Cash & Liquidity ManagementInvestment & FundingCapital MarketsBlockchain will unlock greater liquidity for private markets

Blockchain will unlock greater liquidity for private markets

Blockchain and DLT predicted to help increase efficiency and liquidity of private markets

New technologies like blockchain and distributed ledger technology (DLT) will increase liquidity in the private market, according to a  report by Bain & Co.

“A consensus across the global financial ecosystem has emerged: Digitised financial assets and distributed ledger technology (DLT) platforms will substantially improve transparency of information, automation, distribution and, ultimately, liquidity,” the report said.

When compared to the equity market, private markets lack the same level of post-trade infrastructure, Thomas Olsen, partner at Bain & Co and co-author of the report says.

“At the extreme, it is Excel spreadsheets and accountants and lawyers, sending emails and documents around. If you make an exchange of equity in a private company like a real-estate transaction, it is still very manual,” he says.

“Distributed ledger and blockchain technology is definitely one that is well suited to this because it is a effectively a database that can be shared across multiple parties and automatically updated.”

Transparent fundraising

Many private sector firms are eager for a more efficient way of raising funds on the private market. A report by Texture Capital found that many C-suites were dissatisfied with the fundraising process. In fact, four of five indicated the fundraising process distracted them from running the business.

The vast majority of companies (96 percent) were willing to be more data transparent if it helped with attracting investors, says Richard Johnson, CEO of Texture Capital.

“What we found is companies are happy showing fairly detailed information, and those that are not currently, would be prepared to if it helped them attract more investors.”

In some sectors, the capitalisation of the private market is several times larger than publicly traded equity. Debt in the private market for example is 2.5x that of public markets and in the real estate sector the ratio is even more extreme, with the private market 32x the size of public markets.

“It’s a very large asset class. It is very illiquid but a very popular asset class because it does give you great returns.” says Johnson.

Creating liquidity for real-estate

Many investors are also looking to shorter terms for real-estate funds structure which typically last five to seven years, he adds

Using the real-estate sector as an example, Olsen believes DLT can help solve issues of illiquidity.

“Some companies are trying to ‘tokenise’ a commercial real estate building. Every time there is a rental payment, there would be an automated way all [investors] would get their dividend,” Olsen says. “There would be a cap table of all investors that ‘own’ the building much like it was a publicly traded company.”

But while DLT and blockchain technologies show a lot of promise for improving the efficiency of private markets, Olsen believes the adoption of these technologies by market participants is still in its infancy.

“The electronification of equity markets took 20 years. Public markets like fixed income are still in the process of electronification and maybe need another five years to be more digitalised,” he says.

“The private markets will need time for things to develop around infrastructure, regulations and investor and asset owner behaviour.”


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