In Blockchain We Trust: Operational Infrastructure for Alternatives

Let's take a look at infrastructure, not focused on data centers, toll roads or logistics hubs. Instead, let's look at blockchain as infrastructure or the operational plumbing that may help private markets scale more efficiently into wealth channel for alternatives.

Given: The democratization of alts has dominated if not overwhelmed investment conversations, and took a bit of turn amid the current issues with some credit funds and whether those issues may dampen the wealth channel's appetite for private-market investments.

It's no surprise that investors are trying to square their interest in alternatives with concerns about illiquidity, opacity and good old-fashioned operational mechanics. Worries remain.

Now enter the blockchain. Rightly or wrongly, the blockchain is often associated with crypto, but it is becoming better known as what I will call the "saving" infrastructure for alternative assets in the form of tokenization, where ownership interests in traditionally illiquid assets are represented digitally.

For wealth managers and for high-net-worth investors, blockchain can improve access to investments with lower minimums through fractional ownership; liquidity through secondary transfers; operational efficiency through faster settlements; and transparency through real-time ownership.

As I previously reported here, Hamilton Lane has been an on-chain pioneer in private markets when it tokenized portions of several flagship private market funds several years ago, reducing minimum investments in one case from $5 million to $20,000. Since then, it has added evergreen structures and feeder access to its growing tokenization line-up.

Others have followed like Apollo, BlackRock, KKR, to name a few, adding heavy hitters to the line-up. In particular, Apollo offered its Diversified Credit Securitize Fund as a tokenized private credit vehicle for distribution via the blockchain with secondary transfer capabilities.

With interest growing steadily, let's look at how it works. Tokenization does not fundamentally alter the legal structure of the underlying investment vehicle. The fund remains governed by the same investment mandate, fee structure and regulatory framework. However, what changes are the operational layer surrounding ownership, transfer and distribution.

Platforms such as Securitize have emerged to support this infrastructure, providing issuance, administration, transfer-agent services and regulated secondary-trading capabilities for tokenized securities.

For wealth managers, the appeal lies less in the technology itself than in what technology enables: broader access, improved efficiency and potentially smoother client experiences.

But it is still early days. Approximately $1.4 billion in PE and venture in 22 individual assets are held in tokens, according to recent data provided by RWA.xyz, an industry tracker. That remains small compared with the overall industry, but the trajectory is notable with most tokens only three or four years old.

As a former reporter, I covered how electronic trading transformed the futures and options markets (and wrote a book about it) and now see how the use of blockchain can accelerate the democratization of alts.

To be clear, it is not that blockchain is changing the alternatives landscape (that may be a bit obvious). Instead, blockchain is becoming the operational infrastructure to help with coordination, ownership, and transfer issues. In effect, we are seeing blockchain modernize back-office operations to help scale the wealth channel to an even broader base.

The next phase for the democratization of alts may depend less on product innovation and more on operational infrastructure.

Mark Kollar
Partner, Prosek Partners

Mark Kollar's monthly Letter from America can be read at The Alternative Investor.