The private asset sector (i.e., private equity funds, private debt, infrastructure, real estate) is not only managing unprecedented volumes of institutional money, but is producing returns that exceed hedge funds and traditional long-term investment strategies. While the asset class is in a very strong capital position, it is in urgent need of modernisation and automation. As the wider financial services industry becomes increasingly digital, the private asset market needs to review its operational processes to incorporate new technologies.
AI could be used by managers to analyse data trends when carrying out assessments on prospective investments.
Dirk Holz, head of Product Development Private Equity & Real Estate at SGSS Luxembourg, says artificial intelligence (AI) could lead to major structural changes across the private asset ecosystem. “AI could be used by managers to analyse data trends when carrying out assessments on prospective investments. In effect, the technology would be performing the role of the analyst.” As such, AI could help managers identify investment opportunities or attractive deals faster allowing for capital to be deployed more efficiently. Some managers are starting to take note. EY found 50% of all private equity firms were either using or expected to use AI to support their investment activities, although this rises to 73% among the $15 billion-plus managers.
Furthermore, Holz adds AI could also be utilised by the industry to obtain operational advantages. “AI could help managers of private assets provide clients with real-time valuations for illiquid assets. AI tools could be trained to monitor the market for similar transactions and assets, and use that information to come up with valuations in real time. This would be a major improvement on the existing reporting model, where valuation reports are usually made available to institutional clients on a quarterly basis,” says Holz.
Blockchain: a solution for private asset managers?
Blockchain has received heavy criticism from market participants, many of whom argue the technology has not delivered on what it was originally supposed to. While Blockchain has not met everyone’s expectations, its proponents believe the technology could still have a positive impact on private asset markets.
Making tokenisation happen
Directly intertwined with some of the advancements being made in Blockchain is the concept of tokenisation, says Holz. Tokenisation is the issuance of digital Blockchain tokens whose value is linked to the performance of an underlying, real, asset. Holz says that tokenisation could have a particularly disruptive impact on private markets. “Through tokenisation, illiquid assets such as infrastructure or real estate can be split up into much smaller units and traded on the secondary market. As a result of this, assets which have only been available to big institutions could be traded by ordinary retail investors,” explains Holz.
Liquidity will only emerge in this new asset class if market participants develop some sort of centralised secondary market trading platform subject to internationally agreed upon standards and strong legal protections enforced by a supranational body such as the EU or similar.
In turn, this will lead to once untradeable assets becoming easily accessible to ordinary investors allowing them to achieve better risk diversification while simultaneously widening their return streams. Despite this, Holz is mindful that for tokenisation to succeed, there needs to be robust infrastructure supporting secondary market trading. “Liquidity will only emerge in this new asset class if market participants develop some sort of centralised secondary market trading platform subject to internationally agreed upon standards and strong legal protections enforced by a supranational body such as the EU or similar,” he says.
Tokenisation is an initiative which Societe Generale is actively working on, continues Holz. In 2019, Societe Generale issued and invested EUR100 million worth of covered bonds as a security token, directly registered on the Ethereum Blockchain. The pilot was developed by the internal startup Societe Generale Forge. Among the benefits tokenisation could bring are greater product scalability; shorter time to market; faster transferability; quicker settlement processes; reduced intermediation and cost efficiencies.