BlackRock will buy private credit firm HPS Investment Partners for about $12 billion in an all-stock deal, the companies said on Tuesday, as the world's largest asset manager seeks to expand in a red-hot market.

Private credit, or lending to companies by institutions other than banks, has grown rapidly in recent years as stricter regulations made it more expensive for traditional lenders to finance riskier loans.

The asset class is expected to grow to $2.6 trillion by 2029 from $1.5 trillion at the end of 2023, as per Preqin data.

BlackRock CEO Larry Fink has previously outlined private credit to be a "primary growth driver" within alternatives for BlackRock in coming years.

"Together with the scale, capabilities, and expertise of the HPS team, BlackRock will deliver clients solutions that seamlessly blend public and private," Fink said in a statement on Tuesday.

HPS was founded in 2007 as a division of Highbridge Capital Management, the hedge fund unit of JPMorgan's asset management arm. In 2016, top HPS executives acquired the firm from JPMorgan.

Since then, the New York-based company has become a massive private credit player, with assets under management vaulting to about $148 billion as of September from $34 billion in 2016.

BlackRock, which manages $11.5 trillion in assets, has an existing $85 billion private credit platform as of Sept. 30.

A new private financing solutions business unit will be formed, which will be led by the HPS leadership team.

BlackRock will pay roughly 9.2 million shares upon deal close that are worth about $9.4 billion as of Monday's close. Nearly 2.9 million shares will be paid in about five years, subject to certain conditions.

As part of the deal, which is expected to close in mid-2025, BlackRock will retire for cash, or refinance about $400 million of existing HPS debt.

For BlackRock, "it's important to grow alternatives to gain a presence in the rapidly growing space," said Cathy Seifert, an analyst at CFRA Research, ahead of the deal announcement.

PRIVATE MARKETS PUSH

BlackRock has been on an acquisition spree this year, splurging roughly $28 billion as it positions itself as a comprehensive platform for investors by integrating public and private markets.

In October, the New York-based firm finalized its $12.5 billion acquisition of infrastructure investment firm Global Infrastructure Partners and anticipates completing the $3.2 billion purchase of private markets data provider Preqin by year-end.

These deals aim to strengthen BlackRock's foothold in infrastructure investments and private markets, both pivotal growth areas. BlackRock manages roughly $450 billion in alternative assets post-GIP acquisition.

The HPS deal, which will create a private credit franchise with about $220 billion in client assets, will also increase BlackRock's private markets fee-paying assets under management and management fees by 40% and about 35%, respectively.

However, BlackRock's rival alternative asset managers Apollo Global Management, Blackstone and Ares Management have made bigger strides in private credit.

Apollo manages $598 billion in credit assets and Ares $335 billion as of Sept. 30. Blackstone manages $432 billion in assets across its entire credit platform.

Private assets carry much higher fees than exchange-traded funds, which is BlackRock's mainstay business.

Speaking at a New York event in October, BlackRock's CEO said the growth of private markets could mitigate the economic impact of wide U.S. deficits and high government debt levels.

In an op-ed he wrote for the Wall Street Journal in November, Fink said private investments in infrastructure projects such as data centers could help boost U.S. economic growth.

(Reporting by Arasu Kannagi Basil in Bengaluru and Davide Barbuscia and Carolina Mandl in New York; Editing by Shilpi Majumdar, Marguerita Choy and Sriraj Kalluvila)