BlackRock’s black-box aims to prop up asset management industry

By Chrissy Chiu

12 March 2020

With markets teetering across the globe, firms are turning more to software providers to help mitigate the damage. BlackRock's proprietary software has become – perhaps - indispensible to many.

Asset, Liability, Debt and Derivative Investment Network, or Aladdin, is the asset manager’s proprietary risk management system analysing over $18trn, or around six percent of global assets, according to Institutional Investor and Financial News.

BlackRock’s empire is still expanding and stands to become the risk and valuation backbone of the asset management and banking industries.

The risk and portfolio management tool has not grown overnight. BlackRock founders invested in mainframe computers to value illiquid assets and manage risk – in 1999, the company started selling the platform to clients. Functionality evolved with the markets, and Aladdin ate up the opportunity to diversify across financial products and reporting. The platform can churn P&L, intra-day positioning, and for sophisticated managers, can perform rapid scenario testing.

Understanding the impact of interest rate moves, inflation, recession and political events on net asset valuation (NAV) has driven some of the largest financial institutions to subscribe to the platform, increasing BlackRock’s reach and ability to drive software revenues.

The platform has also continued to expand through acquisition.

“eFront will extend Aladdin’s end-to-end processing capabilities in alternative asset classes, enabling clients to get an enterprise view of their portfolio. We are excited to welcome eFront’s 700 employees to BlackRock as we continue to offer eFront as its own platform and enrich its value proposition with Aladdin analytics,” said Rob Goldstein, BlackRock’s Chief Operating Officer in a press release on the transaction acquiring eFront. 

Announced during the firm’s Q3 2019 earnings call, and together with eFront’s platform, BlackRock’s tech division brought in a 30 percent revenue increase. Reported in Q3 2018 earnings call by the asset manager, the same tech division saw only an 18 percent revenue increase.   

Adding range to over 48 countries and 700 clients, BlackRock’s eFront purchase enhanced its capability to manage the investment cycle, due diligence process, portfolio planning, and risk analysis. The $1.3bn deal has consolidated Aladdin’s grip on the alternative investments industry.

Banks are also part of BlackRock’s strategy to push Aladdin to new frontiers. HSBC, the UK’s largest bank, has made Aladdin available to its own wealth management clients; Santander’s asset management arm has also adopted the platform; a first-mover, UBS’ wealth management arm has been a subscriber since 2017. This expansion has meant that banking clients, who would not otherwise have exposure to BlackRock, are now connected.  

"Aladdin is like oxygen. Without it we wouldn't be able to function," said Anthony Malloy, CEO of $238bn (assets) of New York Life Investors to Forbes Magazine.

Clearly, BlackRock has made a mark on the private sector asset management industry.

During the 2008 crisis, the sprawling manager’s expertise lengthened to advising the US government. The New York Times reported BlackRock’s role in managing toxic assets as part of the TARP programme as well as purchasing them as private investors – essentially resulted in profit for the fund manager at the expense of the tax payer. As both an advisor to the US government during the sub-prime crisis and buyer of government bailed-out companies, the potential for conflict between the asset manager’s own interest and government was clear, but it was managed healthily.

As BlackRock continues to pursue its aggressive penetration strategy, systematic reliance from both government and private sector is more than conceivable.

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