Larry Fink Turned Some Bad Trades Into A Billion-Dollar Business

(Bloomberg Opinion) -- Open up BlackRock Inc.’s annual report and – in case you didn’t know – the company tells you what it does. “BlackRock provides a broad range of investment management and technology services to institutional and retail clients worldwide,” it states. The investment management bit shouldn’t come as a surprise. With $9.1 trillion under management and a franchise the spans the globe, BlackRock has a formidable presence in the industry. In technology services, though, the company is less well known. Yet nestled in with its active asset-management business ($5.4 billion of 2022 revenue), its exchange-traded funds business ($5.5 billion of revenue) and its alternatives business ($2 billion of revenue), there it is: Technology services contributed $1.4 billion.

Granted, that’s less than 10% but in last week’s investor day, BlackRock spotlighted this business and its role in underpinning the group's overall growth strategy. “In the same way that organizations across industries move from paying for their own servers and support staff to cloud providers, clients are transitioning their investment management and financial technology requirements to BlackRock,” said Chairman and Chief Executive Officer Larry Fink.

In fact, BlackRock has been providing financial technology since before cloud computing was invented. Blackstone Inc. Chief Executive Officer Steve Schwarzman’s memoir tells the story of how some miscalculated hedges led Fink’s department at First Boston to post a $100 million quarterly loss. The lesson for Fink when he launched BlackRock in 1988 was to keep tight control over his back office. He thus developed a risk-management system that would be fully integrated with the investment process, called Aladdin (“Asset, Liability, Debt and Derivative Investment Network”). Aladdin’s job was to provide a comprehensive risk overview of the firm’s portfolios; it became central to its position-keeping, record-keeping and risk control.

In 1994, the firm sensed an opportunity to lease the system to others. “People had a lot of mortgage securities that they had bought; that they didn't really have technology to understand what they had bought,” said BlackRock Chief Operating Officer Rob Goldstein. “We started getting calls from people saying, can you take a look at my portfolio and tell me what you think of it.”

The first customer was General Electric Co., soon to be joined by Freddie Mac and others. By the end of 1998, the firm was providing risk analytics to 10 clients, covering more than $400 billion of assets. When the financial crisis flared up in 2008, BlackRock was on hand to help. The firm was hired by the Fed when it took on the assets of Bear Stearns, and then by the Treasury in the industry bailout. By the end of 2008, Aladdin’s services were used by 135 clients, covering $7 trillion of assets.

Today, Aladdin has 1,000 clients. It sits on the desktop of 77,000 financial advisers and over 50,000 other professionals across 70 countries. If there’s 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 lucrative business that throws off a stream of recurring revenue. Sudhir Nair, who runs Aladdin, sizes its addressable market at $12.5 billion, representing what the institutional investment community spends on technology in support of the investment process. He reckons he can grow his share of that from 11% by winning new clients and expanding into new areas such as private markets and accounting. If he succeeds in capturing the entire market, his business will match the size of the firm’s traditional asset-management business.

“The portfolio of the future is more holistic,” he says. “It blends fixed income and equity, active and passive, public and private. It's tax efficient and sensitive to the individualized preferences around sustainability… Don't get me wrong. This is a great outcome for investors, but it fundamentally breaks much of the technology and data infrastructure that our industry has been built upon.” Aladdin, he suggests, fixes that. 

Sudhir Nair doesn’t mention it, but there’s another development that may entrench Aladdin’s position. Right now, companies that provide technology services to the financial industry aren’t subject to the same kind of regulatory scrutiny as their clients. But a new law coming into force at the beginning of 2025 changes that. The European Union’s Digital Operational Resilience Act hands regulators stricter oversight of companies like Aladdin that cater to financial-services companies. While it may not welcome the additional scrutiny, Aladdin has the scale to absorb associated compliance costs, giving it an advantage over smaller competitors.

Having avoided being designated a systemically important financial institution in the past, a similar designation at its technology unit may be a catalyst for growth. BlackRock is big, but Aladdin has potential to be bigger.

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• Goldman CEO's Pay Is Cut But His Vision Survives: Paul J. Davies

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marc Rubinstein is a former hedge fund manager. He is author of the weekly finance newsletter Net Interest.

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