Tech opens doors for democratisation

PE firms are turning to technology in a bid to widen access to the asset class.

According to EY’s 2022 Global Private Equity Survey, 46 percent of private equity firms are looking to increase the amount of capital they get from retail investors and wealth management channels. But in order for sponsors to woo new types of investment, technology tools first need to step up to unlock longstanding barriers to access.

One big area of technological advancement has so far been around tools that combine large numbers of small investors to create meaningful pools of capital for funds. “Platforms that aggregate access to private equity are really taking root in the marketplace now,” says Georges Archibald, chief innovation officer and regional head of North America at Apex Group. “These capture inflows from multiple investor segments via a bank or wealth management institution and channel those to a particular PE sponsor. 

“What has facilitated that is APIs [application programming interface] and the sharing of information in an automated way across platforms. People talk about blockchain, tokenisation and Web3 but a complement to that is the very tangible advancements in technology in the past five years that have made a great contribution to democratisation of access. Web3 in particular will continue to push further access.”

Tech is also making an impact through its ability to bring transparency to the asset class and streamline onboarding. “Technology is incredibly helpful in creating a way for investors who are maybe less familiar with the asset class to access information,” says Fred Shaw, chief risk officer and global head of operations at Hamilton Lane. 

“We have a platform called Cobalt LP that can be used by private markets investors to do modelling and analytics to better understand what that investing might look like. It is a digital database and a portfolio manager selection tool, enabling clients to compare managers against each other.”

Hamilton Lane’s Shaw adds that other tools are designed to help wealth management platforms to access products and services in a more streamlined manner: “For example, digital assets, tokenisation and digital share classes are designed to streamline some of what has historically been an archaic process around subscription agreements, capital calls, distributions and tax management, and make it much easier to navigate.”

When it comes to the subscription process, for example, Shaw explains that “if you are trying to invest in private markets and you are not using those digital on-ramps, you have to fill out a subscription agreement that can run to hundreds of pages and then go through an anti-money laundering and know-your-client review”. 

“High-net-worth investors have no interest in going through that process every time they want to commit,” says Shaw. “Tokenisation allows groups to collect that information when they onboard investors to a platform so that making further investments is as easy as pressing a button on a mobile phone.”

Many PE funds are starting to embrace tokenisation to broaden their investor bases. This year Hamilton Lane tokenised a portion of its $2.1 billion Equity Opportunities Fund V, allowing US qualified purchasers with at least $5 million in invested assets to access a tokenised feeder fund for $20,000 at a time, down from a traditional minimum ticket size of $5 million. 

Elsewhere, KKR tokenised a portion of its $4 billion Health Care Strategic Growth Fund II, while Singaporean digital assets platform ADDX secured an allocation in 2021 to Partners Group’s €5.5 billion Global Value SICAV Fund, giving non-US investors access with a minimum ticket size of $10,000.

Jeroen Afink is co-founder and managing director at Truffle Private Markets, a B2B buy-side-orientated platform designed to help wealth managers, private banks and family offices bring private markets exposures to their clients. 

Afink says: “Technology is definitely an enabler when it comes to onboarding clients, getting details about them and working out whether they are eligible to invest and the products are suitable. It helps make sure all the relevant information is available to clients so that they can subscribe to whatever is on the platform, and it helps deliver the reporting across exposures once invested, which can be the most complex element.” 

But Afink says there are still plenty of hurdles to overcome. “When you talk about democratisation, people assume that all funds that raise capital are willing to be part of the democratisation game, but many are not. We have committed to 25 big-name funds in the last two and a half years and about 10 of those would not even consider being distributed on a marketplace or platform. They don’t need to – they are very successful managers with high re-up rates from existing investors. 

“If you have a platform with 100,000 users and you distribute your fund on there, all those people are looking at your books, your history and your track record. Many fund managers simply don’t want to open up to the entire universe.”

Welcoming private wealth

In the past year, many of the world’s largest PE firms have made sizeable investments in resources to attract more wealthy investors into their funds. Apollo Global Management launched its own global wealth platform last year, while Private Equity International reported in March 2022 that Blackstone had doubled the number of staff in its European private wealth unit over the prior six months.

Such appetite is starting to trickle down to the broader market. “We are seeing a lot more interest in these tools among the managers we work with, particularly given the wider market slowdown in fundraising,” says James Windsor, a senior vice-president at Campbell Lutyens. “People are looking for new potential sources of capital, but it is a steep learning curve to make new channels work at scale. The significant redemption issues we have seen with some of the larger retail funds in the past year just highlight that complexity.”

While Windsor says his firm is getting questions about blockchain and tokenisation, he notes that “there is less focus there than on the broad private wealth access that is being addressed via platforms”. 

“The reality of tokenisation and blockchain is a little more complex – just because you make something digital doesn’t necessarily make it more liquid. You need the market behind it and strong demand and supply,” says Windsor. “Right now, the number of CFOs looking to do something in blockchain is really quite small, but I believe it will come eventually.”

The other challenge will be to get regulators on board. Paul Buckley, a managing partner at FIRSTavenue, says: “The first step towards tokenised funds in the private markets space is acceptance from regulators. In Europe, steps have been taken to create an environment where private credit markets can be tokenised and then traded on the blockchain. 

“Luxembourg is the first country to have embraced blockchain issuances, which means that investors accessing markets through blockchain issuances receive the same legal and economic rights as traditional investors. The EU has also taken steps to comprehensively regulate crypto markets.”

However, Buckley cautions that tokenised funds and trading on the blockchain first need to be accepted by institutional investors. “Then, once accepted by the institutional market, they can be presented to retail investors,” he says. “Therefore, before we see the democratisation of private markets, we need to see a supportive regulatory environment and acceptance from institutional investors first.”