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Industry figures have expressed scepticism over plans by BlackRock to extend the scope of the fast-growing exchange traded fund industry into the world of illiquid private assets.
BlackRock, the world’s largest asset manager with $10.5tn of assets under management, unveiled the £2.55bn acquisition of Preqin, a UK-based private markets data group, earlier this month.
In the wake of the deal chief financial officer, Martin Small, said on an investor call that “in the long range . . . we have a great platform in iShares [BlackRock’s ETF arm] to be able to take some of this data, use it and create investable indices through . . . things like exchange traded products”, according to Reuters.
Private assets — equity and debt instruments that are not traded on public exchanges — have boomed in recent years as institutional investors have increasingly sought out their potentially higher returns.
This has led to a dearth of initial public offerings as companies have stayed private for longer, depriving mainstream investors of opportunities.
“Everyone is talking about private assets because private assets have a higher margin,” said Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, who said they were a hot topic at the recent Fund Forum industry bash in Monaco. “Everyone is stampeding towards that.”
BlackRock signalled its intention to beef up its private market offering earlier this year when it bought Global Infrastructure Partners for $12.5bn.
However, private assets, which are inherently illiquid and hard to value, are not an obvious fit for ETFs, which offer not just daily but intraday pricing and liquidity.
The acquisition of Preqin — which compiles performance data on 60,000 managers across private equity, venture capital, hedge funds, private debt, real estate, infrastructure and related fields — will undoubtedly help in valuing private assets, but the problem of illiquidity would remain.
BlackRock declined to be interviewed for this story, leaving as a mystery exactly what plans it may have to expand its market-leading iShares operation into this sector.
However, the ETF industry figures the Financial Times spoke to were unconvinced BlackRock had a viable plan to solve this conundrum.
“I can see how they’d use the Preqin data to create indexes and benchmarks for private assets. However, I’m not sure how easily that would translate into an ETF,” said Sean Tuffy, an independent industry consultant.
“Obviously ‘private assets’ is a broad church, so there could be some more liquid assets that could work. Still, in the main, it seems like a challenge to wrap inherently more illiquid assets in an ETF,” he added. “And that’s even before you get into the ‘should this be done’ debate, as regulators are taking an increasingly dim view of liquidity mismatches in funds.”
Another leading industry figure, who requested anonymity, said he would not read too much into Small’s comments, given that Small has a background in ETFs, having run iShares’ North American arm.
“I don’t think [launching ETFs] was the reason they bought [Preqin],” he said. “I don’t think they have an intention or desire or pipeline to do it any time soon.”
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The person said the bigger picture was that BlackRock was “transforming away from being an asset or money manager into a full-service financial company”, building on initiatives such as its Aladdin risk management platform by expanding into indexing and data.
“It’s about creating a much broader, more diversified financial service company,” he added.
“They will always be looking to showcase the fact that they are at the forefront of ETF development: ‘we are already thinking about the ETF applications here, we are already thinking about pushing the envelope’.
“This is another thing they can monetise. With shrinking fee revenue [as fund management fees continue to drift downwards], it’s part of a move away from volatile returns-based businesses. It’s part of a bigger, broader strategy.”
If private asset ETFs are really on BlackRock’s agenda, one potential approach might be for it to use Preqin data to find ways that liquid, listed instruments can be used to mimic or replicate the returns of private investment strategies.
This strategy has been adopted by managed futures ETFs, which attempt to replicate the performance of trend-following “quant” hedge funds known as commodity trading advisers.
Using this approach, dubbed “liquid alts”, “ETFs have helped facilitate exposure to different parts of the market that weren’t very accessible before,” said Lamont.
Some firms, such as Chicago-based DSC Quantitative Group and Boston’s Verdad Advisers, have extended this concept to private equity, although not in an ETF format.
While further development “is the next logical step”, Lamont saw potential downsides.
“When you invest in a hedge fund one of its attractions is that it’s uncorrelated to the market. When you make that a liquid investment that can be traded throughout the day, it loses that allure,” he argued.
“When the market drops and people sell, it introduces a large beta element. That reduces that lack of correlation so bringing it into a liquid wrapper can damage that product.”
Moreover, such an approach “is not going to be cheap”, Lamont believed, with the likelihood of multiple layers of fees. Also ETFs cannot be closed to new investment if inflows spiral. Even in the world of mainstream assets, BlackRock faced this dilemma in 2021 when surging inflows into its clean energy ETFs forced a revamp of their underlying index.
An alternative synthetic approach would be for BlackRock to hold illiquid private assets in a standalone vehicle and then write a swap against that vehicle that could underpin the price of an ETF.
Tuffy envisaged something similar, with BlackRock potentially using Preqin data “to create synthetic exposure via derivatives to new private asset indexes”.
“In some ways it’s sort of inevitable,” said Lamont. “The industry is extremely resourceful. The ETF has become the ‘everything’ wrapper. Where there’s a will there’s a way.”
