Investment Software Providers Say the Future of Blockchain Is Now. GPs Are Still Catching Up.
Those with research and development budgets are diving in — but they still need proof that the technology will be effective.
Private equity software providers are going all-in on blockchain and digital ledgers, aiming to add a layer of trust and transparency to processes like valuation, capital calls, and waterfall events.
But the technology’s end users are still catching up, constrained by limited research and development budgets and uncertainty about how to use blockchain effectively.
Last week, Apex Group announced that it had partnered with fintech firm Inveniam Capital Partners to offer its valuation software, which is blockchain-enabled, to its clients. The same day, Broadridge Financial Solutions announced that its Private Markets Hub, which uses a digital ledger to facilitate its processes, is now available to North American funds.
“These are applications and elements of crypto that don’t generally make headlines,” said Jonathan Doolan, managing partner at consulting firm Indefi. “It’s more around what is the application of the technology.”
These technologies aren’t necessarily new. And it’s not as though private equity and venture capital firms are hesitant about the blockchain: In recent years, these investors have plowed a significant portion of capital into assets using the technology — not to mention cryptocurrencies.
But according to Doolan, it’ll take two to four years before it really becomes clear how general partners can incorporate blockchain technology into their businesses.
“Everybody is exploring and dabbling in it,” Doolan said. “It might also be said that in a lot of ways, it’s a luxury.”
Doolan explained that private managers need to have meaningful R&D budgets — something that the largest players will have, but smaller and emerging managers may not — to really explore how blockchain technology can improve their operations.
“[Managers] are thinking: ‘If we ignore this, we may miss. It could also be a bit of vaporware. There haven’t been tons of really effective use cases, but if we’re big enough and have the R&D budget, we need to do it,’” he said.
According to technology providers, the blockchain is the future.
“Obviously there’s a lot of talk about digital ledger technology and blockchain,” said Tony Poulson, vice president of product strategy for private equity at Broadridge. “It’s not technology for technology’s sake. It allows us to bring different personas, different lifecycles around immutable data.”
Broadridge’s Private Markets Hub takes an expansive approach to the technology, automating workflows while using the digital ledger to protect data. Take, for instance, a capital call. Usually, these processes involve an “enormous” amount of communication between fund managers, investors, and administrators. Broadridge’s Private Markets Hub turns the process into a workflow with steps, while the digital ledger ensures that users can tell when any data is changed — lowering friction in the process, Poulson said. Northern Trust is one major user of the technology, and it’s now providing the platform to its North American clients.
“You’ve got auditability,” Poulson said. “Everything that occurs on an immutable ledger is recorded indelibly. It’s visible to users who changes it and when.”
Inveniam, meanwhile, acts as a sort of database, aggregating valuation information that can only be used by others on the platform with permission of the provider. The use of blockchain enables any changes to that data to be visible, in addition to being verified by the provider. According to CEO Patrick O’Meara, users include one of the top five Japanese banks, a top two private equity player, and one of the top two global asset managers, among others.
“Most of our big customers in no way shape or form care that it’s on blockchain per se — they just care that they can prove that trust,” O’Meara said. “It gives total observability and enormous savings.”
The goal is not only to verify valuation data but eventually to enable secondary market trading with up-to-date information.
“If private market assets are going to trade digitally, we’re going to need the world’s largest database in the middle or we need to pull data into a computational system on a regular basis,” O’Meara said.
Poulson also believes that more seamless technology — which is provided by a digital ledger system — can solve for concerns surrounding increasing the players in the private equity market.
“Historically private equity has been an asset class that has been limited as to who can and can’t participate,” Poulson said.
O’Meara agreed: “With this automation around the data, we’re going to see those markets being revolutionized.”