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

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 that 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 in revenue), and its alternatives business ($2 billion in 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 the 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.)