BNP Paribas Asset Management, together with the Chartered Alternative Investment Analyst Association (CAIA) and Liquefy, a Hong-Kong based tokenization platform, released a research paper that argues for tokenizing alternative asset classes.
David Bouchoucha, head of private debt and real assets at BNP Paribas Asset Management, said, “We aim to raise clients’ awareness of the benefits of tokenization and blockchain technology to access new pools of assets, for example within infrastructure financing, and how best to position for future innovation in this area.”
Tokenization is the process of creating a digital representation of a non-digital asset. This technology has great potential to democratize access to alternative investments, while also enabling asset managers to innovate by investing in alternative asset tokens, thereby broadening the types of exposures they can potentially offer investors.
Alternative investments are expected to account for 18-24 percent of the global investable market by 2025, and include such vehicles as hedge funds, private equity, venture capital, private debt and real assets such as real estate, infrastructure and natural resources, which are generally less liquid, accessible and transparent in terms of information than traditional assets.
Adrian Lai, CEO of Liquefy, said, “Liquefy is particularly interested in the democratization and efficiencies that can be achieved, especially in relatively exclusive asset classes within alternative investments.”
Like any major disruption, tokenization is able to shape the financial landscape, opening new opportunities for banks, assets and wealth managers. For asset managers specifically, it could create new investment opportunities, changing the way they analyze and invest in this market, creating potential changes in the dynamics of multi-assets investing.
Ultimately, it would mostly benefit end investors, be they retail, high net worth individuals or institutional, as it would allow them to access alternatives in an easier and more affordable way. Tokenization could potentially also offer access to new types of assets such as art, wine, or even revenues associated with sports teams.
The paper explains the tokenization process involves multiple steps, including deal structuring, digitization, primary distribution, post-token management and finally the enablement of secondary market trading. Across the alternatives landscape, tokenization may be able to address a number of challenges often faced by both GPs (general partners) and LPs (limited partners), including:
- Improving liquidity: tokens can be traded in secondary markets
- Enabling faster and cheaper transactions: reduced transaction and lifetime cost through lower complexity and better operational efficiency
- Offering greater transparency: token holders’ rights and legal responsibilities as well as record of ownership can be embedded into the tokens themselves
- Broadening access: increased access by more investors to previously unaffordable or not easily divisible asset classes
This paper includes a discussion of the basics of blockchain technology and tokenization, highlights some of the special considerations inherent in bringing tokenization to alternative investments and, finally, provides key insights and considerations for the major alternative investment categories.
Joanne Murphy, CAIA’s managing director for Asia Pacific, said,”It is important that those tasked with developing and distributing the tokenized vehicles described in this fascinating new paper maintain a credo of ‘investors first’, something that should never be ‘disrupted.’”