Head of Innovation
High expectations about transparency and access are transforming governance around private capital funds in 2022.
It’s hard to make predictions, especially – as the old saying goes – where the future is concerned. But it is easier, more reliable and more useful to identify trends already in place that are likely to stamp their significance on the months to come.
Three big trends are set to gather pace in the world of private capital in 2022:
- Distinctions between private capital and public market activity are getting narrower.
- Finance is becoming ever more decentralised, changing the power equations of financial centres such as New York, London and Hong Kong.
- Private capital investors are demanding data now commonplace in public markets.
In private capital, 2022 will see technology applied in ways that may alter the nature of relationships between participants.
Investors are likely to take more control
More power will shift into the hands of investors. In public markets, investors have direct influence over governance issues. Boards of directors hold the balance between executives and non-executives – and give room for independent voices to be heard more clearly. Public market investors have a say in remuneration policies.
Investor demands for similar influence over private capital finance may become more obvious, more far reaching and more demanding. Social media, the induction of semi-retail investors into private markets, and crowdsourced opinions will accelerate this. Disintermediation in financial markets powered by new technologies will make information more democratic and transparent.
Public market data and reporting sets standards for private capital
Private capital investment grew in part because fund managers persuaded investors that public market reporting obligations were a burden unsuited to some types of companies and situations, such as turnarounds. Away from the glare of public scrutiny, private capital investments could be given the time to produce returns. And they escaped the accusation of short-termism.
That is now changing – with environmental, social and governance (ESG) concerns providing a case in point. If an investor wants high-calibre credentials when it comes to sustainability, private capital entities need to prove compliance in the same way as their public market peer group.
Equipped with better data resources, investors will have the means to pose new, perhaps tougher, questions. Crowd sourced data, computer power and analytics enable anyone to compete with a reputed stock analyst.
Decentralised finance, or DeFi, tackles two of the main barriers restricting investor access to attractive assets. First, it provides easier access to the data and analytics needed to research investment opportunities; and second, it opens up more convenient access to trading facilities.
Most if not all of the functions of a traditional financial centre can be replicated in the online world of decentralised finance. And because the barriers to entry are lower, many more investors can potentially become involved – and that, in turn, can make for better pricing, more liquid markets and the emergence of new asset classes.
Tokenisation and fractionalisation
DeFi networks are continuing to innovate at pace. One key area for product innovation is tokenisation, whereby traditional asset classes acquire “digital wrappers” that enable transactions to be executed on blockchains in an automated fashion, dispensing with layers of intermediaries.
Tokenisation also allows assets to be divided into chunks small enough to bring otherwise inaccessible markets and investment vehicles within reach of the smallest investors.
For instance, think of a project to build a shopping mall for US$50 million. Traditionally, the project might have been financed by five large institutions contributing, say, US$10 million each. Having only a few large investors meant it was easier to call up capital, disseminate information and distribute returns.
Now, with DeFi fractionalisation, investors with a few thousand dollars – maybe even a few hundred dollars – can join those operating on million-dollar scales.
De-Fi platforms make it easier to trade
Although there are issues around data security, open-source DeFi platforms are likely to play a pivotal role in making data more widely available and make markets more efficient for investors.
DeFi platforms bring the parties to a transaction in a “trustless” relationship where there is no need for a centralised third-party authority. Investment managers sit alongside proprietary and derivatives traders, cryptocurrency and exchange-traded fund (ETF) specialists and publishers of the all-important data on which most investment decisions depend.
In time, all financial assets will be accessible via the networks of decentralised finance. Regulators will become more actively involved – but that won’t neutralise the innovative and low-friction approach that makes decentralised finance so exciting and potentially profitable.
Why Intertrust Group?
We help with the administration of more than $470 billion of client assets and have more than 4,000 employees across the world, combining global and local expertise.
We have expertise in all private capital asset classes, focusing on bespoke corporate, fund, capital market and private wealth services, thus enabling our clients to invest, grow and thrive anywhere in the world.
Intertrust Group is committed to climate actions, flexible working practices and digital transformation.
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