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ADDX, private markets, and the path to tokenization

Oi-Yee Choo, the new CEO, needs her investment-banking skills to bring liquidity to a nascent marketplace.



Oi-Yee Choo, ADDX

Oi-Yee Choo, an investment banker who has recently become CEO of Singapore-based fintech ADDX, likens the company’s efforts to make private markets accessible to the formation of Asia’s Reits industry.

When the first real-estate investment trusts were listed in Singapore in 2002, the industry struggled to gain traction. Choo was then a junior banker at Citi. She would go on to serve as an executive director at Nomura and Morgan Stanley, and then run UBS’s Singapore investment bank for nearly six years.

“Twenty years ago, the Singapore IPO market didn’t matter,” she told DigFin, noting that the city also lacked serious fund managers.

But Singapore’s finance industry could see how Reits had developed in bigger markets like Hong Kong and Australia. Eventually its bankers found the right mix to make property-based stocks work. Today the Lion City’s Reit industry includes 18 securities valued at around S$17 billion.

New business model

Choo feels something similar is going on with technology companies looking to “democratize” private markets by making it easier for mass affluent investors to participate. The idea is still gestating and it will take some trial and error to land on the best business model.

Only this time, Singapore doesn’t have other markets to serve as benchmarks. Everyone around the world is experimenting. But Choo, who joined ADDX in early 2020, argues the firm has graduated from its ‘proof of concept’ stage and is becoming a viable commercial entity.

“In 2020, it was hard for me to say the world ‘tokenization’ to fund managers,” she said, referring to the giant general partnerships that dominate private equity. “By 2021, the idea of democratizing private markets using technology became a relevant conversation for GPs.”

Two asset classes

ADDX was set up up 2017 (originally as iSTOX), backed by SGX, Heliconia (a venture arm of Temasek) and several financial institutions from Japan and Thailand. It’s not the only Singaporean firm using technology to make financial markets more accessible, but it’s the one supported by “Singapore Inc.”

It also differs in that it has two core asset classes it is trying to change: alternative investment funds, and fixed income. In both cases, ADDX is using a blockchain ledger to represent exposures in tokenized form for its investors, while to the GPs or stock market it is a traditional, institutional client.

As ADDX attempts to create depth in its trading activities, Choo hinted that the key to success will be how the platform marries these two distinct sources of liquidity – and then find products to build on top of that aggregation.

For clues of what may link private equity and bonds, hark back to Choo’s career at UBS. She joined in 2014 at a time when investment banks in Asia made money from primary markets rather than advice. She doubled down on that reality and helped link the IB to the private bank, turning it into a distribution juggernaut – an example of how different products can be leveraged to grow the entire business more.

During her UBS days she realized that while most private-banking assets were in public securities, the most attractive returns were often to be found in private markets, with their illiquidity premiums. Only the biggest hedge funds or ultra high-net-worths could get direct access to private equity or infrastructure funds.

“Why limit this to ultra-high-net-worth?” she said. “We always tell clients to diversify, so why can’t we include some hedge funds or private equity exposure?”

Winning acceptance

Big PE funds didn’t want the hassle of dealing with small clients – and small ticket sizes. Family offices or single investors, on the other hand, didn’t have the long-term liabilities of a pension fund, so they didn’t want their assets tied up in funds with 10-year lockups.

Things have changed over the past decade as the hottest companies have put off going public. Wealthy individuals waiting to invest in Silicon Valley have missed out on the heady valuations. The industry began to respond.

Choo built a capability to get smaller clients access to hot private companies such as Grab, but struggled to institutionalize this: the bank’s risk teams deemed private markets too risky.

Another challenge was that five years ago there were only a handful of private Asian tech companies big and interesting enough to warrant the effort to access shares. Today, however, Southeast Asia is on track to produce two dozen unicorns, providing a reasonable supply.

ADDX is one of the companies using technology to make it possible for smaller investors to access these stories.

Making funds bite-sized

It is still cautious – it doesn’t invest in venture capital funds, and prefers brand-name PE firms, especially those open to co-investing with their LPs, which Choo regards as a good sign for an eventual IPO. Exposure to the next Grab would likely come through a PE’s late-stage equity strategy.

Moreover, the past year has been terrible for IPOs, and valuations in private markets are crashing. GPs may face drawdowns. But large PE funds such as TPG and KKR are stable. And because they face a tougher environment, more of them are seeking out tech partners such as ADDX, which can source new channels of investors.

In turn, ADDX is exploring how to make PE and hedge-fund investments more suitable for individuals, such as shorter fund investment cycles (as are rivals such as iCapital of the U.S. or Europe’s Moonfare). PEs are open to new structures because they see a huge growth in Asian family wealth and want to grow this investor base.

Choo says Partners Group, Hamilton Lane and KKR are among those most open to working with retail investors. 

Fractionalizing bonds

ADDX is also using technology to make bond issues available in fractionalized amounts. Given the rocky state of the capital markets, more investors, from individuals to hedge funds, are keen to de-risk into fixed income. “We’re seeing the highest volumes ever in short-term paper,” Choo said. “We’re building a credit space in which individual investors can redeem or rollover.”

As a result, she said, “We’ve accidentally created a use case for blockchain for bonds.” The firm has done one-off placements for clients such as local broker CGS-CIMB and pawnshop chain ValueMax, while using smart contracts to shed entire layers of processing: trustees, paying agents, transfer agents and OTC clearers. Instead of waiting up to two weeks for coupon payments to reach end investors, on ADDX’s ledger it happens within hours.

“Banks and mutual funds are built on archaic processes layered with intermediaries,” Choo said. “I’m not sure where this space will take us, but we created a trading venue that allows bite-sized transactions with same-day settlement and zero counterparty or settlement risk.”

Liquidity remains low, as there is no secondary market to speak of. But Choo says her old private bank would have charged 50-100 basis points on a spread, whereas ADDX merely charges a transaction fee on its platform.

Originate and distribute

To jumpstart its venue, ADDX has found itself in the origination game – which is not what it sees as its business model. For now, though, Choo and her team are required to build both the supply and the demand. She says its third bond issuer is in the works, with several crypto fintechs that require short-term USD funding also in the queue.

Over time, however, ADDX prefers to work with banks, brokers and advisors to generate its pipeline.

It is also working with some of its shareholders to create distribution: the company has placed bonds with partners such as Japan’s Tokai Securities and Phatra Securities in Thailand. In Singapore, CGS-CIMB and wealthtech StashAway have also purchased bonds from the platform via APIs.

Choo says cross-border business is essential to scale, but difficult to arrange. Tokai, for example, was able to receive bonds because it received a one-off nod from its regulator. “We’re working with regulators such as the Stock Exchange of Thailand for cross-border origination and distribution,” Choo said.

Blockchain base

ADDX faces established rivals in private markets, as well as competition from other fintechs “democratizing” access to bonds, such as Singapore’s BondEvalue. If it’s going to succeed, it will be via its use of technology as well as IB people skills.

The company operates a private, permissioned blockchain ledger. It uses this to service the lifecycle of a security, from issuance to post-trade, and manages compliance and security. It issues a governance token but these only circulate on its own blockchain and have no value beyond.

For funds, such as private equity, the platform handles redemptions, calculates management fees (which is very complicated for PE or hedge funds) and other admin. It can handle open-ended or closed funds or other collective schemes like Reits.

But ADDX must work with a third-party fund administrator to connect it with GPs in a traditional form, through a special-purpose vehicle feeder fund. Choo says this is “not ideal” but a tech solution has yet to be devised.

Capital aggregator

Whereas the platform is mostly a back-office service for funds, it is a digital-native venue for bonds: these instruments such as the CGS-CIMB note are issued and traded solely on ADDX. Smart contracts and microservices operate a register, handle payments, mint fiat tokens, 

For securities, cutting out lots of intermediaries is a complex technical undertaking, so ADDX began with relatively straightforward bonds. (The company has yet to create equity access to privately held unicorns.)

The platform uses smart contracts and microservices to provide custody-like securities services, such as operating a register, handling payments, minting fiat tokens, and moving assets among client accounts. ADDX also provides a matching engine for trading.

The contours of a future can be discerned. ADDX and its contemporaries talk about making private assets available to smaller investors, but the real business looks to be the opposite: aggregating the wealth of small investors to create a digital-native capital market across the lifecycle of Asian companies.

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