BlackRock Endgame: Building the Internet of Risk
Why has BlackRock spent almost $30bn on private markets acquisitions?
Over the last year alone, BlackRock (NYSE: BLK) has spent nearly $30bn acquiring private markets asset managers and technology providers: $12.5bn for leading infra investor Global Infrastructure Partners (GIP) in January ‘24, $3.2bn for private markets data vendor Preqin in June ‘24, and most recently, another $12bn for private credit bell cow HPS in December ‘24.
This rapid deployment of capital, earlier acquisitions like eFront, aggressive posturing on crypto, and media messaging around BLK’s tech focus are clearly indicative of some ambitious strategy. But what is BlackRock’s endgame?
BlackRock is building the internet of risk
The future of asset management is going to look a lot more like the internet. Asset managers will coalesce around standard data schemas, consistent protocols, and shared databases. Investors will surf the internet of risk using software specifically built to work with these schemas, protocols, and databases.
The historically firm distinctions between asset classes will soften. Portfolio management will become a more fluid exercise where investors optimize whole portfolios and seamlessly shift risk between bonds/private credit, stocks/private equity, REITs/real estate, and gold/Bitcoin. Public versus private will seem like a strange question.
“I think about some of our largest sovereign wealth fund clients. If I go back a decade, maybe they had 25% or 30% of their portfolios in private markets. One of them in Singapore publishes an annual review every year. They have 52% of their portfolio today "unlisted," i.e., private markets. And so there's just a staggering seismic sea change in the way clients are building portfolios. And that means you have to be able to deliver them whole portfolio advice.” - Larry Fink, CEO
The future is far but nearing quickly, and BlackRock is accelerating its approach. BLK is establishing data transmission protocols for private markets through acquisitions of companies like Preqin and eFront. It’s standing up core services around infrastructure and private credit investing that will fit neatly within its ecosystem of offerings. BlackRock is building the internet of risk, standing up its own applications, and positioning Aladdin as the web browser.
1) Infrastructure Layer - It all starts with data standards
Financial services is an information processing business, but there are significant mechanical divides between public and private markets data. On the public side, investors can corral rich price and fundamental data for individual stocks across the market over the last ~100 years. On the private side, investors receive quarterly valuation estimates for their specific fund investments, with little-to-no fundamental data, and no real way to cleanly benchmark the broader market. Asset-level prices are graphed as step rather than continuous functions.
Beyond lack of availability, there’s a lack of standardization. IRR is often quoted as the measure of return for private equity funds, but it’s extremely difficult to compare IRRs across funds and fund managers given differing practices like subscription lines. Industry taxonomies vary widely (enterprise or application software?) and everyone speaks non-GAAP financial metrics like ARR and EBITDA.
If you can’t speak a common tongue, it’s very hard to do business. As atomic-level financial data is standardized across asset classes, asset managers will more seamlessly roll up exposures to manage portfolio-level risk.
Preqin is one of BlackRock’s first major steps in establishing the lingua franca for private markets. It’s the treasure trove of historical returns data needed to backfill a time series of performance. More importantly, it’s a trusted network of private markets GPs around which BlackRock can establish further standard data protocols.
He who defines the schema, owns the system.
I’ve written in depth about Preqin before (here), but what’s really interesting is as you build standardized benchmarks, you can start to map a road to derivative contracts and eventually exchange-traded products. BlackRock CFO Martin Small described the recipe at a recent financial services conference:
“We want to do that in the near term, which is take what I think is a gold copy data, gold standard data in Preqin, marry it with risk models and create that similar recursive feedback loop that is being able to measure, analyze and benchmark markets through that data set. And if we can do that, then I think we're on to investable indices, right?…But what you really need in investable indices is you need rules-based inclusion, right, what funds, what size, like what are the criteria for inclusion in the index. And you need standard time series of prices, which is something we look forward to working on kind of with the GP community. But if you can create standardized inclusion methodologies and a normalized time series of prices, then you can create futures contracts, right?…People ask me all the time, well, if you can't settle these things physically, then how could you ever have index around them? And I ask them whether anybody has ever physically settled Case-Shiller Futures Home Price contract, like we don't settle that in houses…And if you create futures contracts, you can ultimately create exchange-traded products.” - Martin Small, CFO
In a way, the rise of private markets in spite of fragmented, unstandardized data is impressive. Small goes further in suggesting that more transparency will drive growth:
“Like what happens is that any time you can improve liquidity, price transparency, tradability, hedgeability, actually, all the markets get bigger and better.” - Martin Small, CFO
Flowers grow in the sun.
2) Application Layer - Private markets apps built on top
BlackRock is building out infrastructure that will enable the internet of risk. Like any platform shift (internet, mobile, cloud), there will also be meaningful winners at the application level. BlackRock wants to own some of those winners.
Proximity to Preqin, Aladdin, eFront, and the broader internet of risk will supercharge these applications (also called “financial products”). BlackRock’s private credit and infrastructure offerings will have native reporting integrations with its suite of software offerings and use the latest versions of its data protocols. GP-level decisions will benefit from quick feedback loops with the world’s most important sovereigns and endowments. Assets under management will grow as BlackRock feeds new products through familiar systems to managers who hunger for more private markets exposure. Improved transparency, standardization, and liquidity will drive more capital allocation to private markets while BlackRock stands ready with a menu of vetted offerings.
BlackRock’s recent $12bn purchase of HPS is a bold acquisition with tremendous potential. The stated ~30x 2025E Price-to-FRE multiple excludes a $675m retention pool equivalent to $2.7m per each of HPS’ ~250 investment professionals.
Private credit is an origination-centric, relationship-driven business, so it makes sense that BlackRock would so richly incentivize deal professionals to stay on. You need rainmakers and reservations at 4 Charles Prime Rib. Importantly, HPS cofounders and private credit veterans Scott Kapnick, Scot French, and Michael Patterson will join BlackRock’s Global Executive Committee and lead the combined platform.
Price aside, BlackRock now owns one of the most formidable franchises in private credit which will sit on top of its data, technology infrastructure, and longstanding institutional relationships. In a game where scale matters, BlackRock + HPS is now a top five, $240bn asset manager offering middle-market, upper-middle market, non-sponsor, and junior capital solutions. Surprisingly, BlackRock reported only 6% LP overlap in private credit suggesting serious potential synergy on the fundraising side.
The $12.5bn January acquisition of Global Infrastructure Partners (GIP) shares much of the same rationale but for a different application: private infrastructure investing.
As the internet of infrastructure matures, BlackRock will offer tightly integrated applications like HPS and GIP. When someone buys an iPhone, he’s likely to use Weather, Apple Maps, and iMessage. I think BlackRock will continue to build out its roster of private markets GP platforms and wouldn’t be surprised if we see the acquisition of a secondaries firm and a private equity firm in 2025 or 2026.
3) The Browser - Aladdin is the “unifying technology”
Aladdin is BlackRock’s own portfolio and investment management software platform. Regarded by some as the most important software system you’ve never heard of, the $1.5bn revenue division is responsible for over $20 trillion of assets.
This system will serve as the browser; a single client through which asset managers will engage with applications hosted and managed elsewhere. Aladdin will be the most tightly embedded portfolio and risk management system for investors who want to surf the internet of risk. It’ll be the single pane of glass to trade exposures public and private alike. The holy grail. A true multi-asset class portfolio management system.
An alternative title and further reading
An alternative title to this post could’ve been The Everything Store: Larry Fink and the Age of BlackRock but I felt the internet analogy was a bit more interesting (though certainly still flawed in some respects). The Everything Store would’ve been interesting when you think about platform acquisitions as BLK’s Amazon Basics. That framework applies very well to BlackRock’s strategy around ETFs. According to CFO Martin Small, BLK has 1,500+ ETFs (6x any other provider). They offer every desired risk exposure, but for some exposures like private markets and crypto, they need to build the infrastructure as well.
If you want to go further, I’ve previously written about a number of these topics:
You can also check out my friend at The Credit Crunch for weekly updates about what’s happening in private credit.
And don’t forget to subscribe to Wall Street Fintech! One of my New Year’s Resolutions is to write a more frequently…
Some citations
https://www.blackrock.com/corporate/newsroom/press-releases/article/corporate-one/press-releases/blackrock-agrees-to-acquire-HPS (and associated investor presentation)
2024 Goldman Sachs US Financial Services Conference (BlackRock Transcript)
Very interesting. I do think that there’s still a question around what’ll fundamentally drive the creation of standards, be it regulation or industry utilities in private markets.
The "everything store" and "the internet of" are great analogies, but I prefer the Thanos one. Yet I'm thinking that one infinity ring that's missing from Blackrock's gauntlet is the Brand one (I dug an article from a few years ago where I found out they had less Facebook likes than a certain Blackrock restaurant https://thefr.com/opinion/facebook-and-asset-management-where-is-the-love).