Unfavourable macroeconomic conditions in the first half of 2023 have driven institutional and retail investors alike to reassess their portfolios and rebalance their risk exposure. One asset class that continues to prove popular is private markets. With a broad range of investment strategies available focused on everything from private equity to debt and venture capital, and a track record of outperforming public market benchmarks, private markets continue to attract capital despite macroeconomic uncertainty.
In fact, institutional investors are now often allocating around a third of their portfolios to private assets, and retail investors are increasingly able to access the private markets through innovative new structures. With these evolving and growing demands, private markets participants are seeking out technologies to help them meet these new expectations.
So how are technological developments enabling the private markets’ further growth and popularity?
Our Private Equity clients are continuing to participate in the growing trend of opening up access to private markets for retail investors, as they seek new sources of capital. This is a trend that would not be possible without the technologies that facilitate this process of democratisation – which is dependent on transparency and data certainty. Platforms and access products have continued to evolve, leveraging infrastructure including APIs and blockchain technology. We continue to see the market responding with the creation of products that work for retail and platform distribution. This trend in private markets is expected to continue further in 2023, fuelling greater demand for transparency and information from investors.
Tokenisation is improving and increasing distribution across private assets globally – reducing friction in the distribution process for private funds and, in some cases, facilitating more cross-border distribution. This is of particular importance as the rising interest rate environment forces investors to re-evaluate their liquidity positions. There are several different levels of liquidity and current use cases are more internally focused. For example, using tokenisation at the asset level to effectively rebalance diversified open-ended funds’ exposure to illiquid assets, or using it higher up in the structure at the fund level to provide liquidity to a known pool of investors.
In order to deploy capital in a timely and efficient manner, digitisation and investor onboarding processes underpinned by new technology are essential for private markets investors - especially in the current fast-moving macroeconomic environment where managers need the flexibility to change their positions more quickly. As a result, managers can be more reactive, both to market conditions and in response to implementing legal and regulatory changes. Through blockchain, many of the processes that slow down the transfer process can be front-loaded, resulting in shortened timeframes, cost savings and overall a more streamlined process. We expect this trend to continue to evolve as LPs seek to deliver a more frictionless experience to their own clients.
Data capture has also become more important than ever, forming the bedrock for meeting stakeholders' ever-present appetite for transparency and information. Traditionally valuing private markets assets has involved very time-consuming process including much time spent around process and data management. With the help of blockchain and artificial intelligence, managers can provide a real-time, fully auditable data trail for permissioned users without the need for asset owners to relinquish control of their own data. Data is also crucial for ensuring investments are compliant with ESG and other regulation, and for giving investors the confidence they need that their investments are values aligned.
As 2023 progresses, we anticipate that a common language will prevail across stakeholders in the private markets, as products necessarily evolve to better accommodate and meet investor and regulatory body appetite for data.
Taken together, these technological developments have the potential to revolutionise the private markets by bringing a new level of trusted information, price discovery, and transparency. Managers in the private markets are actively seeking out trusted service partners that have the global reach and ability to scale quickly – with systems and data that are transparent and accessible.
So, what next? Artificial Intelligence, machine learning and natural language processes are all exciting developments which have the potential to add significant value in terms of the ability to collect and process big data, as well as to automate workflows and deliver efficiency.
Exploring an Appetite for Disruption | The Financial Technologist
By Billie Miric, Senior Director at Vertex Inc.
The Rise and Rise of B2B Cross Border Payments Disruptors | The Financial Technologist
By Ronnie d’Arienzo, Chief Commercial Officer at Freemarket
Candidates: The Market is in Your Favour! | The Financial Technology Salary Survey
By Hannah Chowdhury, AVP