The drive to increase access to private capital will be dependent on technology, discovers Nicholas Pratt. But what technology and who will provide it?
In early November, private markets firm Partners Group announced that it was setting up a private wealth unit. The move was designed to capitalise on the growth of the private wealth management space.
According to Partners Group, its private wealth business accounts for nearly a third of the firm’s US$131 billion of assets under management. In order to increase this amount, the firm intends to carve out private wealth from its institutional activities, emphasising “these clients’ differentiated needs”.
The move follows in the footsteps of other private markets firms. In February, KKR announced its 2021 results and its intention to boost capital inflows from its private wealth channel. “Historically, private wealth has contributed about 10% to 20% of the money that we raise annually,” said CFO Robert Lewin.
“With the investments we’re making in people, technology and new product innovation, alongside the strength of our brand and our track record, we believe over time that it should be 30% to 50% of the money that we raise.”
The objectives are twofold: to make private capital more accessible in terms of both liquidity and minimum investment levels; and to create offerings that are more in keeping with traditional wealth management platforms and services.
Track recordBoth Partners Group and KKR stated that technology would play a prominent part in their private wealth management efforts – investing in their own platforms as well as striking partnerships with fintechs and their service providers.
However, the private capital market does not have a great track record when it comes to technology.
According to research commissioned by specialist fund administrator Intertrust, private capital funds are guilty of an “ad hoc” approach to adopting new technology that is now causing them a range of operational problems.
The study, ‘Introducing the Halo Framework’, interviewed 150 “senior decision-makers” at private capital firms and found that just 6% of the participants said they had developed what they consider to be a “mature tech platform incorporating next-generation technology across the firm”.
It is unlikely private capital firms will look to build or adopt any tech in-house. Instead, we are likely to see greater outsourcing to third parties and vendors, as stated by 58% of respondents.
“By their own admission, most private capital GPs have been slow to fully embrace and invest in new technologies to improve their operating models,” said Chitra Baskar, president, fund solutions, Intertrust Group.
“By their own admission, most private capital GPs have been slow to fully embrace and invest in new technologies to improve their operating models.”
“As private capital firms progressively look to upgrade, update or modernise their operating model, they are increasingly looking for trusted third-party vendors and partners that can provide established platforms and solutions to support their technology needs.”
While the likes of Intertrust and other specialist fund administrators will doubtless look to capitalise on this sales opportunity, fintechs are also looking to supplant themselves in the fledgling private wealth management space.
Private Markets Alpha launched in October 2021 with the objective of improving access to private markets for wealth and asset managers via its online digital platform.
“We aim to revolutionise private markets investments because we firmly believe that broad access to these markets is crucial for providing a wider range of asset classes to better serve the long-term needs of individual investors,” says Tom Douie, founder and CEO of PM Alpha.
“Developments in fintech over the last five years have improved access to private markets, and some distribution platforms have successfully grown a direct ‘professional’ client base, but no one is really thinking about it from a wealth-management market perspective in our opinion,” says Douie.
“It is our method to provide all the tools, including curated thematic investments backed by macro research, and all the sales support that has made the largest private banks so good at selling private markets product to their clients.
“Any service of this type has to solve for all potential hurdles, no matter how seemingly banal, because the issue you don’t overcome becomes the barrier to adoption. We aim to fully enable the wealth manager to offer access to private markets,” he adds.
Liquidity: the elephant in the roomWhenever there is talk of widening access to private markets to attract more individual investors, digital assets, tokenisation and distributed ledger technology inevitably come up as a way to make illiquid real assets more liquid and accessible. On paper it seems like a perfect marriage. However the reality is more complex than that.
Digital assets are very much part of PM Alpha’s masterplan, says Douie. The elephant in the room is liquidity. “There are ways to meet this challenge,” he says. “We have seen regulatory vehicles like Eltifs [European Long-Term Investment Funds] and LTAFs [Long-Term Asset Funds], and a growing class of so-called “semi-liquid” funds, but my firm belief is that the digitisation of assets is the only way to get access to wider liquidity pools.”
Douie points to the example of Hamilton Lane announcing the offering of tokens on private market funds through the ADDX platform, while KKR has announced a similar initiative. But there is some confusion that needs to be resolved, he says.
“Just making something digital doesn’t make it liquid. Some things can be done simply, such as creating a digital token that is transferable into the wider marketplace. But there is a long way to go and there are some significant headwinds. The headlines around the collapse of FTX are not supportive of the near-term development of digitising assets.”
“The headlines around the collapse of FTX are not supportive of the near-term development of digitising assets.”
Nevertheless, the underlying technology is here to stay, says Douie.
The other question is whether any demand exists. Another study, this time from boutique asset management think-tank Independent Investment Management Initiative, found that 96% of its members do not currently trade cryptocurrencies or digital assets and 83% have no plans to do so moving forward, citing a lack of pricing and valuation fundamentals, regulatory oversight and credible service providers, as well as excessive volatility.
The scepticism extended to tokenisation. While 33% said they think tokenisation will take off, only 4% said they intend to tokenise their own funds and 63% said they had no interest in tokenising their funds even if it does make them more attractive to retail investors.
Despite this apparent apathy, Douie believes private markets will prove to be fertile ground for tokenisation. “Everybody wants more liquidity and the ability to buy and sell products, and that can only be done through tokenisation and the use of DLT/blockchain. There may not be a demand for tokenisation per se, amongst the older generations at least, but there is a demand for liquidity,” he says.
“The infrastructure is there and we have seen tremendous innovation but the big issue is regulation. You need confidence that the asset you’re holding is under full purview of regulators and that it is tangible with an audited NAV [net asset value]. It has to be in a fully regulated space – that is how you get full confidence,” says Douie.
Automation is the priorityFor some service providers in the space, tokenisation and digital assets are still solutions in search of a problem when it comes to private markets. Goji is a tech company that is looking to widen access to private markets and works with both fund administrators and asset managers, offering a combination of tech platforms and investment solutions.
For its CEO, David Genn, the priority should be bringing more STP and automation to private markets administration and operating models rather than too much focus on tokenisation, fractional assets and distributed ledger technology.
“There are three things to be considered when it comes to widening access to private markets – regulation, operating models and the products themselves,” says Genn.
“You have to ask what problem tokenisation is trying to solve and whether it actually adds more complexity, at least in the short term.”
In terms of regulation, Genn praises the introduction of the Eltif and LTAF fund structures in the EU and UK, respectively. And in terms of product development, the likes of Partners Group are bringing products to market designed to attract more individual investors. But when it comes to operating models, the focus should be on straight-through processing and the automation of manual processes. “You have to ask what problem tokenisation is trying to solve and whether it actually adds more complexity, at least in the short term,” says Genn.
It will also put more of an onus on investors to understand the ‘new’ assets they are adding to their portfolios. “If a real asset is tokenised, regulators have said they will treat it the same way as a conventional asset but investors need to understand how the asset is being held and its level of liquidity,” says Genn.
And while DLT and tokenisation can both help reduce settlement time, the private markets do not have the same time constraints as other markets.
For tokenisation to really work, it needs liquidity and a powerful secondary market with buyers and sellers – properties that are currently missing from the sector.
But while much of the talk around tokenisation, digital assets and DLT is premature, Genn does at least appreciate that the topic has helped administrators and managers to think more broadly about how the market should operate now and in the future.
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