CityWire: The Future of Tokenisation in Private Markets

This interview first appeared in the October 2022 CityWire Wealth Manager Special Report, issue #572.

Tokenisation is increasingly viewed as a critical technology in the ‘democratisation’ of the private markets industry. Frederick Shaw, Global Head of Operations and Chief Risk Officer at Hamilton Lane, shares his views on how tokenisation may well be the next frontier in private markets.

CityWire: What is tokenisation? How is it different from everything we’ve heard about crypto over the past few years? Is it a fad or here to stay?

Frederick Shaw: It is important to understand that there is a difference between crypto and blockchain. Think of blockchain as a technology: One needs to have an underlying technology to match orders back and forth. Crypto is one way people use that technology. All cryptos work on a blockchain, but not all blockchains deal with cryptos.

As for tokenisation – it is essentially the creation of a representation of a unit of value in another asset. In terms of private markets, tokenisation converts private equity funds into tradable digital securities. For example, a $5 million fund commitment could be divided into 100 tokens worth $50,000 each, then fractionalised and sold in smaller units; like an investor trading one-tenth of a bitcoin at a time.

CW: Many view tokenisation as the new frontier in private markets. Do you agree?

FS: Tokenisation is definitely one of the new frontiers that people are exploring. The exact picture of how blockchain will be leveraged within private markets’ infrastructure is still developing. In the past, private equity funds have been accessible only to large institutional investors. But that’s changing. At Hamilton Lane, we tokenised a portion of our Global Private Assets Fund with an exchange in Singapore, and we are working with other providers to do more in the digital asset space. This allows end investors to access our Fund in a very efficient manner. If the right structures can be put in place and both investors and general partners choose to embrace and adopt tokenisation, then, yes, I agree it will be a new frontier.

CW: Should we be cautious of tokenisation as it continues to develop?

FS: Tokenised technology is gaining interest all over the world. There is a need to understand the technology as it develops, and to build the necessary infrastructure to support it from a security standpoint, from an operational standpoint and from an investor reporting standpoint. ‘Cautious’ might not be the right word, but we need to be thoughtful and intentional to ensure that we are leveraging tokenised technology in the right way from a business and regulatory perspective, and in a way that adds value for investors.

CW: We all know that Hamilton Lane has been an early mover in this area. What steps have you taken so far and what more is on the horizon?

FS: Hamilton Lane was one of the first major private markets firms to tokenise a fund, and was an early investor in tokenisation technologies and applications for end investors. Early on, we prioritised researching and understanding how the underlying technology could enhance investor access to - and experience with - the private markets.

At Hamilton Lane, our purpose is simple: provide financial well-being for those who depend on us. This is not just a slogan. We’re continuing to invest in tokenised technology and explore different types of digital securities offerings. Our goal is to enable access to the strong returns and performance opportunities generated within the private markets space for a newer set of investors, while increasing usability and transparency using blockchain technology.

CW: What are the two or three things that investors should be thinking about or doing when it comes to tokenisation?

FS: Many investors have heard about tokenisation, but only a few understand what it means or how it is different from other blockchain-enabled investments. Tokenisation enables individual investors to participate in private equity value creation for the first time in a digitally native way. For investors who are interested in the private markets and looking for a simpler and easier way to access this asset class, we recommend they speak to their wealth managers about tokenisation. Coming back to where I started, crypto does not equal blockchain. The value is not determined on the trading price, but the value is determined on our reporting. The actual underlying values of the securities is that what the fund owns. And that’s a big difference.

Another thing to keep in mind is that tokenisation is currently a nascent space. Right now, there are markets that are developing to allow investors to sell a token if they hold it. They’re not nearly as deep with liquidity as public equity markets, or public debt markets, or the like, but they are starting to develop.

Most private markets funds have a lifespan of ten to 12 years and you’re generally in for that whole time period. But with a token, you could decide after five years whether you need to rebalance, or simply don’t want to own it anymore. You could go out and try and sell it in the secondary market, in a very easy process. Somebody is willing to buy it for that price and they match the orders up and you’re done.

As asset managers like Hamilton Lane continue to enable access to the private markets for a broader set of investors, tokenization through blockchain technology is expected to be an important tool in that effort. While this use of the technology is still relatively new, it may present a new investment opportunity to those who could historically only invest in public markets, or face arduous requirements and steep hurdles. As digital assets gain popularity, investment minimums decline and structural efficiencies increase, the private markets are more accessible than ever.