July 9, 2024

BlackRock Pays a Premium to Get Preqin

And just like that, we’re in the second half of 2024. It feels like it was only yesterday that I went full time on AMO and now here we are, six months into my full-time entrepreneurial life. Thanks to everyone for being part of this journey with me.

Later this month, I’m hosting a webinar about outsourcing, so be sure to check that out.

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There’s money in data businesses

Early last week, BlackRock announced that it was acquiring UK-based Preqin, a data provider that tracks the performance of private equity and hedge funds. If the deal closes, BlackRock will pay $3.2 billion for the company.

According to the Financial Times:

The $10.5tn asset manager beat S&P Global and Bloomberg to acquire Preqin in the latest of a series of deals for specialised data providers, according to people briefed on the deal.

The company was founded by Mark O’Hare, who is expected to become a vice-chair at BlackRock. It had also attracted interest from private equity buyers but ultimately opted to be acquired by a strategic rival.

I’ll start with a comment on S&P Global and Bloomberg’s participation. S&P Global must have considered this, considering it’s a pretty acquisitive company. Back in 2022, it merged with IHS Market in a deal valued at $44 billion, so it has the heft to make a multi-billion dollar buy. But Bloomberg doesn’t typically make acquisitions of this size. As every Bloomberg person I’ve ever spoken with said, “if Bloomberg wants it, they build it.” But M&A is always a good way to get a look under the hood of a potential competitor.

With that said, BlackRock has paid a premium for this deal. The top line number being touted is 13× 2024 estimated revenue. As one data business owner told me, “8-15x [revenue] is a typical range… 40-50% EBITDA margins…” And so, 13x is closer to the higher end of that range, but it would make perfect sense considering it’s basically all subscription revenue. According to an investor presentation, “highly recurring revenue base (99%) which is less linked to market movements.”

If the business was acquired for between the 8-15x revenue range, why do I say that BlackPaid paid a premium? There are a couple of reasons.

First, it’s 13× the estimated revenue of $240 million of ARR in 2024. That could be on the bullish side. I did the math. Back in 2021 and 2022, Preqin generated $106.6m and $147m in revenue respectively. Those numbers are public on Preqin’s Companies House filings (page 16). That’s very good growth and if that had continued with that sort of annual growth, we’d be looking at a business expecting close to $280 million in revenue this year.

In that investor presentation, BlackRock talks about “20%+ revenue growth in the last 3 years.” And the way it defines that growth is “revenue CAGR from 2021 – 2023.” This is where analysis gets complicated because what is 20%+? Here are a few scenarios.

Scenario 1: 20% CAGR

In this case, we know the first two years, so we apply the 20% CAGR to 2023 and 2024 and we get $176 million and $212 million respectively. That’s a healthy business and more than doubling since 2021, but it’s also ~$28 million shy of the ~$240 million that BlackRock is projecting.

Scenario 2: 25% CAGR

We’re getting closer now with 2023 and 2024 generating $184 million and $230 million respectively. Still shy, but certainly much closer than a 20% CAGR.

Scenario 3: 29% CAGR

I made a final assumption with the + sign representing 9% of CAGR (anything more and it would have to be 30%+), which frankly irritates me because BlackRock should have called it 25%+. In this case, 2023 revenue is $189.6 million and 2024 revenue is $244.7 million. We’re actually a little over in this case, so it’s looking like a 27.5% CAGR, but whatever.

Whatever the case, the business is growing. That’s solid and because of the recurring nature of the revenue, the multiple is warranted, right?

Well, maybe. But then we have the EBITDA component. Now, this is also hard to calculate because all BlackRock said is that Preqin has “a track record of scaling margins.” Again, we have an idea of what this looks like because of 2021 and 2022 numbers. Adjusted EBITDA margins grew from 15.49% in 2021 to 16.80% in 2022. That’s about 8.5% in annual growth to the EBITDA margins. If we extrapolate that to 2023 and 2024, Preqin will finish this year at approximately a 19.77% adjusted EBITDA margin.

If we take those adjusted EBITDA margins, we can estimate what the adjusted EBITDA was last year and would be this year if it hits the ~$240 million in revenue. See the graph below.

If this is the case, then BlackRock paid nearly 68× 2024 estimated adjusted EBITDA, which is a very significant premium, especially considering that the margins are not very high. But perhaps the margin is growing faster than single digits. If we took the same 27.5% CAGR for revenue and applied it to the adjusted EBITDA, we’d finish 2024 at 27.31% margin, which would be 49x.

Not aggressive enough? Gross profit grew by 42% from 2021 to 2022. If we took that growth and applied it to the 16.8% adjusted EBITDA margin in 2022, we’d finish 2024 at an ~34% adjusted EBITDA margin. If this is the case, the business would have been bought for ~39× 2024 estimated adjusted EBITDA.

I wanted to accomplish two things with this exercise. First, these various breakdowns show the math behind the numbers. I’ve seen other analysts throw out numbers without showing the math and it always irritates me because they feel made up. I won’t name names… And second, I wanted to try and glean whether it was an overpay or not. In all three cases, it might be.

If we recall, in 2021, Dow Jones acquired the Oil Price Information Services (OPIS) business for $1.15 billion. This business operated at approximately 50%+ adjusted EBITDA margins and News Corp paid 19x the adjusted EBITDA. Was that a premium or was that a steal? For Dow Jones, its b2b business is the fastest growing part of the company. So, maybe it made a lot of sense to “overpay.”

For BlackRock, the same could be the case here. In the press release announcing the deal, BlackRock said:

Through the Aladdin platform, BlackRock provides technology solutions to over 1,000 clients. The combination of Preqin with eFront, Aladdin’s private markets solution, brings together the data, research, and investment process for fund managers and investors across fundraising, deal sourcing, portfolio management, accounting, and performance. Preqin will also continue to be offered as a standalone solution.

In the presentation, it said that “Value creation potential of identified synergies results in an estimated IRR of ~18%, well in excess of cost of capital.” And so, perhaps it sees a path to increasing the adjusted EBITDA margins both by growing wallet share with the addition of Preqin with Aladdin and by finding synergies. It’s easy to say something is an overpay or an underpay. It’s hard to integrate. That’ll be where we truly determine whether this deal is a success.

The real lesson to glean from this in-depth, hypothetical analysis of the numbers is that there is legitimate money in data businesses. This is why FreightWaves’ split off SONAR from the media business. As part of a blended media business, its multiple would be held back. But on its own, the data business can command a much higher multiple.

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