Tokenization of private equity, real estate, infrastructure, hedge funds, and other alternative investments could come a lot faster than many have predicted — and make private assets a more mainstream investment.
Tokenization, which uses blockchain technology to create fractional digital shares of assets like buildings or artwork, could broaden access to alternatives to individual investors as well as create new opportunities for asset managers, according to new research jointly published by BNP Paribas Asset Management, Chartered Alternative Investment Analyst (CAIA) Association, and Liquefy, a Hong Kong-based tokenization platform.
Alternative investments are one of the fastest-growing parts of asset management, but unlike public stocks and bonds, alternatives are generally hard to buy and sell, offer investors little timely information about the valuation and other characteristics of assets, and are expensive to process. For many institutional investors that’s been part of the allure.
These harder-to-access investments have proved their worth, generating higher returns than some public assets over long periods of time. But with more companies staying private longer, the landscape is changing.
The report argued that tokenization could open up new opportunities for banks, asset managers, and wealth managers. Tokenization could potentially also offer access to new types of assets, such as art, wine, revenues from sports teams, and other investments rarely available to most investors.
Most importantly, tokenization could potentially lead to an efficient secondary market, where investors could easily sell their stakes and buy up others. While the assets would remain private, tokens could give investors some of the benefits of the public markets.
“Tokenization could help to democratize alternative investments by providing accessibility to more investors,” according to the report.
Tokens, for example, could then potentially be traded in the secondary market, and operations could be automated and expenses reduced. Legal rights and obligations of owners could also be embedded in tokens, according to the report.
The report cited the tokenization that has already happened in the real estate industry as an example of how realistic this type of automation is, even if the industry has encountered some challenges. Individual investors are active buyers of real estate tokens, in part because it’s a familiar asset class.
Creating tokens that digitally represent shares of private equity funds or office buildings isn’t a magical solution for the industry, however. There are significant challenges, including how to scale the process of tokenization in real estate and private equity, rather than doing it building by building or deal by deal, and how to address unique characteristics of some assets, such as complex covenants in private debt transactions.
The report argued that tokenization, by opening up private assets to new pools of investors, could also help fill the huge need for financing over the next 20 years, including an estimated $15 trillion for global infrastructure. Creating fractional digital shares of alternative assets will transform the industry, the authors said.
“Considering how the adoption of passive investment radically changed the landscape of mutual fund investment, there is compelling evidence that the growth in adoption of tokenization will do the same for the investment industry – including the alternative investment community,” according to the report. “With real assets, ownership is binary: There is only ownership and non-ownership. Tokenization could play a crucial role, and lower the barriers of entry to real asset investment.”