• Titanbay

How tokenisation using blockchain technology is impacting private markets

Blockchain technology is radically transforming how investors buy and sell assets. According to the World Economic Forum, the equivalent of 10% of global GDP could be stored on blockchain tech by 2027 [1]. That means tokenised markets could be worth as much as $24 trillion in the next five years, HSBC said [2]. About 3% of global currency trading is already covered by tokenised assets, according to EY [3].


Tokenisation allows the ownership of real world assets to be split into smaller pieces and converted into digital tokens and stored on distributed ledger technology such as the blockchain. This enables fractional ownership of illiquid assets such as commercial real estate so they can be bought and sold as easily as publicly-traded shares in a company. This can potentially give a broader array of investors access to assets that were traditionally out of reach to all but the largest institutional players and wealthiest individuals because they can be purchased for a much lower minimum investment.


According to the Chartered Alternative Investment Analyst Association (CAIA), tokenised assets provider greater transparency of ownership, more inclusive access, faster and cheaper transactions and better liquidity [4].



Beyond real estate


While commercial real estate is one common example of the type of real asset that can be tokenised in this way, there is no limit to what assets can potentially back these digital tokens. For instance, they could be backed by natural resources including renewable energy assets such as wind or solar farms, infrastructure projects such as transport networks or hospitals, or even works of art and other collectibles.


Tokenisation also makes it possible to broaden access to the wider alternatives asset class. Take private equity. One of the challenges with private equity is that it mostly has a high barrier to entry with sizeable minimum investment requirements (typically at least $10 million if investing directly into a private equity fund). Investor cash is also locked up for extended periods of time (usually about 10 years). Tokenisation makes it possible to lower that barrier to entry while also potentially making it easier and cheaper to exit those investments at an earlier stage.


Likewise, tokenisation can make it possible for a more diverse range of investors to access venture capital investments, private debt and hedge fund assets.



Tokenisation targets


A survey earlier this year by tokenisation platform Token City found that 73% of respondents believe that private equity assets will be the first to see significant levels of tokenisation, followed by 65% who believe that hedge funds will be targeted for tokenisation [5].


According to Brown Brothers Harriman, a US private investment bank, tokenisation offers the potential to open up private markets [6].


“By tokenising hard-to-access asset classes, the industry could potentially improve settlement efficiency, as well as enable new liquidity through tokenised and fractionalised trading in DLT-enabled [digital ledger technology-enabled] primary and secondary markets,” the bank said.


All of this means that private markets can potentially attract deeper and previously untapped pools of capital while also increasing access to asset classes that have historically been effectively closed to many investors.


 

If you found this article interesting, and haven't already signed up to receive

content from Titanbay, please subscribe below.


 

Footnotes


[1] https://www3.weforum.org/docs/WEF_GAC15_Technological_Tipping_Points_report_2015.pdf

[2] https://www.gbm.hsbc.com/-/media/gbm/insights/attachments/potential-of-tokenisation.pdf

[3] https://www.ey.com/en_ch/real-estate-hospitality-construction/tokenization-from-illiquid-to-liquid-real-estate-ownership

[4] https://caia.org/sites/default/files/2021-02/CAIA_Tokenisation_of_Alternatives.pdf

[5] https://www.finyear.com/Tokenization-research-Private-equity-and-hedge-fund-assets-first-for-tokenization_a47176.html

[6] https://www.bbh.com/us/en/insights/investor-services-insights/how-tokenization-is-changing-the-way-the-industry-thinks-about-financial-transactions.html

 

Disclaimer

The views, opinions and estimates expressed herein constitute personal judgments of certain members of the Titanbay Ltd. (Titanbay) team based on current market conditions and are subject to change without notice. This information in no way constitutes Titanbay research and should not be treated as such. Titanbay does not make investment recommendations, and no communication, including this document, should be construed as a recommendation for any security offered on or off the Titanbay investment platform. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production.


This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, investors should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment in private placements involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Past performance is not indicative of future results. Non-affiliated entities mentioned are for informational purposes only and should not be construed as an endorsement or sponsorship of Titanbay.


Investments in private placements, and private equity investments via feeder funds in particular (such as through the Feeder), are speculative in nature and involve a high degree of risk. The value of an investment may go down as well as up, and investors may not get back their money originally invested. Investors who cannot afford to lose their entire investment should not invest. Past performance is not indicative of future performance. Please refer to the respective fund documentation for details about potential risks, charges and expenses. Prospective investors should carefully analyse the risk warnings and disclosures for the respective fund or investment vehicle set out therein. For private equity investments via feeder funds, investors will typically receive illiquid and/or restricted membership interests that may be subject to holding period requirements and/or liquidity concerns. Investments in private equity are highly illiquid and those investors who cannot hold an investment for the long term (at least 10 years) should not invest. The external Alternative Investment Fund Manager is Avega Capital Management S.A., a public limited company (société anonyme) formed under the laws of Luxembourg, with registered office at 2, rue Edward Steichen, L-2540 Luxembourg, Grand Duchy of Luxembourg, and registered with the RCS under number B 246.691.


The representative in Switzerland is ARM Swiss Representatives SA, Route de Cité-Ouest 2, 1196 Gland, Switzerland. The paying agent in Switzerland is Banque Cantonale de Genève, 17 quai de l’Ile, Geneva, Switzerland. The Prospectus, the Articles of Association and annual financial statements can be obtained free of charge from the representative in Switzerland. The place of performance and jurisdiction is the registered office of the representative in Switzerland with regards to the Shares distributed in and from Switzerland. Titanbay is an Appointed Representative of Brooklands Fund Management Limited which is authorised and regulated by the Financial Conduct Authority with firm reference number 757575.