Tokenisation – the process of transforming real world assets into digital representations that can be recorded, traded and atomically settled – is at an inflection point in the UK. Potential benefits are significant, including faster distribution, access to a broader investor base, diversification of concentration risk and reduced liquidity risk, along with a reduction in credit and operational risk.
But this topicality also risks confusion. Even a quick search reveals a plethora of providers with very little objective guidance available on how to distinguish between them.
As private markets experts, we have undertaken a detailed assessment of the future landscape, including for example, Tokeny’s Issuance, Archax’s Trading and Zodia’s Custody. We’ve then gone further, defining a model of how tokenisation can best be deployed.
This approach offers a way to manage your entire investment lifecycle in illiquid assets in an optimised and risk reduced manner, contributing to an environment whereby asset owners can scale their private assets investment portfolios confidently, through the adoption of tokenisation strategies, whether as funds, share classes within funds, direct assets or collateral.
These are just some of the factors we considered in creating Sionic’s distinctive approach.
The role of pension funds and insurers
Unleashing Capital, written by Connor MacDonald, Head of Economics and Social Policy at The Policy Exchange, eloquently describes the contribution pension funds and insurers can make to the UK Government’s ‘prosperity and growth’ agenda, through increased investment into private assets such as real estate, private equity, infrastructure and other alternative assets.
The report calls for Government to prioritise a regulatory environment which encourages growth and competitiveness balanced with policyholder protections and financial stability. In this context, the Edinburgh reforms are particularly important, as are changes to Solvency II. Conor sets out four strategic priorities, among which is a call to improve the Solvency II insurance regulation ‘by making the right reforms to the Fundamental Spread, Matching Adjustment, and Solvency Capital Requirements’.
The combined wealth of UK pension funds, at the time of the report’s publication, stood at £3.4TRN. Yet UK pension funds allocate just 7% of assets to alternatives as opposed to an average of 19% amongst other countries within the P7 (Australia, Canada, Japan, Netherlands, Switzerland, UK, US). Furthermore, the UK’s insurance sector sits a lowly ninth in the top ten table of European Insurers investing into infrastructure, private equity funds, real estate funds and property.
All of this suggests there is significant available capital which could be put to good use in support of ‘levelling up’.
The scale of the opportunity
It is the truest of statements that Britain requires substantial investment. Two areas ripe for investment and opportunity are housing and the transition to clean energy. Michael Eakins, Chief Investment Officer of Phoenix Group stated during the Unleashing Capital webinar, that in the right regulatory environment, they stand ready to invest £30-50 billion of assets in the next 3-5 years into Productive Finance. Wishing to invest over the long term, in a manner which delivers investment returns to customers and delivers on the green agenda in a way that is beneficial to the economy. There is similar investment appetite among retail investors. Today however, access to such opportunities is limited and while the performance returns may appear attractive, the time horizon is far greater than that of other asset classes.
The Long-Term Assets Fund, ‘LTAF’, has been designed to solve for some of these challenges, the FCA (Financial Conduct Authority) approved fund structure provides pension fund savers and retail investors access to longer term investment opportunities whilst providing infrastructure projects access to long term capital. In addition to providing the investment opportunity the LTAF sets out protections for both the investor and the manager, such as 90-day redemption notice periods and a restriction on redemption points to no more than one day a month.
The minimum requirement for an LTAF is to have at least 50% of its investments in unlisted securities and other long-term assets such as private credit, infrastructure, and real estate. Given the 6.4% annualised return of infrastructure since 2013 the opportunity for direct investment will be welcomed by pension fund savers and retail investors.
Difficulties of scale
Creating an appropriate regulatory environment for investment into private assets is one thing, creating an investment operating model which afford assets owners the opportunity to significantly scale up their private asset allocations is another.
Post trade processes for private assets are notoriously laborious compared to their public equivalent, with many manual activities undertaken and often, over very long periods of time. Hampered by such inefficiencies, current models are challenging to scale.
Tokenisation as the tool to move the dial
Tokenisation is conceptually the solution to many of these obstacles. And although the idea has been bandied around for some time without any meaningful use cases developing, something is definitely different this year. The sheer energy behind the concept has certainly never been greater, with many leading industry figures recognising its potential, and several buy side firms actively engaged in planning, designing and testing. Add in the excellent work that some of the major banks have undertaken in recent years, such as the tokenisation of a BlackRock money market fund by JP Morgan, and what becomes clear is an impressive appetite among industry titans to adopt this nascent technology and take advantage of its opportunities.
What does the near future hold?
We believe that any successful tokenised private asset strategy will
- exist within the same regulatory environment as that which institutional asset owners and their clients are already used to such as KYC (Know Your Customer) / AML (Anti Money Laundering), investor protections and institutional grade custody as a minimum requirement
- be a blended service provider model of some of the new market entrants and the traditional financial services providers, who not only have strong networks within the investment community, but also advocate a partnership style approach to collaboratively building a pathway to a better outcome.
We work closely with asset owners and asset managers to harness the benefits of tokenisation. And, while some firms are in the initial discovery phases and others further ahead, what is clear to all is the sheer scale of opportunity.
- To take advantage of tokenisation, find out more about our model, or discuss how to develop your own tokenisation strategy, please contact us.