Last week Securitize, a digital asset securities firm, announced the launch of a tokenized fund to allow access to the
KKR
Health Care Strategic Growth Fund (HCSG) II. This is the first time private equity investing—with a major sponsor—has become available to qualified purchasers in the U.S. using blockchain technology. This fund is available for individuals or family businesses with portfolios of $5 million or more.
Use of blockchain technology in the feeder fund should help with onerous record-keeping requirements.
Dreamstime
The fund is essentially a feeder fund that provides exposure to the HCSG II Fund. The tokenization of the fund has nothing to do with the underlying investments.
Instead, the blockchain should help improve transparency, lower the minimums, and improve the efficiency of record-keeping, says KKR. The technology will help with the onerous paperwork, which can be difficult to manage when there are many investors in one fund. Investors will need to use a digital wallet for transactions with the tokenized fund.
A spokesperson at the firm notes that financial advisors will play a critical role in advising their clients about their allocation to these types of investments.
“We see this transaction as an ideal opportunity for advisors and wealth managers to delve deeply into the tokenization of alternative asset strategies since they will certainly be asked by their clients to provide diligence and guidance as to how these products can fit into their portfolios,” says David Hogan, head of sales and distribution at Securitize Capital.
Blockchain is a digital ledger that keeps track of transactions and cannot be changed. The tokenized fund is using one called Avalanche. “This is the fastest blockchain in the world as measured by time-to-finality, with regularly completed and irreversibly settled transactions in under a second,” says John Wu, president of Ava Labs, which supports the platform.
Another advantage of Avalanche is its use of subnets, or subnetworks. These allow for the creation of customizable blockchains. “For example, you can create a subnet that allows only compliant and approved firms to participate,” says Wu.
Early days. As should be no surprise, there are mixed views about tokenized funds. Ba Minuzzi, the founder and CEO of Umana, a multifamily office, says that they will help to democratize investments. “It’s silly that in the connected world we live in, the investment world is still so divided, and only the wealthiest have access to the best-performing investments,” he says.
But there are skeptics as well who worry investors are attracted by the hype and won’t understand what they are getting with these vehicles. “I think we have the same problem as we’ve seen with crypto investing,” says Catherine Valega, a wealth consultant at Green Bee Advisory. “Retail investors will often skip the more boring financial planning tasks—emergency funds, insurance, maxing out retirement contributions—and jump right into these investments.”
Another issue is with cybersecurity. Blockchain-based platforms have been the source of various breaches, such as with the Axie Infinity hack for $615 million (value as of end-March). Then there was the disastrous plunge of the Luna stablecoin as well as bankruptcies of crypto firms like Voyager Digital and Celsius Network.
“Manipulation of a digital account is what I’d be concerned about with a tokenized fund,” says Charles B. Sachs, the chief investment officer at Kaufman Rossin. Risks include: “Someone either logs in as you or there is a cyberattack that alters the blockchain,” he says.
The early days of new technologies often pose risks. This was the case with the use of ACH transfers and e-commerce transactions. But over time, these became reliable and trusted systems.
Traditional Wall Street firms continue to experiment with crypto and blockchain technologies. For example, in early August, BlackRock (ticker: BLK) announced a partnership with
Coinbase
(COIN), which runs the largest cryptocurrency exchange in the U.S. The technology has been integrated into BlackRock’s Aladdin investment management system to provide risk analysis of Bitcoin holdings.
“Most people have only become aware of blockchain in the past year or two, so there is a period of education and getting comfortable that must occur as with anything new,” says Carlos Domingo, CEO of Securitize. “But if you compare this to the internet, to email, to bank transactions, to your car—before too long, you are comfortable that they work, are better than the old way, and you can’t imagine life without it. That is what we will experience as tokenization improves finance.”
Tom Taulli is a freelance writer, author, and former broker. He is also the author of the book, The Personal Finance Guide for Tech Professionals.