Strategically speaking interview: Edwin Conway, BlackRock Alternative Investors

For Edwin Conway, head of BlackRock Alternative Investors (BAI), the breadth of opportunities is a key attraction in challenging times.

In 2019, the OECD tallied the number of global listed companies at 41,000, with a combined market capitalisation of some $80trn (€75trn). Although sizeable, as Conway points out, this total market cap is heavily concentrated. The S&P 500 alone accounted for around a third of it – $26.6trn at end-2019. IPO sizes are also trending higher, as research by McKinsey has shown, suggesting more of early-stage growth is captured by private investors.

“The behaviours of the markets are largely dictated and determined by the few, so concentration risk exists today in public markets,” says Conway. “The number of investable options has decreased at a time when in private markets… the projects and the companies have just exploded.”

BlackRock calculates the unlisted equity and issuer set to be 7m, according to Conway. “To us it means if you don’t take advantage of the alternative universe in private markets you’re missing out on an extraordinary amount of investable opportunities.”

Investors have read the memo: alternatives assets grew at a fast clip from 2015 to the end of 2021, according to Preqin, notching up a compound annual growth rate of 10.7%. It estimates this will increase to 11.7% by 2026, with total assets set to reach $23trn, from $7trn today.

BlackRock’s alternatives business has enjoyed a decent share of this demand, with funded inflows from clients of $52bn in 2021, of which $42bn was to private markets and $10bn to liquid alternatives. Private credit, infrastructure equity and debt, and to some extent private equity, have all seen what Conway describes as “disproportionate” growth. BAI now accounts for $330bn in client assets.

He emphasises the multi-decade development of BlackRock’s credit capability – the firm was originally a fixed-income house – and points to the way it has built out capabilities in new areas of private credit and in infrastructure over the years.

Drawing a contrast with the myriad of private markets boutiques, Conway alludes to BAI’s sizeable staff headcount of 1,300, and the fact they work in 50 locations worldwide; success, he believes, is as much about access to unique opportunities as it is about performance. 

A key advantage is therefore as much about understanding policymakers’ plans and priorities in areas like green energy, for instance, as it is about understanding local corporates’ funding needs and assessing credit risk or future cashflows. This is underpinned by teams versed in local languages, policy and business cultures.

“Being local, being in the markets, sourcing and originating proprietary deal flow for our clients, I think is the new alpha in a world where you’ve seen mass syndication for years,” says Conway.”

Conway cites the importance of being able to provide both equity and debt capital throughout corporates’ growth trajectory. “You can continue to have a pricing advantage, because developers and companies are looking for a strategic partnership and relationship of substance.” 

Quant’s role

BAI is seeking to get itself an edge in private markets by leveraging techniques honed in BlackRock’s quant group – for instance, by trawling analyst reports for mentions of private companies. It also acquired the private equity software platform eFront in 2019.

Conway believes a future path will involve marrying the highly human and fundamental-oriented investment of private markets with quant analytics capabilities. “The more information we can get, the more prudent we can be with each investment decision, we think the better outcome we will have for our clients,” says Conway.

Deglobalisation is a trend BlackRock is particularly sensitive to – both as investee companies reorient supply chains but also as clients increase investment in their domestic economies either to create resilience in portfolios that may be vulnerable to the breakdown of global supply chains and increasing economic nationalism, but also as they seek to publicly support flagship political projects like the European Green Deal or Levelling Up in the UK.

BlackRock is also conscious of its role and ability to attract capital in underserved geographies such as emerging markets. The firm’s Climate Finance Partnership, for example, raised $250m from 10 investors including the French development agency, Germany’s KfW and Japan’s international development bank at an initial first close in summer 2021.

Technology for climate change 

The same goes for channelling early-stage capital to proven technologies to tackle climate change. In 2021, together with Temasek, BlackRock launched Decarbonization Partners, a platform to invest in late-stage venture and early-growth private equity opportunities, between them committing $600m in initial capital. This is intended to help give these companies and their technologies global scale and reach.

BlackRock has also reportedly been studying a plan by HSBC and the Asian Development Bank to acquire coal assets and wind them down responsibly.

Hedge funds have been eclipsed as private capital moved to replace banks as a source of funding. To some extent, these strategies were simply overtaken by the extraordinary returns available on public markets but that could change, particularly as investors seek diversification at a time of market instability and volatility.

BlackRock reported 150% growth in fees from liquid alternative strategies in 2021, and Conway points to strong inflows over the last 3-5 years, particularly from private wealth channels. 

BlackRock may be one of few entities that can convincingly claim to understand policy, corporate funding needs and investor demand globally and match this with investment product at scale. What it can’t do is change the standard terminology of investing, where alternative asset classes are increasingly mainstream and some have little in common with one another.

Conway says: “As a fiduciary to our clients that looks across all of these asset classes, alternatives are no longer alternatives in our mind; they’re essential; they’re a necessity; they’re a core holding. So we think we should probably scrap the nomenclature of alternatives. It just doesn’t seem to make sense any more.”