Northern Trust is approaching two years of running a blockchain for the administration of private-equity funds. It has slowly added a handful of participants, but activity remains limited to a pair of funds domiciled in Guernsey, one of the Channel Islands.
Danielle Henderson, Sydney-based senior vice president responsible for innovation research for Asia Pacific, is hoping to extend that activity to her region.
“This is an opportunity to leapfrog competitors,” she said.
But Henderson did not identify specific projects in the region. The bank is actively following blockchain-related projects at the stock exchanges of Australia and Hong Kong.
The bank’s proprietary blockchain was launched in 2017, built with the help of IBM. Swiss asset manager Unigestion was the first to join, along with a law firm and an audit firm.
Since then, the bank has added just one more buy side, Emerald Technology Ventures, also Swiss-based. Its Emerald Cleantech Fund III was the first to process a live capital call via Northern Trust’s distributed ledger, in November.
Private equity on blockchain
The bank’s DLT was built specifically to process administration for alternative investments. Illiquid assets are harder to administrate because of complex operations, such as capital calls, and less transparency around information.
(Private equity funds typically let their investors hold onto monies earmarked for a fund until the moment when the manager is ready to make a transaction, and issues a ‘capital call’ to have investor funds delivered.)
One of the biggest uses of blockchain is to digitalize the paperwork and underlying agreements among alternative investment firms, their investors, and their lawyers, auditors and regulators.
By coding these processes as smart contracts, the DLT removes the need for manual, paper-based reconciliation. The end result should be faster settlement times, which in turn should reduce costs – allowing fund managers to bring down total expense ratios, which can be high in the alternative-investment space.
After two years following Northern Trust’s platform launch, are two funds and one capital call much to show?
Unigestion has been on the platform for more than a year, giving it a full annual cycle’s worth of activities around portfolio company annual general meetings.
Unigestion officials, however, declined DigFin’s requests for comment regarding their experience.
“Building an ecosystem takes time,” said Henderson. She notes that there are now two auditors (including PwC) and one law firm with nodes on the platform. “Now that we’ve done the first private-equity administration on a blockchain, this is a core delivery.”
For the platform to thrive it will need to attract more lawyers, auditors, and administrators – and other custodian banks. “We want others to join,” Henderson said, although she declined to say if there was serious interest. The bank could have attempted this through a consortium but that would take too long and might not have gone anywhere; now Northern Trust has two commercial deployments.
“From digital identity management to digital board meetings to evidence and audit, we’ve now processed an entire cycle on DLT,” she said.