Investment software vendors say the future of Blockchain is now. The GPs are still following up.
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 valuations, capital calls and waterfalls.
But the technology’s end users are still lagging behind, 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 blockchain-enabled valuation software to its clients. On the same day, Broadridge Financial Solutions announced that the Private Markets Hub, which uses a digital ledger to facilitate processes, is now available to North American funds.
“These are applications and elements of crypto that don’t usually make headlines,” said Jonathan Doolan, managing partner at consulting firm Indefi. “It’s more about what is the application of the technology.”
These technologies are not necessarily new. And it’s not as if private equity and venture capital firms are hesitant about blockchain: In recent years, these investors have plowed a significant portion of their capital into assets using the technology—not to mention cryptocurrencies.
But according to Doolan, it will take two to four years before it really becomes clear how general partners can incorporate blockchain technology into their businesses.
“Everybody is exploring and pursuing it,” Doolan said. “It can also be said that in many ways it is a luxury.”
Doolan explained that private managers need to have meaningful R&D budgets – something the biggest players will have, but smaller and emerging managers may not – to truly explore how blockchain technology can improve their operations.
“[Managers] thinking, ‘If we ignore this, we might miss out. It may also be some vaporware. There haven’t been tons of really effective use cases, but if we’re big enough and have the R&D budget, we have to do it,” he said.
But according to technology providers, the blockchain is the future.
“There’s obviously a lot of talk about digital ledger technology and blockchain,” said Tony Poulson, vice president of private equity product strategy at Broadridge. “It is 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 technology, automating workflows while using the digital ledger to protect data. Take, for example, a capital call. Typically, these processes involve a “huge” amount of communication between fund managers, investors and administrators. Broadridge’s Private Markets Hub turns the process into a step-by-step workflow, while the digital ledger allows users to see when data changes — reducing friction in the process, Poulson said. Northern Trust is a big user of the technology, and it is now offering the platform to its North American clients.
“You have revisionism,” Poulson said. “Everything that happens on an immutable ledger is recorded indelibly. It is visible to users who change it and when.”
Meanwhile, Inveniam acts as a kind of database, collecting valuation information that can only be used by others on the platform with the permission of the provider. The use of blockchain means that any changes in this data are visible, in addition to being verified by the supplier. According to CEO Patrick O’Meara, users include one of the top five Japanese banks, one of the top two private equity players and one of the top two global asset managers.
“Most of our big customers don’t shape or care in any way that it’s on the blockchain per se — they just care that they can prove that trust,” O’Meara said. “It provides total observability and huge savings.”
The goal is not only to verify valuation data, but ultimately to enable secondary market trading with up-to-date information.
“If private market assets are going to be traded digitally, we’re going to need the world’s largest database in the middle, or we’re going to need to pull data into a computational system on a regular basis,” O’Meara said.
Poulson also believes that more seamless technology – delivered by a digital ledger system – could address the concerns surrounding growing players in the private equity market.
“Historically, private equity has been an asset class that has been restricted in terms of who can and cannot participate,” Poulson said.
O’Meara agreed: “With this automation around the data, we’re going to see these markets revolutionized.”
