Blockchain technology could help bring alternative investments to retail investors - and do so through the ELTIF, a fund structure that has not lived up to its potential, says Christian Edelmann of management consultancy Oliver Wyman.
The European Long-Term Investment Fund (ELTIF) was supposed to throw open the doors of the cloistered kingdom of alternative assets to ordinary investors. Six years later, the rush still hasn’t happened.
This should be a golden era of ELTIF investing for institutional and retail investors alike. The global pandemic has prompted governments around the world to tap enormous amounts of taxpayer money to fund major infrastructure projects. At the same time, low and at times negative interest rates have pushed investors further out on the risk curve in a bid to generate returns. And a wave of adventurousness has swept through markets around the world since the pandemic began, from cryptocurrencies to online investing boards, as more retail investors allocate money to capital markets as an alternative to savings accounts.
Yet retail investors have been reluctant so far to dive into ELTIF portfolios. At the end of 2020 assets under management of ELTIF funds across the EU stood at just €1.5 billion.
What’s the holdup?
One major stumbling block is liquidity. At a time of instantaneous computerised trade executions, ELTIF portfolios are long-term, buy-and-hold investments in public infrastructure projects, real estate and small- and medium-sized enterprises that can take years to pay off.
What’s more, the funds themselves have liquidity hurdles. Selling assets requires enormous amounts of legal resources; it can take months or years for contracts to be finalised and deals to close. Cross-border transactions present a whole host of additional challenges.
Blockchain technology isn’t a cure-all to these problems, but it can help. Futurists for years have been singing the praises of the blockchain, which is essentially a digital ledger that can’t be changed and is distributed instantly across an entire network of users. ELTIF portfolios are crying out for these sorts of capabilities.
Advocates of ELTIF for the past few years have been calling for improvements in regulation, information and education in hopes of fostering standardisation across the EU, improving the quality and availability of data, and improving education of distributors and advisors on illiquid investors. For example, at the moment there is little standardisation in the registration process for ELTIF portfolios. It typically costs €300,000 in legal expenses, compared with roughly €30,000 to €40,000 for a typical European mutual fund.
Another problem: the lack of standardisation of the underlying investments. Each private debt loan is a bilateral contract often spanning 100 or more pages, requiring manual (and expensive) intervention in administration. And ELTIF funds suffer from a lack of a standardised template both for regulatory reporting and for communication between manufacturers and distributors.
Blockchain technology would allow for real-time distribution of everything from the most current valuations of underlying assets to legal information needed to speed up an asset transfer. Hours and days could turn into fractions of a second. It would also help the EU create and distribute the lingua franca needed to standardise these products and underlying investments across firms and borders.
Lifting the veil
At the same time, a blockchain-driven platform for secondary trading might help attract a new cadre of well-heeled investors concerned about liquidity. Private assets are sometimes viewed as an insular world of asymmetric information, and blockchain could help lift the veil.
That would help democratise markets that for years have been dominated by the largest firms and the highest-net-worth individual investors. For retail investors, it could provide access to alternative investments that offer diversification benefit and attractive risk-return profile. For advisors and distributors, it could help elevate client relationships by providing a differentiated value proposition.
There are macro benefits as well. For the broad economy, more ELTIF investment would provide a much-needed source of funding for companies and infrastructure projects. And for society at large, that could help channel money to important social goals such as the green transition.
Blockchain technology won’t turn ELTIFs into the hottest retail investments overnight. But it could help to create some buzz for a product that, so far, hasn’t lived up to its potential.
*Christian Edelmann is managing partner, Europe, at Oliver Wyman.
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