Private market funds’ high investment minimums and concerns around illiquidity have long restricted individual investors’ ability to take advantage of the opportunities they afford. Could tokenisation be the answer?
With the private markets industry enduring a slowdown in institutional commitments, many asset managers are turning to the vast global pool of private wealth. Blackstone, the world’s largest alternatives asset manager, launched its Blackstone Private Equity Strategies (BXPE) fund earlier this year for individual investors with at least $5 million to invest, having already set up strategies allocating to private credit and real estate. Rivals are doing the same. Tokenisation though offers another level of private market ‘democratisation’.
Tokenisation tipping point
Asset tokenisation – the process of converting the rights to an asset into digital tokens on a blockchain – has reached a tipping point, and is now “moving from pilot to at-scale deployment,” according to a recent McKinsey article.
Almost any asset can be tokenised theoretically. Use cases span fiat currencies, equities and bonds to commodities, art, infrastructure, real estate, and private equity and venture capital funds.
Real world examples are already demonstrating the technology’s feasibility. Earlier this year, Hamilton Lane, Apex Group and Sygnum Bank created a new digital share class of the Hamilton Lane GPA fund, and a distributed ledger technology registry to manage its distribution and administration. Citi carried out a simulation to issue and custody tokenised versions of a hypothetical Wellington Management-issued private equity fund. Real estate platforms such as RealT offer fractionalised digital property ownership.
“We believe the next step going forward will be the tokenisation of financial assets, and that means every stock, every bond … will be on one general ledger,” stated BlackRock chairman and CEO Larry Fink in a January 2024 Bloomberg interview.
McKinsey’s analysis predicts total tokenised market capitalisation could hit $2 trillion by 2030 (excluding cryptocurrencies and stablecoins), or around $4 trillion in a bullish scenario.
“Tokenisation of real estate and private assets is particularly attractive due to illiquidity and high capital investment requirements of these assets,” noted a 2023 Northern Trust and HSBC paper, which forecast approximately 5% to 10% of all assets will be digital by 2030. “Through fractionalisation, tokenisation can enable access to these assets for a much wider range of investors,” it said.
Benefits to investors and issuers
Family offices and high-net worth investors are viewed as most likely to be interested in tokenised options of illiquid alternative asset classes. But the technique could also put such assets within reach of the mass affluent and broader retail markets.
Dividing assets into tokens allows ownership to be sliced into smaller, less costly claims, enabling more people of differing financial means to access investment opportunities previously beyond reach. The increased diversification possibilities will better enable investors to create hyper-personalised portfolios. Fractional ownership may also boost secondary market liquidity for illiquid assets by making tokens easier to buy and sell.
Plus lowering the barriers to investment allows “global pools of capital to reach parts of the financial markets previously reserved to large investors,” the OECD observed. “The flow of private financing from capital owners to SMEs could be eased and facilitated, enhancing access to financing for SMEs.”
Further benefits include:
Programmability – the ability to embed smart contracts with programmable features such as automated compliance checks and dividend distributions can reduce the cost of issuing and administering securities, and increase speed of execution.
Increased efficiency – automating the issuance, distribution and servicing of securities creates efficiencies at each stage of the asset’s lifecycle, and may reduce costs for both issuers and investors.
Enhanced transparency – by making information about the issuer, the asset’s characteristics and all transactional data available to everyone.
Atomic settlement – ensuring all parts of a transaction occur simultaneously enables near-instant 24/7 transaction settlement and reduces risk.
Tokenisation drawbacks
Tokenisation has its drawbacks though.
Obligations automated in smart contracts will self-execute regardless of whether discretion and forbearance are needed to contain damage at times of stress, as during the global financial crisis, observed American University Washington College of Law professor Hilary Allen. Smart contract software also offers a prime target for hackers.
The legal and regulatory landscape is still evolving, creating uncertainty for investors and market participants around ownership rights, compliance requirements and anti-money laundering duties. Distribution networks and the financial infrastructure are still being developed. Prices, especially in thinly-traded markets, can be volatile. And, as McKinsey pointed out, sparse initial transaction volumes may deter issuance (the “cold start problem”).
Tokenisation is coming. But with the applications still in their infancy, the prospective benefits are yet to be fully realised. In the meantime, individual investors will need alternative ways to access the PE and VC fund opportunities they crave.
To learn how Treble Peak’s platform utilises fractionalisation to offer access to VC and PE opportunities at reduced minimums, please get in touch
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