Asset managers Hamilton Lane Inc., KKR & Co., Apollo Global Management Inc. and Partners Group Holding AG are moving forward with efforts to market funds on the blockchain, a technology that functions as a decentralized ledger for financial transactions.
People close to the company’s ventures estimate that the total amount raised by blockchain-based private-equity vehicles to date is about $100 million — pocket change for asset managers who command hundreds of billions of dollars in traditional funds.
The hope is that blockchain technology can unlock access to the wealthy, who can avoid the complex and complicated process of investing in private funds.
Blockchain technology can eliminate some of these transaction frictions, said Fred Shaw, chief risk officer and global head of operations for Hamilton Lane, a private fund manager that has raised several million dollars through funds using the technology and is preparing several other new funds. use.
“What we are trying to solve here is to make it easier for investors to get into private-market funds,” Mr. Shaw said. “We see this as a potential new avenue to create a better investor experience.”
The question remains as to how the turmoil in the crypto sector will affect the willingness of investors to commit to investment vehicles that trade on blockchains. The digital asset has fallen sharply in value this year and, following the bankruptcy of the cryptocurrency exchange FTX, has been largely attributed to lax risk controls and possible financial malfeasance.
The private equity firm points out that blockchain technology, which facilitates decentralized financial transactions, is different from cryptocurrencies and crypto exchanges that are in the recent crisis. Asset managers say they are using blockchain to provide another way to invest in traditional funds, not create new speculative digital assets.
Blockchain-based private equity funds may face the high stigma of the crypto boom because of the underlying technology, said Hugh MacArthur, head of the private equity practice at Bain & Co., a consulting firm that advises private equity managers.
While there is a “huge difference” between cryptocurrencies and blockchain-based private-equity funds, “that does not mean that the latter will avoid the halo of scrutiny and negativity,” he said.
For leading alternative-asset managers, blockchain-based funds are one of the different routes being explored to gain access to wealthy individual investors, a vast and largely untapped source of capital. Most private equity firms raise almost all of their money from institutional investors such as pensions and endowments.
With institutional investors under severe economic pressure, companies are scrambling to reach individual investors in any way they can.
Strategies to reach this group of investors include wooing financial advisors for wealthy families; launch vehicles on platforms such as those managed by Institutional Capital Network Inc. or iCapital, and Moonfare GmbH; using feeder funds, business development companies and mutual fund-like structures; and even tried to destroy the 401(k) market.
Using blockchain technology and “tokenized” funds is another effort in the same vein, said people working on the fund.
Hamilton Lane is one of the companies most enthusiastically embracing blockchain. In October, the private fund manager announced plans to offer three token vehicles in partnership with Securitize Inc., which operates a blockchain-based trading system for digital assets. Hamilton Lane has not set a target size for the vehicle, but Mr. Shaw, who oversees regulatory compliance and risk management activities at the company, expects it to be in the tens of millions of dollars initially.
“Right now we’re in the adoption and understanding phase,” he said. “It has to start small.”
Companies are taking different approaches to putting their assets on the blockchain. Last year, Partners Group marked part of its open investment fund on the ADDX digital securities exchange, with a lower minimum investment than a typical private fund structure. KKR has also partnered with Securitize to underwrite a portion of its funds investing in healthcare businesses.
Hamilton Lane and Apollo separately said last month they would set up a token offering with digital asset specialist Figure Technologies Inc., running on Provenance’s public blockchain.
Apollo, Mitra and KKR did not say how much money, if any, the blockchain-based fund has raised so far.
Buyout companies say investors in blockchain funds need the same legal due diligence as those investing in traditional ways. Companies operating tokenized funds must verify the identity of investors, determine whether they meet the legal requirements to invest in the private market and perform other background checks.
“This is not the way to get around the private placement rules,” Mr Shaw said.
But once investors go through this on-boarding process, blockchain-based funds can be bought and sold more easily than traditional private-equity investments, he said. All traditional private market fund investment paperwork “is essentially reduced to a buy button in the app,” he said.
Balanced with this potential long-term advantage is the difficulty of trying to replace the correct and correct investment method of investing in private funds-one that has a well-established legal and regulatory structure-with a relatively new technology that is often associated with cryptocurrency volatility and fraud. .
For Mr. MacArthur Bain, the biggest obstacle to obtaining such funds is the aura of insecurity – there are no clear rules and regulations, and there may be doubts about the security of assets in the blockchain ledger.
“There has been a very strong argument over the years that because of its decentralized nature, blockchain is safer” than holding assets with traditional financial institutions, he said. “Is it true? There will be questions, and people will have to feel comfortable that it’s safe.”
