Last week, Securitize, a digital asset investment firm, announced the launch of a tokenized fund to provide access to
KKR
Health Care Strategic Growth Fund (HCSG) II. This is the first time private equity investment – with a major sponsor – has become available to qualified buyers in the US using blockchain technology. This fund is available to individuals or family businesses with portfolios of $5 million or more.
The use of blockchain technology in the food fund should help with onerous record-keeping requirements.
Dreamstime
The fund is essentially a feeder fund that provides exposure to the HCSG II fund. The tokenization of the fund has nothing to do with the underlying investments.
Instead, the blockchain should help improve transparency, lower minimum requirements and improve record-keeping efficiency, says KKR. The technology will help with the burdensome paperwork, which can be difficult to handle when there are many investors in one fund. Investors must use a digital wallet for transactions with the tokenized fund.
A spokesperson at the firm notes that financial advisors will play a critical role in advising their clients on their allocation to these types of investments.
“We see this transaction as an ideal opportunity for advisors and wealth managers to dive deep into the tokenization of alternative asset strategies as they will certainly be asked by their clients to provide due diligence and guidance on how these products can fit into their portfolios, ” says David Hogan, head of sales and distribution at Securitize Capital.
Blockchain is a digital ledger that keeps track of transactions and cannot be changed. The tokenized fund uses one called Avalanche. “This is the fastest blockchain in the world by time to completion, with regularly completed and irreversibly settled transactions in under one second,” said John Wu, president of Ava Labs, which backs the platform.
Another advantage of Avalanche is the use of subnets, or sub-networks. These make it possible to create customizable blockchains. “For example, you can create a subnet that allows only compliant and approved firms to participate,” says Wu.
Early days. As should come as no surprise, there are mixed views on tokenized funds. Ba Minuzzi, founder and CEO of Umana, a multifamily office, says they want to help democratize investing. “It’s silly that in the connected world we live in, the investment world is still so divided and only the richest have access to the best investments,” he says.
But there are also skeptics who worry that investors will be drawn in by the hype and won’t understand what they’re getting with these vehicles. “I think we have the same problem that we’ve seen with crypto investments,” said Catherine Valega, a wealth consultant at Green Bee Advisory. “Retail investors will often skip the more tedious financial planning tasks — emergency funds, insurance, maximizing retirement contributions — and jump right into these investments.”
Another issue is cyber security. Blockchain-based platforms have been the source of various breaches, for example with the Axie Infinity hack for $615 million (value as of the end of March). Then there was the disastrous plunge of the Luna stablecoin, as well as the bankruptcies of crypto firms such as Voyager Digital and Celsius Network.
“Manipulation of a digital account is what I would be concerned about with a tokenized fund,” says Charles B. Sachs, chief investment officer at Kaufman Rossin. Risks include: “Someone either logs in as you, or there’s a cyber attack that changes the blockchain,” he says.
The first days of new technology often present risks. This was the case with the use of ACH transfers and e-commerce transactions. But over time these became reliable and trustworthy systems.
Traditional Wall Street firms continue to experiment with crypto and blockchain technologies. At the beginning of August, for example, BlackRock (ticker: BLK) announced a collaboration with
Coin base
(COIN), which operates the largest cryptocurrency exchange in the United States. The technology is integrated into BlackRock’s Aladdin investment management system to provide risk analysis of Bitcoin holdings.
“Most people have only become aware of blockchain in the last year or two, so there is a period of education and getting comfortable that has to happen as with anything new,” said Carlos Domingo, CEO of Securitize. “But if you compare this to the internet, to e-mail, to bank transactions, to your car – before too long, you’re comfortable that they work, are better than the old way, and you can’t imagine life without it . That’s what we’ll see when tokenization improves the economy.”
Tom Taulli is a freelance writer, author and former broker. He is also the author of the book, Personal financial guidance for technical professionals.
