Granted, that’s less than 10%, but at last week’s investor day, BlackRock highlighted its role in supporting this business and the group’s overall growth strategy. “In the same way that organizations in similar industries are shifting from paying for their own servers and support staff to cloud providers, their investment management and financial technology needs are shifting to BlackRock,” said Chairman and CEO Larry Fink.
In fact, BlackRock has been providing financial technology since before the invention of cloud computing. Blackstone Inc. CEO Steve Schwarzman’s memo tells the story of how some misplaced hedges led the finx department at First Boston to post a $100 million quarterly loss. When he started BlackRock in 1988, the lesson for Fink was to keep a tight rein on the back office. Thus, Aladdin (“Asset, Liability, Debt and Derivative Investment Network”) has developed a risk-management system that is fully integrated with the investment process. Aladdin’s job was to provide a comprehensive risk profile of the firm’s portfolios; It became central to inventory, inventory and risk management.
In the year In 1994, the company had the opportunity to lease the system to others. “People were buying a lot of mortgage securities; they didn’t have the technology to understand what they were buying,” said Rob Goldstein, BlackRock’s chief operating officer.
The first customer was the General Electric Company, soon to be joined by Freddie Mac and others. In the year By the end of 1998, the company was providing risk analysis to 10 clients covering more than $400 billion in assets. In the year When the financial crisis hit in 2008, BlackRock was ready to help. The firm was hired by the Fed and then the Treasury as the industry’s bailout fund when it took over Bear Stearns’ assets. In the year At the end of 2008, Aladdin’s service was used by 135 customers, representing $7 trillion.
Today, Aladdin has 1,000 customers. It sits on the desktops of 70,000 financial advisors and over 50,000 other professionals. If ever there was a common operating system underpinning the world’s asset management industry, this is it. (Bloomberg LP, the parent of Bloomberg Opinion, competes in the market for portfolio management products.)
For BlackRock, Aladdin is a profitable business that generates a recurring revenue stream. Sudhir Nair, who runs Aladdin, expands its reach to $12.5 billion, representing what the institutional investment community spends on technology to support the investment process. By winning new customers and expanding into new areas such as personal markets and accounting, it is estimated that it can increase its share from 11 percent. If it succeeds in capturing the entire market, the business will match the size of the company’s traditional asset management business.
“The future portfolio is more comprehensive,” he says. “It combines fixed income and equity, proactive and passive, public and private. Tax is efficient and sensitive to personal preferences around sustainability… Make no mistake. This is a big win for investors, but it fundamentally breaks much of the technology and information infrastructure on which our industry is built. Aladdin points out, It fixes it.
Although Sudhir Nair did not mention it, there is another development that could overturn Aladdin’s position. Currently, companies that provide technology services to the financial industry are not subject to the same regulatory oversight as their customers. But a new law that takes effect in early 2025 will change that. The EU’s Digital Operational Resilience Act will put regulators under stricter control of companies that offer financial services companies like Aladdin. Although it doesn’t accept the extra scrutiny, Aladdin has the balance to accept the associated costs, giving it an advantage over smaller competitors.
Avoiding the designation of a previously strategically important financial institution, the same designation in the technology segment could be the catalyst for growth. Blackrock is big, but Aladdin has the potential to be even bigger.
More from Bloomberg Commentary:
• How BlackRock Lost $1.7 Trillion in Six Months: Mark Rubinstein
• Read Blackrock Right Wing Riot Law: John Otters
• Goldman CEO Pay Cut But Vision Survives: Paul J. Davis
This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.
Mark Rubinstein is a former hedge fund manager. He is the author of the Net Interest weekly financial newsletter.
More stories like this can be found at bloomberg.com/opinion