BlackRock Finance Inc (BLK) — Q3 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 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. It's my pleasure to present the results for the third 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 adjusted financial results, I will be focusing primarily on our adjusted results. BlackRock's proven track record of delivering to stakeholders reflects our ongoing commitment to anticipate change before it happens and continually invest for the long term. Our globally integrated investment in technology platforms enables us to construct resilient whole portfolios for clients. We rely on thought leadership, global investment insights, and state-of-the-art risk management tools to help clients navigate ever-changing and increasingly volatile market environments. Our approach is resonating more than ever, and is reflected in the continued strong momentum we're seeing across our entire platform. BlackRock generated total net inflows of $75 billion in the third quarter, $98 billion of long-term net inflows representing approximately 4% annualized organic asset growth were partially offset by net outflows from lower fee cash and advisory AUM. In addition, strong net inflows from ETFs and our active franchise once again contributed to this quarter's 9% annualized organic base fee growth. Over the last 12 months, our differentiated investment management platform, which pairs active and index capabilities across the entire range of traditional and alternative products has now generated over $450 billion of total net inflows, representing 13% organic base fee growth, well in excess of our 5% long-term target. Third-quarter revenue of $5.1 billion increased 16% year-over-year while operating income of $1.9 billion rose 11% and reflected the impact of approximately $96 million of fund launch costs primarily associated with the successful launch of a $2 billion closed-end fund in late September. Earnings per share of $10.95 were up 19% compared to a year ago, also reflecting significantly higher non-operating income in the current quarter. Non-operating results for the quarter included $298 million of net investment income, primarily driven by non-cash gains related to our strategic minority investments in iCapital and Scalable Capital, as well as mark-to-mark gains in our private equity co-investment portfolio. Our as-adjusted tax rate for the third quarter was approximately 24%. We continue to estimate that 24% is a reasonable projected tax run rate for the fourth quarter of 2021, though the actual effective tax rate may differ as a consequence of non-recurring or discrete items or potential changes in tax legislation. Third-quarter base fee and securities lending revenue of $3.9 billion increased 22% year-over-year, reflecting the positive impact of market beta on average AUM and 13% organic base fee growth despite higher discretionary money market fee waivers and strategic pricing investments over the last year. Sequentially, base fee and securities lending revenue was up 5%. Our third-quarter annualized effective fee rate on a day count equivalent basis increased by 2/10 of the basis point from the second quarter as the positive impact of strong organic base fee growth driven by our higher fee active businesses and lower discretionary money market fee waivers more than offset the negative impact of diversion equity beta primarily associated with the accelerating decline in emerging markets during the current quarter. During the third quarter, we incurred approximately $130 million of gross discretionary yield support waivers. Lower discretionary yields support waivers in the current quarter were linked to the Fed's technical adjustment to the IOER and RRP in June, as well as outflows from U.S. government money market funds during the current quarter. Performance fees of $345 million reflected generally strong performance from our single strategy hedge fund platform over the last year. The decline in year-over-year fees reflected lower revenue from a single hedge fund with an annual performance measurement period that ends in the third quarter, which delivered truly exceptional performance a year ago, partially offset by higher revenues from illiquid products. Quarterly Technology Services revenue increased 13% from a year ago. Annual contract value or ACV increased 16% year-over-year and continued to reflect strong growth from the third quarter of 2020, which was impacted by slower sales and extended contracting in the early months of the pandemic. We remain committed to low to mid-teams growth in ACV over the long term. Total expense increased 19% versus the year-ago quarter driven primarily by higher G&A, compensation, and direct fund expense. G&A expense was up $139 million or 30% year-over-year, primarily driven by higher technology and portfolio services expense in the current quarter. Third quarter G&A expense also included $96 million of fund launch costs primarily associated with our first ESG oriented closed-end fund, the $2 billion BlackRock ESG Capital Allocation Trust, and $29 million of contingent consideration fair value adjustments related to the estimated final payment on our successful Citibanamex acquisition in 2018. Recall that we exclude the impact of product launch cost from reporting our as-adjusted operating margin. Core G&A expense for the third quarter, which excludes the impact of product launch and transaction-related costs, was up 3% from the second quarter. We have made no changes to the discretionary investment spending plans we have previously outlined and would expect a sequential increase in our fourth quarter core G&A spending to be generally consistent with previous years, reflecting seasonal increases in marketing spend, additional costs related to return to office planning, and ongoing technology costs associated with the latent cloud migrations. Employee compensation and benefits expense was up $116 million or 8% from a year ago, primarily reflecting higher base compensation and higher deferred compensation related to the impact of grants associated with 2020 compensation. Direct fund expense increased 38% year-over-year, primarily reflecting higher average index AUM, and intangible amortization expense increased $11 million year-over-year due to our Aperio acquisition. Our third-quarter as-adjusted operating margin of 45.8% was down 120 basis points from a year ago. As operating leverage was more than offset by the impact of lower performance fees, higher contingent consideration fair value adjustments, and higher intangible amortization expense compared to a year ago. We're seeing more opportunities to invest for growth than ever before. We reopened the closed-end fund market in 2019 by making it more efficient for investors to access products at NAV. By synthetically seeding these new funds, we've now raised $14 billion in ACV AUM, representing over $170 million in new revenue. Our strategic minority investments in iCapital and Scalable Capital are reinforcing our tech for flows strategy and simultaneously generating very attractive returns for shareholders. And we continue to build our best-in-class ESG capabilities, most recently by acquiring Rhodium models related to the financial risks associated with climate change. Effective use of our balance sheet to seed new products, co-invest alongside clients, or make strategic minority investments both support our growth and drive value for our shareholders. And while our capital management strategy remains first to invest in our business, we also remain committed to returning excess cash to shareholders and repurchased an additional $300 million worth of shares in the third quarter. As we discussed at investor day, we continue to invest in our highest growth franchises such as ETFs, private markets, and technology. And we are accelerating investments to drive growth in our sustainable, traditional, active, and solutions capabilities. Each of these areas once again delivered strong results in the third quarter. Quarterly long-term net inflows of $98 billion were driven by continued momentum and our ETF and active platforms. Our ETFs generated net inflows of $58 billion in the third quarter, positive across each of our product categories, representing 7% annualized organic base fee growth. ETFs attributable to our strategic category drove over 50% of net inflows in the quarter, reflecting continued strength in fixed income and sustainable ETFs. Core equity and higher fee persistent exposure ETFs saw net inflows of $16 billion and $9 billion respectively led by U.S. equity exposures. Retail net inflows of $23 billion representing 11% annualized organic base fee growth were positive in both the U.S. and internationally and across all major asset classes. Retail multi-asset results included the impact of the previously mentioned $2 billion closed-end funds raised in late September. Inflows continue to reflect broad-based strength across our active platform and we remain well-positioned to meet investor needs for risk-adjusted alpha and yield in the current market environment. BlackRock's institutional active net inflows of $26 billion, representing 6% annualized organic base fee growth, were led by $25 billion of multi-asset net inflows. The growth included the impact of a significant outsourced CIO mandate from the Asia-Pacific client, continuing our momentum in an important growth area where we are providing cost-effective whole portfolio solutions to the world's most sophisticated institutional clients. We also saw continued demand for our LifePath target-date offerings, and Larry will update you about a recent milestone for our new LifePath Paycheck retirement solution. Institutional index net outflows of $8 billion broadly reflected equity net outflows, which were partially offset by fixed income net inflows, as clients continue to rebalance portfolios after significant equity market gains, or sort to immunized portfolios through LDI strategies. Overall, BlackRock generated approximately $45 billion in quarterly active net inflows across the platform, including our tenth 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, private credit, real assets, and private equity solutions. Fundraising momentum remains strong and we have approximately $29 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. BlackRock's cash management platform experienced net outflows of $12 billion driven primarily by redemption from the U.S. government and offshore Sterling prime money market funds in line with the broader U.S. money market fund industry. BlackRock's diverse cash management offerings position us well to serve clients' needs and you'll hear more from Larry about how we're expanding our ESG cash offerings to enhance our competitive positioning even further. Finally, third-quarter advisory net outflows of $10 billion were primarily linked to the successfully planned wind-downs of portfolios managed by our financial markets advisory group on behalf of the Federal Reserve Bank of New York. Recall that revenue linked to these assignments is primarily reflected in the advisory and other revenue line item on our income statement. BlackRock continued strong performance reflects our commitment to strategically invest in our business in anticipation of change and to lead the evolution of the asset management industry. Today, we see even greater opportunities to invest in our employees and our clients and in the communities in which we operate to ensure that we will continue to optimize organic growth in the most efficient way possible. With that, I will turn it over to Larry.

Thanks, Gary. Good morning, everyone and thank you for joining the call. I truly hope that all of you are staying healthy and safe. Fortunately, I've been traveling again in recent months to see clients worldwide. It's great to be back on the road meeting face-to-face with our clients. I found our clients actually more engaged, more interested in our conversations than ever before. As investors continue to navigate uncertainty in the markets and in the broader global economic outlook, BlackRock is partnering more closely with our clients to help them achieve their long-term goals and helping them seek new opportunities. BlackRock is providing insights into the global economy, guidance on how to navigate the market volatility, and providing solutions for their entire portfolio. Our comprehensive unified investment in technology platform combined with our steadfast client-centric approach is enabling us to deliver consistently strong results for our stakeholders. Long-term net inflows of $98 billion in the third quarter represented 9% organic base fee growth and were driven by continued strength in our strategic growth opportunities that we spoke to you about in the past. Our consecutive quarters of strong growth are the direct result of these investments that we've made over time to enhance and evolve our business, and to be more prepared for the needs of our clients. We have now delivered organic base fee growth in excess of our 5% target for six consecutive quarters, including 13% growth over the last 12 months. We also generated 30% year-over-year growth in Technology Services revenues, as more clients are turning to Aladdin to execute on their growth aspirations and help them scale their business. At our promising global economic restart earlier this year, we saw certain countries and markets take a step back in recent months as they are confronted with the virus variants and economic issues. Concerns around slowing economic growth are increasing while policymakers evaluate the timing and pace of easing, whether it's rate hikes or reductions in bond purchases. With interest rates still at historically low levels, investors need solutions that can earn a real yield and be resilient in a higher inflationary world. Inflationary trends are appearing more than transitory, reflecting structural changes, including a shift from consumerism to job creation, rising wage growth, and the energy transition. As I said in a speech to the G20 in July, society needs to rapidly invest in innovation to offset inflationary pressures associated with the transition to a net-zero economy. We need to make sure that we are pushing just as hard on the demand side as we are on the supply side. Otherwise, we risk supply issues that drive up the cost for consumers, especially for those who can least afford it. Against this backdrop, clients are turning to BlackRock more than ever before, and we are using the full breadth of our capabilities to meet our clients' needs. BlackRock, a top-performing active platform continues to outpace the industry, generating $45 billion net inflows in the quarter and nearly $200 billion over the last 12 months. Momentum and active equities continue, and BlackRock's number 1 in year-to-date asset gathering in the U.S. active equity mutual fund industry is up from number 3 in 2020. These results reflect our investments over time to incorporate data science, integrate ESG considerations, and enhance portfolio construction capabilities across the entire active business. We remain committed to continuous innovation so we can deliver strong and durable alpha for our clients over the long term. In addition to our traditional active strategies, you're also seeing clients increase portfolio allocation to private markets. As they reach for yield, institutions are turning to BlackRock for private credit, real estate, and private equity solutions. We’re seeing advisors access the private market through our record closed-end fund vehicle, which has up to 25% allocation to alternatives and accredited investor solutions. In total, we raised about $5 billion of illiquid alternative flows and commitments in the quarter, and we continue to steadily deploy that capital for our clients. Portfolio construction and asset allocation decisions are critical in achieving desired returns, and more clients are adapting our ETFs as building blocks in their portfolios. We generated $58 billion of ETF net inflows in the third quarter, with growth across each of our core, strategic, and precision product categories, including strong flows in fixed income as clients sought inflation protection in sources of income. We crossed $200 billion in ETF inflows year-to-date, exceeding our 2020 full-year flows. We are seeing this momentum across the entire ETF industry as more and more investors discover the convenience, efficiency, and transparency that the ETF vehicle has. We see opportunities well beyond the 30 million people who use our ETFs today and continue to believe in the long-term growth potential for ETFs. We will remain confident in our ability to deliver strong organic base fee growth and lead the industry. In my conversations with clients, I hear about how they are looking to focus on their core business and partner with select investment managers that have the expertise, the technology, and the scale, to navigate the increasingly complex markets. We see outsourcing portfolio management through OCIO for institutions and for model portfolios for wealth managers, both of which are fast-growing areas of the industry. BlackRock is well-positioned to capture this opportunity and partner with our clients across our whole portfolio. Few asset managers have the scale and diversity of offerings to do this, and the consolidation we have seen in the industry is further validation of the business model that we've already built here at BlackRock. We're also innovating to expand clients' options for how they participate in proxy voting decisions, much like asset allocation and portfolio construction, where some clients now can take an active role while others outsource these decisions to us. More of our clients are interested in voting on their index holdings. This is another great example of one BlackRock’s effort to further democratize choice for our clients and is in line with our commitment to provide them with the broadest range of options. Client demand for more holistic and flexible technology-driven solutions is also increasing. Technology Services revenue grew by 13% year-over-year as Aladdin captures opportunities from industry shifts. We are leveraging our user-provided model to further evolve Aladdin. The combination of Aladdin and eFront has been well received by clients and we now have over two dozen clients using both across their entire whole portfolios. As we've done throughout our history, we continue to invest ahead of our client's needs and evolve BlackRock to lead in the biggest long-term opportunities of the future. We are seeing meaningful progress in executing on these opportunities. In sustainability, momentum remains strong, and so we generated another $31 billion of net inflows across all regions. Active sustainable net inflows of $7 billion were led by the launch of our ESG capital allocation trust closed-end fund, which Gary mentioned earlier. As ETFs, iShares is the leading sustainable provider, capturing nearly 50% of the industry category inflows year-to-date. In Europe, almost half of all industry flows are now going into sustainable ETFs, up from less than 10% just three years ago. Clients also want an impact-oriented strategy that seeks to deliver targeted environmental or social outcomes. We recently repurposed one of our money market funds to seek positive social outcomes by supporting a diverse trading ecosystem. BlackRock will also be contributing 5% of our management fees, net revenues from the funds to support students in historically black colleges and universities and predominantly black institutions. This fund is already growing more than 40% to $4.5 billion since its conversion in July. We are proud to work together with our clients to help make a positive impact on the futures of many diverse students, on the futures of many diverse business owners, and in their own communities. BlackRock is also supporting clean energy solutions that change the demand curve for hydrocarbons, which is actually accelerating today and driving energy prices higher. The gap in costs between clean energy technologies and those that emit greater amounts of greenhouse gases is still very large for most things, which is why BlackRock is supporting a range of initiatives to help bring down the green premium of clean energy. Building our partnership with Temasek earlier this year to advance a decarbonization solution, the BlackRock Foundation announced last month a $100 million grant to the breakthrough Energy Catalyst program. This grant will help speed the development and commercialization of clean energy technologies, and BlackRock will provide our investment expertise as the program deploys its financing around the world. We have a long history of innovating to help millions of people worldwide improve retirement readiness. Today we are the largest investment-only defined contribution provider in the industry with over $1 trillion of assets under management on behalf of over 72,000 defined contribution plans. Our targeted franchise LifePath has seen $23 billion of net inflows so far this year, representing a 9% organic growth rate far in excess of the broader target-date industry. We continue to innovate ahead of the future needs of our clients. We recently announced a significant milestone in our retirement income solution; LifePath Paycheck, large plan sponsors whose plans together represent about $7.5 billion in target-date investments, have elected to work with BlackRock to implement our LifePath Paycheck solutions as a default investment option in their retirement plans, subject to necessary approvals and conditions. We remain committed to working alongside our clients and partners to help more people address the challenges of spending and income in retirement. We believe that globally integrated financial markets provide people, companies, and governments with better and more efficient access to capital that supports economic growth around the world. This conviction drives our long-term strategy in China as it has in every community and every country where we operate. BlackRock's clients have benefited from our focus on the long term, and we will bring this perspective to help Global Clients invest in China, and importantly, to deliver investment solutions to Chinese investors. After receiving our FMC and WMC license earlier this year, we launched our first two products in the third quarter, raising over a billion dollars in two weeks from more than 110,000 investors. This milestone demonstrates the value proposition of BlackRock's platform and the strength of our partnerships. It also highlights the start of BlackRock living its purpose in China by helping more people secure a better future and investing in the long term and retiring hopefully in dignity. Just as we continue to evolve our business to meet client needs, we also evolve our entire organization. A key driver of BlackRock's success over the years has been our focus and deliberate talent processes on delivering leaders with a broad range of expertise, a deep commitment to the firm, and a One BlackRock mindset. This commitment to the evolution also extends to our Board of Directors. We recently elected two new Directors to our Board, Beth Ford, President and CEO of Land O' Lakes, and Kristin Peck, CEO of Zoetis. Beth and Kristin are recognized leaders in their respective industries, and they bring a wide range of valuable perspectives and experiences that will help BlackRock and the board navigate our future on behalf of all our shareholders. Looking ahead, I am confident the investments we're making today will enable us to capture greater opportunities and to deliver industry-leading growth in the years to come. More immediately, I'm very excited to welcome our colleagues back to BlackRock's offices in certain parts of the world as we begin our future of work pilot. It's our culture that can't be built or maintained remotely over the long term that ensures we can never forget who we are, who we serve. It also helps us in our markets and our industry and most importantly, help us continue to evolve and experience the constant change of the world. Having togetherness and connection with all our employees is vital for our culture and vital for serving the needs of our clients. With that, let's open it up for questions.

Hey, good morning. Thanks for taking the question. Just wanted to ask about alternatives given prospects here for rising yields and interest rates. There is some fear in the marketplace that this could soften flows into alternative products. So just would be curious to hear your perspective and how you see potential for investor allocations to alternative products to evolve in a rising rate scenario. And then as you look across your alternatives franchise today, maybe you could just touch upon some of your recent initiatives on illiquids and just any sort of views on which you think could be the largest contributor to growth at BlackRock amongst your illiquid products. Thank you.

First of all, hi, Michael. I'm going to let Rob Kapito answer that question.

So my question now that we have been involved in the alternatives business in one way or another for a pretty long time, especially in the retail sector since 1988, and our goal has been to access the retail area for alternatives by keeping our promises over a long period of time on performance. So to start with, the growth in retail alternatives is certainly compelling as part of our strategy to serve advisors' whole portfolios. And what we chose to do is bring a diversified product lineup to the retail alternative investor. So our job is to bring the appropriate wrappers for those products to provide the solutions to help reshape their portfolio at a period of time when rates and returns have been very low. What we've seen them do is move from 1% to 2% of their portfolio to allocations up to 20%. So year-to-date, just in that sector, we've raised over $24 billion of net inflows. That's at approximately an 85 basis point average fee rate across what we'll call our retail liquid alternatives and credit vehicles, and our public-private closed-end fund offerings. Our recent launch of alternatives portfolio analytics for financial advisors on the web-based BlackRock Advisors center and the continued product expansion is going to help us grow with those clients. In the recent years, we expanded our retail alternatives to include private credit and private equity for year-to-year access to growth equity through closed-end funds. We're working to expand our retail alternatives offerings now across real assets, sustainable, and co-investment opportunities. So just in the closed-end funds alone, we provide a wrapper that will enable us to provide up to $3 billion in alternatives in them. Overall, we manage about $180 billion across liquid and illiquid alternatives. Currently, we have $29 billion right now in dry powder to invest and deploy, approximately $210 million of future annual base fees. Including liquid and liquid credit, our platform is now over $310 billion, and we're the top 5 manager in that. We've built up alternatives platforms and raised another $100 billion of gross capital over the last five years and we expect to raise another $100 billion in the next three years. Just for September year-to-date, we have raised $25 billion of gross capital and deployed $10 billion. There is some expectation that rates can rise, but still, these are longer-term investments that have enough spread in it that I believe that the demand is going to continue for quite a long time. I think Larry's rate scenario, which he said in the beginning, is that rates are low for longer, and this will only enhance the ability for people to want more alternatives.

Great. Good morning. Hi, Larry. Thank you for taking the question. So inflation concerns are clearly everywhere, and Larry, as you highlighted in your prepared remarks, that's something you guys are clearly focused on as well. So maybe a two-part question here. One, when it comes to BlackRock's own cost structure, where are you seeing expense growth and margins heading into 2022? We obviously make changes on the salary from last quarter, but I'm curious if this is becoming a bigger issue for total comp and G&A as you think forward. And then secondly, from a product perspective, what are the strategies you're advising clients to lean into more aggressively in 2022 to protect their portfolios against the upside inflation risk? Thank you.

And I'll take the expense first. Hey, Alex, it's Gary, how are you? So we've obviously seen some expense growth, which I think is expected in the context of the outsized organic-based growth we're delivering on the top line. For the third quarter, our margin obviously was down about 120 basis points versus a year ago. There were a couple of things that clouded what would have been some operating leverage in the business: one was lower performance fees year-over-year. If you recall, we had this discussion last year that performance fees in general hit the P&L at a much higher margin than the rest of the business because there's really only compensation associated with it and no other operating cost in the business. When we see performance fees decline, as they did year-over-year, that has an impact on the margin. Secondly, we had higher contingent consideration fair value adjustments or non-core expense this quarter, related to the Citibanamex final payment. We also have higher intangible amortization. Looking at those three things, they really more than offset our margin on a year-over-year basis where you would have seen some operating leverage improvement. In terms of just looking at those individual costs, comp is up about 8% year-over-year and that was primarily driven by base salaries. Remember, comparing it to a year ago, we have normal base salary increases at the beginning of the year and the mid-year. The headcount is a little higher, and obviously, we have Aperio this year versus when we didn't have it last year. FX also increased the dollar cost of some of that compensation. So that's the main driver: base salary, but the mid-year salary increase didn’t have much to do on a year-over-year basis. G&A side was up about 30%, but again, there are a bunch of components there. Technology expense increased year-over-year, and you will still continue to see that. The primary driver there is technology infrastructure, primarily the ongoing migration to the cloud, which we're probably about halfway through. We will be accelerating into next year. You're also seeing higher portfolio services costs, which again is part of our success story in OCIO. Where you see us winning large outsourced wealth solution mandates, you're going to see higher portfolio services costs because not all of those mandates are managed in-house. We use third-party advisors, and when we do, you see those expenses reflected in that line item of the P&L. It's grossed up on revenues, but we also have to bear the expense. There's always some noise in our non-core. Here, we talked about the Citibanamex and Hunter fund launch costs, which, again, are associated with higher revenue. Finally, on the direct fund expense side, I think that is purely variable. It's tied to our growth in our index AUM, which is fundamentally driven by our success in iShares. That number was up roughly 38% year-over-year, but there is always going to be some noise in that number as we manage that expense on behalf of the fund shareholders. Excluding that noise, that number was probably up about 31% year-over-year versus average iShares AUM, which increased just close to 34%. Yes, there are some expense increases; I would say it's less tied to inflation for us than other players. It's really more tied to continuing to invest for growth. If we can continue to deliver organic base fee growth well in excess of our 5% target, which we've done for the last 6 quarters in a row at a 9% clip, and 13% over the last 12 months, we're going to see some elevated expenses to drive that success.

And on the products in a more inflationary environment, I would just clearly tell you that our platform is large and diverse. We're having conversations with clients globally where they should be allocating. I do believe you're seeing higher allocation towards equities over the last year across our clients' portfolios. As equities rally, they didn’t do much in terms of rebalancing. The bigger question is, how do you allocate across equities? The roll-up of emerging markets? I don't think inflation is playing a dominant role in the conversations. Even in fixed thinking, it's very obvious long-duration assets are going to be impacted the most. Those clients in fixed income who are worried about their duration risk could go down into a low-duration product, various products with less convexity and less issues. They could also go into some type of inflation-protected notes too. That's not going to be that large. But the resiliency of our platform allows us to have that conversation in both deflationary and inflationary worlds. The volatility of a global economy is allowing us to have robust, deep conversations. I don't think there's one global trend to go in and out of one product because inflationary fears exist; some clients don’t believe in that, while some people actually believe it's transitory. When there is uncertainty and in a transition period, more clients come to BlackRock than ever before, asking those questions. I think the robustness of our platform, whether it's in index-oriented strategies or active strategies across the spectrum, allows us to work with them across all economic environments.

Great. Thank you. Good morning everyone. Shifting to the growth in sustainable investing, Larry, you mentioned at a conference that we aren't on track for net-zero at our current pace. Can you discuss the demand and BlackRock's capacity to provide impact fund products, particularly regarding our readiness and future developments? Should we view this as a solid path for organic growth moving forward?

The flows in this COVID world have accelerated into sustainable products. Let me give you the context, I think, with global capital markets. Public institutions are moving very rapidly to adapt more disclosures related to sustainability. More clients, including our hydrocarbon clients, are looking to adapt to continue to provide hydrocarbons to meet the current needs of our society, but also to slowly adapt in a more sustainable platform. So across the board, we are having very deep conversations. The conversations we're having with our hydrocarbon companies are more robust than ever. Our flows continue to grow and dominate, where we continue to be a leading player. Year-to-date we had about $80 billion of sustainable inflows, we had $32 billion of those inflows in the third quarter. When I talked about the shift in finance, we're seeing that. Specifically on your question related to impact, this is one of the reasons why we wanted to be a partner in Breakthrough Energy. We want to learn more about science and new technology. This is why we partnered in our decarbonization fund with Temasek. The demand is growing rapidly in terms of clients interested in finding new opportunities to be part of this transition. The capital is there, but what is not as prevalent are projects or opportunities. We are having conversations with universities and governments on how we can provide capital. One of the dynamic conversations we're having is how can we partner with traditional hydrocarbon companies in terms of moving forward on their sustainable strategies. Our flows are strong, and I continue to see this significant shift in investor portfolios. While we are not moving fast enough, the movement toward sustainability is very rapid. I fear we are creating a bifurcated world; the pressure on public companies and banks is enormous. Still, we're not applying pressure on private companies. The hydrocarbon divestitures from public companies are often purchased by private equity firms, which does not help us reach net-zero goals. We are fooling ourselves if we restrict supply in traditional hydrocarbons; rising energy costs create a huge challenge for transitioning industries. As a leading asset manager, we're seeing significant flows. We need to accelerate our sustainability transition and work proactively with hydrocarbon companies instead of against them.

Okay. Thank you very much.

Hey Bill.

Good morning, everybody. Thank you for taking the questions today. I appreciate all the discussion. Maybe a two-part question, just keeping the line with that. One is, can you maybe peel back a little bit on why you're so successful in the retirement business and where you see the Paycheck opportunity gaining scale and share? Completely unrelated, but maybe for Gary, how do you think about the exit fee rate and base fee rate, just given the divergent beta versus the very strong flow mix dynamics? Thank you.

So Bill, the story is we're able to look at a client's portfolio holistically over the long term, and the focus is to have our clients be able to retire in dignity. It's not a one-off situation; it's a constant look at a portfolio over a period of interest rates, solving the problem with the appropriate wrappers and products. We have a scale of products, we have performance, we have wrappers. So honestly, it is the focus. A significant portion of all of BlackRock's assets are dedicated to retirement. This is what we do, and when we dovetail that into the analytics we can provide.

We can't fulfill the entire gamut of retirement expectations. It's product, performance, technology, and a focus on what we think is the most important business that there is in the world, which is keeping our promises to clients so they can retire in dignity.

I would add one more thing to what Rob is talking about. I think our consistency of messaging to our clients over many years has built a deep relationship with them, and I don't believe our 9% growth rate is a one-time thing. We continue to grow our presence in this market. We continue to innovate, whether it’s the LifePath Paycheck or any recent innovations. I believe our conversations have never been broader and more robust, and we continue to drive these conversations. I believe more large plans are turning to BlackRock for that type of advice and hand-holding. I believe this need for connectivity in the workplace and deeper connections with employees is going to be a larger and more dominant theme going forward.

On your second question, which was about fee rates heading into the fourth quarter, we generally don't provide a lot of guidance on that, but I will say a couple of things. You will see that the spot rate entering the fourth quarter was moderately lower, but not significantly. If you look at page 5 of our supplement, a lot of things go into the fee rate. From an organic growth perspective, every month of the third quarter was generally very consistent. There was not a lot of volatility in our organic growth. You do see some differences in the spot rates regarding market relative to average rates. We did see a divergence in equity beta accelerate towards the end of the quarter, particularly with emerging markets. No question that we saw equity beta decline at the end of the quarter. I think that might have a moderate, very moderate impact on the fee rate, but nothing significant.

Good morning, everyone. Hope everyone's doing well. Maybe we'll return to the alternatives business. I am interested in the position in the insurance market in terms of some big clients and where you see more CIOs. Do you feel you have the right product set as the insurance industry expands its horizons into credit and alternatives? Just trying to get a better feel for how you're tapping into that upfront.

Insurance portfolios have traditionally had allocations to alternatives. As alternative packages have become more complicated, the technology and management of those have not kept pace. We're being asked by insurance companies, many of whom have determined that managing investments with technology would be better, cheaper, and faster. This opens up huge growth areas for us, particularly with Aladdin. We're seeing strong interest from insurance companies across private credit, real estate, and infrastructure. We've spent a lot of time developing those areas and Aladdin's capabilities are unmatched. This is a major growth opportunity for us.

I couldn't agree more. Our business today is obviously in excess of $450 billion, including the significant mandate you mentioned earlier from AEL which will fund in the fourth quarter. I think Rob is right; portfolio resilience, diversification, and construction are critical for our increased momentum and capabilities across the private markets, and we're seeing this reflected in the market. It's strong applicability beyond just insurance companies as well, and we're seeing increasing momentum across institutional outsourcing as well.

Thank you, Operator. I want to thank all of you for joining us this morning and for your interest in BlackRock. Our third quarter results, again, are a direct result of our steadfast commitment to serving our clients, listening to our clients, responding to our clients, and hopefully staying in front of our client's needs to be with them as they evolve and change. I see a larger opportunity ahead of BlackRock than ever. BlackRock's focus remains on investing in our people, our communities, where we operate across the world, and in our platform. Most importantly, as we continue to stay ahead of our client future needs, we will continue to drive excellence on behalf of all of our shareholders. With that, thank you. Hopefully, everyone has a safe and healthy fourth quarter.