bespoke investment and service model. This partnership represents the largest of its kind in the U.K. pension fund, and we believe it will be a catalyst for more transformational change in the industry. We manage over $200 billion in OCIO assets today and believe that trend towards outsourcing will only continue to accelerate. We are also seeing demand for personalization grow among financial advisors and our wealth clients. And we're continuing to invest behind the democratization of tax-efficient personalized portfolios at scale. BlackRock is partnering with financial intermediaries and providing model portfolios, which utilize our broad range of iShares ETFs and actively managed funds, as well as separately managed account strategies across alpha, factor investing, and index investing. Building on our acquisition of Aperio, we recently announced a minority investment in SpiderRock Advisors, which will further enhance our ability to provide wealth managers and financial advisors with tax-efficient, personalized portfolios and risk management solutions. This is another major step we are taking to advance our market-leading franchise in personalizing the SMAs. Alongside ETFs, SMAs continue to see high growth rates as advisors employ personalization and tax management for wealth client portfolios. BlackRock is the second-largest SMA provider today with over $200 billion in assets, including Aperio. We remain focused on investing in a comprehensive platform of solutions and customization capabilities for the wealth management market. BlackRock's commitment to evolve and to meet our client's needs is recently most evident in sustainability. As we adapt to the fundamental restructuring that the energy transition is driving across the economy, we are investing across products, data, and technology capabilities so we can help clients address the impact of sustainable factors on their portfolios and help them capture significant client demand for sustainable solutions. Last year, we began developing Aladdin Climate to fill a need in climate risk analytics and to help investors better understand and act on climate risk. Aladdin Climate measures at both asset and portfolio levels, the impact of physical risks, like extreme weather events, and transition risks such as policy changes, new technologies, and energy supply. In June, we further advanced Aladdin Climate through a new partnership with Baringa. The combination of Baringa's climate transition risk models and Aladdin's financial and physical risk models will provide investors with the ability to better understand and customize their climate risk exposures. This partnership is a significant milestone in the build-out of Aladdin Climate and will set a new standard in the industry for climate analytics and risk management tools. We're also committed to bringing the benefits of our global platform to clients around the world by deepening our local infrastructure. We're investing in people who speak every language to understand local markets and regulations, and have insight into how the changing world intersects with each of our client's goals. This includes investing to be the leading global asset manager in China. Rapid economic development and wealth accumulation in the world's second-largest economy has propelled the growth of the $9 trillion Chinese domestic asset management industry. Earlier this year, we obtained our wealth management joint venture license. And last month, we received our fund management company license. We are the first global asset management firm to obtain this type of license. We are now well-positioned to extend the breadth of our investment solutions and insights to all of our client segments across China and help more people transition their savings to investments in China, including in preparation for their retirement. With more than half of BlackRock's assets linked to retirement, we are incredibly focused on innovating and helping our clients address the retirement crisis around the world. Client demand for our LifePath target date funds remains strong, with $17 billion of net inflows year-to-date representing a 10% organic growth and outpacing the entire industry. The need for retirement income and retirement is also accelerating. A recent study BlackRock conducted found that nearly 90% of the participants across every generation want a retirement income solution and 96% of plan sponsors feel responsibility for helping their participants generate and manage their income in retirement. BlackRock is developing LifePath Paycheck to address this growing need. And we're already seeing strong commercial demand with several initial client commitments and support from institutional and investment consultants. The incredible momentum we are seeing across our entire platform is a direct result of our dedicated employee base. I have never been prouder of BlackRock's nearly 17,000 employees. I have seen their commitment to our clients and to each other in incredible ways throughout this pandemic. And in recognition of this hard work and to have them share in BlackRock's growth and success, we are investing in our employees through an 8% raise in base salary compensation for all employees up to and including director levels as of September 1, 2021. We strive to cultivate an environment at BlackRock where employees feel supported and have a diverse and inclusive environment where they can thrive, grow, and build a career in life. After a period like no other in the firm's history, BlackRock has never been better positioned for the future. My recent trips to Europe and the Middle East to meet with our clients have only further validated our differentiated positioning and our approach to building deeper, broader relationships with our clients. We have always led by listening to our clients and hearing what they want, what they need, and through that — through anticipation and embracing change and innovating and staying in front of our client's needs, that has what driven us going forward. Our fiduciary focus has guided the deliberate — our deliberateness in terms of investments we have made to build a more resilient asset manager and a more resilient technology platform by anticipating and staying in front of our client's needs. And we will continue to deliver industry-leading growth to benefit all our stakeholders for the long term. With that, let's open it up for questions.

Good morning, Ken.

Hi. Good morning. Thank you for taking my question. I'd love to dig in further into direct indexing and customized SMAs. So, maybe first, can you give us some additional color on how SpiderRock compliments customized SMAs in your direct indexing capabilities at Aperio? And then you highlighted in your prepared remarks a number of times the importance of retirement solutions. So, should we see Aperio and SpiderRock capabilities permeating the retirement management part of your business? And if so, what does this mean for LifePath and its evolution over time?

We'd have Rob start off and then Rob.

So, as you know, more clients are looking for personalization, and that's what we're seeing in direct indexing. Our combination with Aperio, which Larry had mentioned, actually enhances our ability to deliver personalized tax-managed SMAs and gives us a two-plus-year acceleration in that space, while we continue to organically build additional capabilities for different client segments. So, BlackRock's core SMA capabilities historically were in actively managed equities, fixed income, and multi-asset. Aperio brings experience in building index-based, highly custom investment solutions. So, these are our complementary businesses and they enhance our value proposition for whole portfolio SMAs across equity and fixed income in alpha, factors, and index solutions. So, with over $200 billion in SMAs, including Aperio, BlackRock is a market leading whole portfolio sponsor. And with the prospect of higher income and capital gains taxes, we've now built a pipeline of over $6 billion in potential new Aperio mandates just since the transaction closed. So, this is an example of how we are getting more into the personalization and direct indexing. And of course, ETF and direct indexing complement the tech that we are investing in and building.

Ken, on the target date in LifePath and LifePath Paycheck, we have invested significant effort into LifePath Paycheck. We are now collaborating with various plans, and we anticipate this will transform the 401k defined benefit plans and corporate plans. We are in discussions with numerous corporations and believe there are substantial growth opportunities and announcements ahead regarding our positioning. This initiative is distinct from our customized efforts related to Aperio. We are confident it will alter the retirement landscape. We have engaged with all the consulting firms, which have provided buy recommendations across the board. We are actively communicating with many plans and hope to make significant announcements in the coming quarters regarding the success we are experiencing with LifePath Paycheck. This reflects BlackRock's commitment to addressing our clients' future needs. When we announce this to our clients, it will highlight how retirement will be reshaped and the importance of certainty during the accumulation phase. We are proud of the extensive research and development work we've conducted over many years, which is now resonating more than ever with our clients across the United States. We also hope to expand this initiative beyond the U.S., as it will form a core part of our foundation. Lastly, regarding the LifePath target date franchise, we have reached $370 billion, not including LifePath Paycheck, and we expect to continue to gain market share rapidly.

Hi, Craig.

Hey, good morning, Larry. I had a question on ETF adoption. I know you covered a lot of this in the Investor Day, but I had a follow-up here. Which client verticals do you think provide iShares the most one to three upside? And have you seen any significant rise or decline in demand among any client segments over the last six months? And I'm thinking some of the bigger ones like U.S. RAA, insurance, and retail.

That's a great question, Craig. We've consistently stated that we see substantial potential for growth in ETFs. Currently, the penetration in the equity and bond markets is quite low. We anticipate generational shifts that will drive significant new growth, especially in whole portfolios, where fee-based ETFs are approximately 11%. Emerging investment capabilities like ESG and overall replacements in capital markets are seeing ETFs account for about 5% of the total market and 1% of the bond market. By 2025, we predict that ETFs will more than double to $15 trillion. Even at this level, we would still represent a small portion of the markets we compete in, which leads us to believe there are decades of growth ahead. Our goal is to be the market leader in revenue growth, organically driven client flows, and total assets as this situation evolves. We acknowledge the need to offer various options to clients, but we believe ETFs will take the lead. Key segments include Europe, which is adopting rapidly; the wealth segment through model portfolios, where we are a leader and are experiencing significant growth; and institutional clients, particularly in fixed income, which is also growing. The sustainable investment segment, where we lead, is showing growth as well. Our global client base includes self-directed investors, wealth managers, pensions, insurers, and active managers. We offer the most diversified platform with $2.3 trillion in the U.S. and $650 billion in Europe, with $2.3 trillion in equity and $700 billion in fixed income. This aligns well with the client segments I mentioned. Importantly, we maintain the highest secondary market liquidity. U.S. iShares traded nearly $9 trillion in 2020 compared to $7 trillion in 2019, and EMEA iShares traded $0.2 trillion in 2020 versus $1 trillion in 2019. While our precision exposures have impacted us negatively in previous years, they're now contributing to our strong revenue growth this quarter. We are optimistic about growth in the segments where we currently lead.

Good morning, Alex.

Hey, good morning, Larry. Good morning, everybody. I was hoping you guys could flush out the expense dynamics a little bit in the quarter, as well as look out further in a year. Obviously, a very strong revenue environment, revenues up 25% in the first half. But the comp rate is actually up, on a year-over-year basis for the first half as well. Now, I know performance fees tend to skew that upward sometimes. So maybe help us think through the rest of the year. And then just big picture, your framework around expense management and margins. Thanks.

Thanks, Alex. It's Gary. Good morning. So, let's break it down maybe individually. In terms of the comp side, we talked about comp being up about 34% and that primarily reflected higher incentive compensation. You correctly pointed out that incentive compensation is very much tied to both profitability and performance. As we saw higher operating income and performance fees, that definitely ticked up. But we also saw higher deferred compensation year-over-year. That was up by about a $100 million year-over-year. I'd say there's really two things there. One is more ongoing, which is the ongoing impact of additional grants associated with last year's compensation. Obviously, we defer a significant component of current compensation for retention. Last year saw a rather large level of deferrals, especially as it related to performance fees and the level of performance fees last year. That was probably about 60% of that increase. But there was also a one-time, what I would call a crystallization and acceleration of certain compensatory arrangements tied to the success of one of our historical acquisitions. That was probably about $35 million or about 70 basis points on the comp ratio that ultimately should migrate away now that that has been settled out. That's it on comp as I would think about it. Obviously, Larry mentioned the base salary increases, which is more a function of going forward. He talked all about recognizing the accomplishments of our tremendous employees over the last 18 months. I don't expect that to have a very significant impact on our financials this year, but it could be, given its effective date of September 1st, let's call it roughly 20 basis points or thereabouts on both comp and margin impact on a purely isolated basis for the rest of the year. In terms of G&A, we have — I think we gave you some guidance at the beginning of the year. We've made no reductions to the discretionary investment spending plans in terms of G&A spending and hiring that we originally budgeted for the year and that we referenced on our call. Much as others are, I think we're probably hiring a little slower than we had anticipated. We're working on that to make sure we can get the employee support to support our growth plans. We would, as I think is somewhat customary for us anticipate our overall level of G&A spend to be higher in the second half, especially around such areas as marketing, technology. As Larry mentioned, if people get back to traveling, obviously we haven't had a lot of T&E in the first part of the year, but the potential for that I think exists for next year. So broadly speaking, that's it on the comp. There was kind of that one-time issue and on the G&A side, again, our plans are generally exactly the same as we laid them out to you at the beginning of the year.

Hi, Patrick.

Good morning. Hey, hi everyone. It's obviously hard to handicap the chances of a change in the capital gains tax rate at this point, but are you guys seeing any change in either retail or institutional behavior change in conversations around that concern via specific gain harvesting, or just wanting to talk about options? Should it come through?

So not really. I mean, look at, maybe that is one of the reasons that Rob Kapito talked about the personalization and customization of tax-efficient strategies. I think across the board, the awareness of after-tax returns are becoming more dominant in the RRA channels. But I don't think it's — excuse me — I don't think it's reflective yet, and I don't think people are motivated or seeing any real changes in behaviors related to the potential changes in taxes. I think there is just a much greater awareness, as the ability now to create customized, personalized tax-efficient portfolios. I think that's what's going to be driven. Rob, do you have anything to add?

No. I'd say it's another reason why people are moving towards ETFs, which are much more a tax-efficient tool than the typical mutual fund is that they are in. So, actually it's another growth area for ETFs.

Hey, Dan.

Good morning. Larry, you mentioned that you were having some of the largest conversations or big mandates with clients in previous history. I was just curious, are you used to give a backlog number on these calls and obviously you're much bigger and more diverse today, but hoping you can help us size you sort of more near term potential flow picture or those dialogues and the kind of size those mandates, so we can think about the potential there.

Yeah. Well, you're right. We don't do that and we're not going to do that at this call. But I think when you think about — and I — when I referenced the British Airways CI mandate, we believe this is going to be — this is just the beginning of more focus on the virtues and the value proposition of — for these pension funds to rethink how it's organized. Should it be done under a platform like BlackRock and then do we create the efficiencies? Most importantly, can we have a better fiduciary outcome on behalf of their participants? All of this is about their participants and can we provide a better outcome for the participants? I really do believe — we are thinking about that. But we have had some very large wins with a few other clients in the last few quarters. We are in large dialogue with many more, but I want to underscore the transformation of LifePath Paycheck could be too. These could be some very large opportunities to, and having the defined contribution business be reimagined and rethought. This is how we framed it. How can we reimagine and provide better certainty to the participants? How can we provide better outcomes, and how can that lead to a better closeness between the employer and the employees, and how can they build deeper bonds when the employees are retired during the de-accumulation period? These are broad-based solutions we've focused on. No different than the broad-based solutions we focus on the needs of focusing on climate in portfolios across the board. I believe you're seeing in the past related to above trend line growth above 5% organic growth is because of these deepening relationships across the board. As I concluded in my speech, I believe we are going to continue to see this type of elevated opportunity. It's because we are so relentlessly focused on how to think about our clients and help them become better at what they're doing. I truly believe regardless of the outcome of British Air and the other measures we talked about. I would say with the strong performance that we've had in our active platform flows generally follow. When you can have — no firm can have this when you could have a dialogue where you're agnostic about the role of index assets, like ETFs and active assets, and then focusing on whether it's tax-efficient portfolio strategies, or focusing on a sustainability overlay, or now focusing on outcomes related to more certainty during de-accumulation periods. This is what's driving the flows. This is what I think is differentiating BlackRock, and we are spending more time. We're investing — as Gary talked about our investments in the future. These are the type of investments we're making and ensuring that we are staying in front of the needs of clients and providing something unique and differentiated. I believe this will resonate more and more. Let me just leave it at that.

Good morning, Bill.

Good morning, everybody. Can you hear me okay?

Yeah, perfectly.

Thank you for taking the question this morning. Great update. I have a two-part question. First, Larry, when do you anticipate upgrading your 5% organic growth rate? It seems like everything you're discussing has significant and long-term potential. Secondly, following up on your previous mention of the Paycheck opportunity, where is that market share coming from? Thank you.

I'm going to let Gary answer that because he, as the CFO, really connects our platform. He balances the relationship between us. I appreciate him, Gary?

Thanks, Larry. I really appreciate your input. Bill, you might not be surprised to hear some familiar responses from me. We're feeling very optimistic about our organic growth potential moving forward, which showcases the platform we've established, our global reach, diverse investment capabilities, integrated risk management, and strong performance. However, as you're aware, growth is influenced by market conditions. Some of our current growth is definitely a result of the environment we find ourselves in. We try to maintain a broader perspective across various cycles instead of fixating on a specific situation. Over the past five years, we've averaged around 5% organic base fee growth. More significantly, it's not only about how quickly we grow in a favorable market, even though I know Larry has mixed feelings about that expression. The truth is, when markets decline, we continue to perform positively. In challenging years like 2016 and 2018, when the industry was largely in the negative, we still managed to stay in the positive. I’d like to point out that the industry as a whole is projected to grow around 3%. Being at 5%, we're outperforming the industry by more than 60%. We're confident in this, thanks to our broad offerings, solutions focus, and technological capabilities. We see significant opportunities for secular growth as well as maintaining our market share in areas like ETFs. We believe we have substantial growth potential in illiquid markets, where we currently hold a low single-digit market share. Additionally, our investment performance is well-positioned to remain a key player in active management. For now, as we navigate this cycle, our target remains 5%, and we are confident in our performance moving forward in relation to that.

LifePath Paycheck, as I try to frame, is U.S.-based specifically — but we're redefining defined contribution business in the United States. I think that's what it is. But globally it was — retirement is a $70 trillion — has a big gap. We need to rethink retirement as we move away from DB, but we need to find better ways of creating more certainty in a defined contribution world. This is one of the big problems we have in our society today, the uncertainty of retirement. This is one of the problems we've been focusing on for years to try to find a way to have something closer to a defined benefit, but still in a defined contribution way. I think there are great opportunities. We're having robust conversations on this, Bill. I think it's going to reshape or reimagine or redefine the defined contribution business.

Hi, Michael.

Hey, good morning, guys. Thanks for taking the question. Just had a question here on Aladdin. I was just hoping you could update us on the pipeline. I recall in the past you had spoken about a slowdown in implementations, but given the recovery here, the reopening, just curious if you think we can see that accelerate? Then also on the technology services revenue, I think that was up about 14% in the quarter, but the ACV was up a bit higher than that. Just hoping you could help unlock some of the moving pieces there between your ACV definition and the technology services. I think your ACV excludes some of the consulting fees and implementation fees; just hoping you might be able to quantify how much that is relative to the overall technology services line. Thank you.

Thanks Mike. So, again, we're not going to get very specific on pipelines, but we will give you some tonality on Aladdin growth rate. I think as we've talked about, there's clearly increased client demand accelerated by COVID for comprehensive whole portfolio solutions that involve greater systemization, fewer vendor relationships as a number of financial service companies and other insurers, asset managers and funds try to minimize their costs. More importantly, they are trying to take down the number of data sources that they are relying on. We feel that growth going forward is going to be a function of a number of things, but it's going to be primarily gaining new clients, expanding relationships with existing clients, expanding the platform through enhanced functionality and products, and obviously expanding into under-penetrated geographies, most notably, Europe and Asia. With that, what we've said at Investor Day, and we'll continue to reinforce is given all of that, that our pipeline is as strong as it's ever been. We continue to reaffirm our low to mid-teens growth rate for technology services revenue. As it relates to ACV, ACV was up 16%. As you correctly noted, we are migrating a bunch of the eFront business over to Aladdin in terms of its hosted model, as opposed to its traditional model, that does, as you say, have different accounting ramifications. We decided to put ACV out as a key performance metric because we think it better reflects the overall momentum of the business and takes away some of the timing and accounting changes from migrating models over. ACV was up 16%. I think as you also correctly note, that's probably a little faster than we would expect the longer term to be given our target. I think that's a function of some of the business coming through today at a more rapid rate that was delayed from a year ago in the early days of the pandemic, as we highlighted longer sales cycles and contracting periods. We're definitely seeing a little bit of an acceleration there, but again, reaffirming our low to mid-teens growth outlook.

I would just add one thing or two things. One is — and there's a lot of this before my meetings in Europe last week; the demand for data and analytics on sustainability is going to grow exponentially. This is why we've been so aggressive in terms of building out our analytics data across the board. I believe this is going to be a major sleeve and major opportunity for Aladdin. Aladdin Climate is going to be a major component of Aladdin, and we believe having the differentiating data and analytics is going to be why clients are going to be looking to add on Aladdin across our portfolio. What we've witnessed since the acquisition of eFront is that the need for data and analytics related to alternatives and across all the alternative space integrated in a comprehensive data and risk analytic environment is really, really important. If you overlay the movement into capital markets and client demand and alternatives, if you overlay the demand for clients that relate to sustainability and climate, that's going to be a major change and that's going to be a major component of it. That's why some metrics are now having that role and helping us drive Aladdin Climate. As you move away from our client relationships, I'd leave it with that.

Thank you, operator. I want to thank everybody for joining the call this morning and your continued interest in BlackRock. Our second quarter results, again, are a result of the steadfast commitment focusing on our clients first and importantly, thinking and investing and anticipating their needs in the future. I see tremendous opportunity ahead and BlackRock's full focus remains on the long-term fiduciary commitment to all our clients worldwide. We will continue to invest in our business so we can deliver that long-term value for our stakeholders and lead the asset management industry in the many, many years ahead. Thank you again and have a great remainder part of the summer. And unless everybody hopes to have a great third quarter, talk to you then. Bye-bye.