BlackRock: How is technology transforming the management of PE funds?

From deal origination to portfolio construction to investor reporting, technology is poised to revolutionise private markets fund management, says Arnab Mazumdar, managing director and chief digital officer at BlackRock Alternative Investors.

This article is sponsored by BlackRock

Your role as chief digital officer is a new one. How did that come about?

Arnab Mazumdar

I have worked in our alternative investments group for the past 10 years, most recently as the chief operating officer of the firm’s multi-alternative solutions investment team. In 2020, we created the role of chief digital officer and built a digital strategy team to drive a technology-enabled transformation of our private markets businesses.

Over the past decade, BlackRock has driven tremendous inorganic and organic growth across private markets, including private equity, private credit, infrastructure and real estate. These businesses succeeded in siloes with disparate business processes and systems. Today, our investors are looking beyond asset class labels; as such, we are seeking to operate our business with a more unified investment culture through better connectivity, communication and information sharing.

Our mission – to champion a new era of alternatives – is predicated on delivering to our clients a deeper understanding of how private markets investments across asset classes impact the rest of their portfolio through an integrated approach. This is only possible through technology. The private markets industry, historically, is notoriously rich in data but poor in analytics. A data-driven and thoughtful whole portfolio approach differentiates top-tier managers. eFront’s technology platform is enabling our digital transformation and delivering the scale for the next stage of private markets growth within BlackRock.

The user-provider model you have with eFront, since BlackRock’s acquisition of the business in 2019, is clearly key to that digital transformation. How does the model work?

The user-provider model is not new for BlackRock – it started over 20 years ago when we opened our proprietary portfolio management software called Aladdin to clients, eventually building a distinct technology business. BlackRock’s portfolio managers across public markets use the same platform that we implement for other asset managers and owners. Now that eFront is part of BlackRock’s technology business and integrated with Aladdin, we are leveraging the same business model in the private markets.

We are currently in the process of implementing this market standard for private markets technology across our investment teams. As a user and a provider, we are able to advocate for enhancements that benefit both us and the eFront client community. For example, we recently helped develop and implement new functionality related to secondary investments, and these enhancements are available to all eFront clients.

How is technology being used in private equity and to what extent is it a differentiator?

BlackRock invests in direct investments, co-investments, primary funds and secondaries. Like most private equity groups, our business is complex, data intensive and is managed through interconnected core processes such as capital raising, portfolio planning, deal origination, structuring and execution, investment monitoring, portfolio tracking and fund operations. Many private equity firms face the challenge of these processes being insufficiently automated or disconnected from one another. With eFront, we are making significant strides to doing both.

By connecting all our private markets investment teams across BlackRock and collating the vast amounts of data they have amassed over time within eFront, we have amplified sourcing and origination. Insights from the historical investment pipeline, together with trend analysis, enable our originators to identify the strongest investment opportunities and negotiate fair prices. Moreover, by using a CRM platform to manage daily interactions with our sourcing networks, we are able to augment our collective market intelligence.

Technology also is being used to facilitate access to quality-controlled and normalised investment data collected from GPs and management teams – this is a game changer for our investors. They no longer need to spend countless hours collecting and aggregating data; instead, investors can spend their time reviewing advanced trend analytics on portfolio companies and fund investments.

We now also have a real-time investment book of record – our single source of truth for tracking our portfolios’ performance and risk. This has enabled our portfolio managers to track their portfolio to their plans – and help them understand their exposures to industries, geographies, currencies, etc, and ensure that the portfolio is not taking excessive systematic risk during the investment period.

Technology is also enhancing client transparency, transforming investor relations with easy-to-use, cloud-based platforms that guarantee secure access to information anytime, anywhere and from any device. Platforms like eFront Insight allow GPs and LPs to have deeper conversations on the portfolio and allow LPs to actively watch their aggregated portfolio of assets.

Is technology proving particularly transformative in certain segments where you operate?

Technology has an important role to play in every strategy, but we are seeing some particularly interesting use cases in certain areas. For example, we recently held a final close on a $3 billion fund focused on secondaries. That fund will target both traditional LP secondaries as well as the GP-led secondaries market, which is a part of the secondary market that is gaining momentum.

Technology also has an important role to play in sourcing and diligencing these deals by connecting with our primary manager coverage team, with its deep sponsor relationships, with our private credit team that may have a mezzanine exposure, for example, in an underlying asset in one of these GP-led deals, and then outside the firm with secondaries brokers, as well.

Additionally, with eFront Insight, we can analyse all of the underlying portfolio companies and exposures across all secondary deals in the fund, delivering scale in both portfolio monitoring and portfolio construction activities.

Technology is also proving to be transformative in our co-investment and direct investment strategies. We typically engage in non-syndicated processes and are either leading or co-leading transactions. As a result, we receive significant transparency at underwriting and on an ongoing basis post investment. We collect models, budgets, actual financials and other key performance indicators from management teams. eFront allows us to monitor investment health through a standardised and digital data collection process. Moreover, the platform allows our investment professionals to analyse company, sector and portfolio-level analytics with a click of a button. Our investment teams can spend time on analysis, rather than on data manipulation and quality control.

What other industry trends are you seeing where technology is likely to play an important role?

The evolution of ESG and impact investing is a big trend where technology will play a critical role. Five years ago, ESG involved a checklist of questions to ensure no specific ESG risks were being taken – or, if they were, that we were going in with our eyes wide open. Since then, we have made sustainable investing core to our investment approach, using technology to bring greater transparency to our clients and providing them with ESG investment options that have the potential for better outcomes.

Today, we are actively sourcing opportunities based on their positive ESG credentials. For example, we are investing across the private market asset classes to accelerate positive economic outcomes for undercapitalised racial and ethnic communities in the US – seeking not only market returns but also long-term, sustained social impact. Technology will have a key role to play in identifying and diligencing these deals, in measuring impact and sustainability performance, and in reporting that performance back to investors.

The opening up of private equity to retail investors is another major trend. With recent regulatory changes in Europe, we have launched a European long-term investment fund. Similarly, in the US, we have launched a 40 Act registered fund for the retail market. Technology plays a significant role in launching and managing these products, both from a portfolio compliance perspective and from a regulatory reporting perspective.

Looking forward, what role could emerging technologies play in private equity?

One area we think is particularly exciting is natural language processing. There is a huge amount of information stored in folders and mailboxes – term sheets, PPMs, investor letters, quarterly financials, etc. These are just words on a page in a PDF that cannot readily be accessed for analysis. With natural language processing, we can read these PDFs, take unstructured data, and turn it into structured data. We are using this technology within eFront Insight to process information we receive from third-party managers through their quarterly reporting. This allows our investors to get standardised analytical output in a far quicker manner.

Currently, we are also testing a new natural language processing platform to support our due diligence activities. Imagine a group like our private equity team that has been engaging with GPs since the 1990s. We will have countless term sheets, marketing presentations and private placement memorandums that, potentially, can be indefinitely preserved in our organisation’s institutional memory and accessed seamlessly by our investment professionals in the future. Our platform is indexing all of this information and saving it into the cloud with tags. We can then search for a specific set of terms, giving us access to information right down to individual contacts. This allows us to build a network map of specific strategies, sectors, niches that we are diligencing. It is an exciting new avenue of development that we believe will revolutionise portfolio management within private markets.