Northern Trust and IBM have announced the first commercial deployment of blockchain technology for the private equity market. The goal is to increase security and transparency of asset management and trading. The solution was jointly developed by Northern Trust and IBM using the open source Hyperledger Fabric.
It is deployed by Unigestion who are based in Geneva, Switzerland. Last month Unigestion merged with Akina taking its total assets under management to over $23 billion. Private equity represents around 25% of this figure.
According to Peter Cherecwich, president of Corporate & Institutional Services at Northern Trust: “Current legal and administrative processes that support private equity are time consuming and expensive. A lack of transparency and efficient market practices leads to lengthy, duplicative and fragmented investment and administration processes. Northern Trust’s solution is designed to deliver a significantly enhanced and efficient approach to private equity administration.”
What does this solution deliver?
This is a platform for fund managers. It will potentially make it much easier for them to focus on profitability of the fund without breaching investor restrictions. For example, an investor may put a sum of money into the fund with a restriction on the type of asset it can be used for. That could be based on country, religion or ethical reasons.
At present fund managers spend a lot of time ensuring that funds are correctly allocated. This is not just a problem with administration but also impacts regulatory compliance. Northern Trust says that it has developed the solution with the support of both local and international regulators.
This is a big deal. If they are happy with how it works and it delivers both the claimed reduction in paperwork and increase in transparency Unigestion will gain an edge over other funds. It is not just the regulators who will welcome this. Investors will now have greater transparency over how their investments are allocated. For those with key restrictions on use of funds, this is good news that corporate shareholders will also welcome.
Can Northern Trust simplify investment in multiple funds?
There is another benefit here to investors. At present, they have to track every fund using a separate interface. Northern Trust is saying that it will make this platform available to other funds it works with. As a result, an investor could use a single blockchain ID across all instances of the platform. This will give them a single view as to how and where their funds are being used. Northern Trust has not revealed whether this is possible though.
This approach will also put pressure on fund managers to clean up their act. If investors can see where their money is invested in real time they may decide not to renew investments or even withdraw funds. As shareholder activism increases, this could result in companies having to provide more information about funds in which pensions, for example, are invested. The ramifications of this platform will take time to become clear but they are likely to be far reaching.
The private equity market is wholly dependent on the amount of money a fund can raise. If Investors gain real time visibility of where their fund managers are investing their money it could have a significant impact. If funds invest counter to investor wishes, stated or even unstated, they may choose to invest additional assets elsewhere or even withdraw funds.
That last sanction is often a last resort as there are often penalties. Fund management companies will need to review complaint procedures and contracts as investors may look to raise a higher level of complaints given the added transparency. However some funds will see this as an advantage to create an open and honest dialogue with customers and it will remove some of the secrecy in the industry. Additionally, this level of transparency will allow investors to balance the return on their investment against their ethical concerns.
Delivering this as a platform is a smart move by Northern Trust. It allows them to sell it to other funds and build a reputation for market innovation. It is also a clever use of blockchain in a finite environment and will see its reputation grow within financial institutions.