INTERVIEW-BlackRock's Botein adds investor alternatives

Thu Nov 3, 2011 3:34pm GMT

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* Wall Street cutbacks open opportunities, Botein said

* BlackRock real estate unit needed fix after losses

* Private equity unit getting started after new hires

By Aaron Pressman

BOSTON, Nov 3 (Reuters) - BlackRock (BLK.N), the world's largest money manager, wants to attract more customers to its hedge fund, real estate and private equity offerings, filling a void left by Wall Street cutbacks.

With investment banks curtailing proprietary trading and buyout funds in the face of tighter regulation, money managers like BlackRock are raising funds from clients to chase other opportunities and raid the talent to exploit them.

Just last year, BlackRock chief executive Laurence Fink appointed Matthew Botein to pull together the varied alternative investing units the firm had collected over the past decade. Many were small pieces in the larger acquisitions of State Street Research Management, Merrill Lynch's fund unit and Barclays Global Investors.

"Alternative assets were not the core focus of the acquisitions that created the modern BlackRock," said Botein, head of the firm's alternatives unit, in an interview. "Very little was acquired explicitly to enter the alternatives business."

Alternatives remain a small part of BlackRock's $3.3 trillion under management. Botein's unit totaled $109 billion at the end of September, a 3 percent gain from a year earlier.

Botein, who worked in private equity at Blackstone Group (BX.N) and at Boston-based hedge fund Highfields Capital before joining BlackRock in 2009, had his work cut out for him.

While the firm was deep with hedge fund talent, the real estate division had been crushed by failed investments like the $5.4 billion purchase of Peter Cooper Village and Stuyvesant Town at the height of the housing bubble. And direct private equity capability had to be built almost from scratch.

REAL ESTATE FIX

Fixing BlackRock's ailing real estate division was one of Botein's immediate priorities. The 2006 deal for the Cooper and Stuyvesant Town apartments was a huge loss for investors by early 2010. And the firm's Granite Fund for institutional investors saw its net asset value drop by more than 50 percent from the end of 2007 to the end of 2009.

"It would have been easy to cut and run from real estate," Botein said. "But that can -- and should -- be a big part of an investor's core portfolio as long as one is disciplined about the market cycles."

Instead, Botein is rebuilding, starting with the hire in April of Jack Chandler, an experienced real estate hand who had spent 25 years at LaSalle Investment Management, one of the world's largest property owners.

BlackRock needed "investment talent at the top," Botein said. Chandler is someone "who has seen the whole world and is capable of being an investment decision maker." WALL STREET TALENT

Botein's reorganization comes as pension funds and other institutional investors are increasingly turning to the alternative sphere. Current low yields hurt performance while enlarging the value of future liabilities.

At the same time, banks like Goldman Sachs (GS.N) and Morgan Stanley (MS.N) that once dominated alternative markets have been closing their prop trading desks and shuttering hedge and buyout funds. Goldman closed one of its former flagships, the Global Alpha Fund, after major losses in September.

"Private equity and prop trading were the profit engines of Wall Street," said Don Raftery, managing director at research firm Greenwich Associates. "We've seen a pullback in the face of the Volcker rule and other regulation."

In May, Botein snapped up a seasoned private equity team led by Nate Thorne, who founded Merrill Lynch's private equity business in 1994 and led investments in major leveraged buyouts like hospital chain HCA and car rental leader Hertz.

The business model at BlackRock will be quite different than the one used by Merrill and others on Wall Street. BlackRock will invest client money but will not put its own balance sheet at risk.

"Everything we do is with client funds," Botein said. "A lot of temptations can arise if certain pockets are your money and other pockets are client money."

(Reporting by Aaron Pressman)

((Aaron.Pressman@ThomsonReuters.com +1-617-942-1752; Aaron.Pressman.Reuters.com@Reuters.net)) Keywords: BLACKROCK/BOTEIN

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