LONDON, Sept 19 (Askume Breakingviews) – BlackRock’s (BLK.N) status as an asset management giant stems from its success in passive investing, where clients buy indexes rather than picking stocks or fund managers. So it’s worth noting that founder Larry Fink saw an opportunity for a similar revolution in alternative assets such as buyout funds. His chief financial officer even said a private markets index product could be one of the most lucrative opportunities in the company’s history. The reality, however, looks messier.
Fink’s recent $3.2 billion acquisition of private markets data provider Preqin raises a fascinating idea. Could BlackRock, synonymous with the rapid growth of index products such as exchange-traded funds, repeat its mistakes in private equity and direct lending? The stinkTalked about the potential for indexation to help “democratize” private markets .
BlackRock faces significant risks, with its index business currently managing about $5 trillion in assets. One problem facing Fink’s core business is that public tracker funds are becoming increasingly commoditized and have low profit margins. Meanwhile, companies that compile the underlying benchmarks, such as S&P Global (SPGI.N) and the London Stock Exchange’s (LSEG.L) FTSE Russell, get the lion’s share of the fees.
Private markets offer Fink an opportunity to build a better future. Preqin data shows that assets under management in private equity, infrastructure and private credit reached nearly $12 trillion last year. BlackRock’s acquisition of Global Infrastructure Partners has helped it tap into that potential. The more transformative opportunity, however, is to use Preqin’s detailed fund performance statistics to create private market benchmarks, allowing Fink to sell widely used index products without paying anyone else for the underlying data.
Companies such as Morningstar (MORN.O) Pitchbook, LSEG and MSCI (MSCI.N) as well as Preqin already offer some private indexes . However, they were far from Fink’s dreams. Irregularities in the data are a common problem. The process of creating a private market benchmark typically involves gathering the performance of individual funds, either by persuading buyout tycoons and cornerstone investors to share it voluntarily, or through freedom of information requests from public pension funds.
Preqin’s Private Wealth Index tracks more than 14,000 funds, giving Fink an advantage here because it has one of the most comprehensive data sets. However, no benchmark is perfect. Reviewing investor performance reports inevitably means losing some money, and private wealth managers may not want to share data from bad years. And there are no universal standards for dealing with tough issues, such as when to remove a fund from an index when reporting fails.
Converting an index into an investable product poses additional difficulties. Public tracking funds typically buy the underlying assets they are supposed to track, which is not easy with closed-end acquisition vehicles. Of course, the secondary market for private equity holdings is increasingly active, but it remains extremely volatile compared with listed shares. Sellers often accept double-digit percentage discounts to face value. As a result, instruments such as index mutual funds and ETFs rely on market makers to trade the underlying securities on a daily or intraday basis and therefore do not fit into Fink’s findings.
Derivatives may provide a solution. For example, investors can speculate on acquisition returns through futures contracts linked to the performance of private benchmarks. Some real estate futures markets and cash-settled commodity derivatives work in a similar way. Industry sources told Breakingviews that several companies are currently developing similar products for private assets. In theory, they could attract wealthy people who would otherwise have difficulty putting money into private funds.
But someone has to bet on it to move the market. It’s not clear who that person is. Most of the funding for private equity and private debt comes from pension funds and insurance companies eager to avoid daily price changes. The market is low risk. For example, U.S. housing futures on the Chicago Mercantile Exchange have traded just $15 million this year.
Reporting standards need to go further to streamline derivatives. Currently, private equity funds disclose information on a quarterly basis, while broadly traded indices require monthly or weekly updates to prevent valuations from becoming outdated and reducing deal flow. It is possible that Fink or rival analytics experts could fill the data gaps with comparable fund performance in public markets, such as private equity stocks and widely traded private debt obligations. However, this requires the trust of index investors, who invest primarily in the index evaluator’s assessment of potential returns rather than actual returns.
Despite the challenges, the potential rewards offered could justify Fink’s efforts. Currently, private individuals have only 16% of the funds allocated to alternatives, according to Bain & Company . Creating a suite of index products that is more transparent and accessible could bring in a huge amount of new cash.
Private markets are slowly moving in a direction that could help make Fink’s dream a reality. Blackstone (BX.N) , KKR (KKR.N) and others are launching so-called evergreen funds in efforts to attract the working class. Such instruments have no expiration date and can report valuations monthly, which could make it easier to create indexes. Evergreen currently manages about $350 billion in real estate, debt and equity, Preqin said.
Also, the rapid growth of private debt is another supportive trend. This is because leveraged loans are already widely traded, making them more liquid and therefore suitable for passive investing. Apollo Global Management (APO.N) is partnering with State Street Bank (STT.N)Launch ETFs to invest in public and private debt .
For Fink, the involvement of private market players is both good news and bad news. More investment and marketing dollars could speed up the adoption process and help create a viable product. The downside of the competition, however, is that BlackRock will struggle to achieve index investing dominance in the public markets.
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BlackRock said on June 30 it had agreed to acquire British financial data company Preqin for 2.6 billion pounds ($3.2 billion) in cash.
During an earnings call on July 15, Martin Small, the asset manager’s chief financial officer, said there was a long-term opportunity to build a “machine” to help create indexes for private markets.
He compared the opportunity to the effect of public benchmarks on the stock market. According to LSEG activity records, Smalls said, “We believe the opportunity to index the private markets is truly one of the most attractive opportunities in BlackRock’s history.”
