The rise of interest in multi-ledger technology blockchain may be leaving regulators cautious about the impact of glitches in this new technology, but market participants increasingly believe it offers new opportunities.
“Most governments are starting to view technological change as an advantage to overcome the current problems of lack of productivity,” said Markus Mueller, global head of the chief investment officer of Deutsche Wealth Management. For instance, in China, the one-child policy (now scrapped), has led to a rapidly greying population.
The world’s second-largest economy will need to harness technological advances if it hopes to overcome the challenges of a potential labour shortage in the future, he added. “It’s a similar situation in Europe.”
More specifically, tokenisation -- in which physical assets are divided into a finite number of digital assets -- could change the very definition of private markets and rewrite pricing dynamics.
“Illiquidity premia will grind lower, but not go away entirely, as markets turn more liquid,” predicted Mueller.
It’s likely to take time; he estimates it could be a decade or more before these shifts take place. Another likely impact would be greater investor participation, which lowers transaction costs. Other experts believe tokenisation would pile more pressure on the 2/20 fee (2% management fee plus 20% of any gains) now prevalent in most private markets.
Currently, investors have relatively low allocations to private equity (typically less than 10% of overall portfolios), partly because it’s difficult to access and transactions costs can be high. Blockchain could help solve some of these issues.
However, not everybody agrees. Northern Trust’s Justin Chapman, global head of market innovation and advocacy research, argued that returns depend more upon good strategies than limited participation: “Improved liquidity and access from blockchain will drive more investors into the market, but that won’t affect the returns from a particular strategy.”
Indeed, easier accessibility is likely to be the big lure for sceptical institutional investors. “I don’t think institutional investors care about technology implementation per se, but they do care about costs, transparency and the ease with which they can execute their own business. Potentially, blockchain is a good solution for what they want to achieve,” added Aaron Perryman, head of Asia Pacific financial services advisory at EY.
Deutsche WM added in a September paper that using blockchain to represent assets as digital tokens could generate up to $150 billion in annual cost savings “across many parts of the economy and participants”.
The biggest challenge to expanding tokens of private assets may be how to best educate investors about what blockchain can do – and how it differs from the cryptocurrencies it infamously supports.
When AsianInvestor asked the chief investment officer of a Korean pension fund about his views on blockchain, he responded that cryptocurrencies (like bitcoin) are not an area that institutional investors should concern themselves with. That lack of understanding is not helpful, particularly when bitcoin is in meltdown mode, having fallen more than 80% from its peak value in 2017 to December 1, 2018.
“Most investors still do not know the difference between blockchain and bitcoin,” said Katrina Cokeng, co-founder and chief executive officer of Singapore-based alternatives digital platform Xen Technologies. However, she believes this could change over time.
At the other end of the spectrum, there are institutions such as Singapore state investment agency Temasek. It has been monitoring – and investing – in blockchain and artificial intelligence for some time now.
“These [blockchain and AI] play into longer-term trends that are creating impact across industries and geographies,” a Temasek spokesman told AsianInvestor.
Companies that Temasek has invested into in this space include SenseTime, an AI start-up in China; and R3 in the US, which has a blockchain platform backed by a group of banks.
“AI and blockchain are just two such areas we’re focusing on for investable opportunities that we see delivering sustainable value over the long term,” the spokesman added.
It will take time for investors to overcome their suspicions and engage with this fledgling technology. But if they can, the possibilities are promising.
This article was adapted from a feature on blockchain and private assets in AsianInvestor's December 2018/January 2019 edition.