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Private-equity firms push blockchain-based funds despite crypto collapse

Asset managers Hamilton Lane Inc., KKR & Co., Apollo Global Management Inc. and Partners Group Holding AG are pushing forward with efforts to market their funds on the blockchain, the technology that functions as a decentralized ledger for financial transactions.

People close to the firms’ efforts estimate that the total sum raised by blockchain-based private-equity vehicles so far is perhaps around $100 million—pocket change for asset managers that command hundreds of billions of dollars in their traditional funds.

The hope is that blockchain technology can unlock access to wealthy individuals, who can avoid the current cumbersome, paperwork-intensive process of investing in private funds.

Blockchain technology can eliminate some of this transaction friction, said Fred Shaw, chief risk officer and global head of operations for Hamilton Lane, a private-fund manager that has raised several million dollars through funds using the technology and is preparing several other new funds that use it.

“What we’re trying to solve here is making it easier for investors to get into a private-markets fund,” Mr. Shaw said. “We see this as a potential new avenue for making the investor experience better.”

Questions remain about how turmoil in the crypto sector will affect investors’ willingness to commit to investment vehicles that trade on blockchains. Digital assets have sharply declined in value this year and, following the bankruptcy of cryptocurrency exchange FTX, are widely associated with lax risk controls and possible financial malfeasance.

Private-equity firms point out that blockchain technology, which facilitates decentralized financial transactions, is distinct from the cryptocurrencies and crypto exchanges involved in recent meltdowns. Asset managers say that they are using blockchains to provide another way to invest in their traditional funds, not creating new speculative digital assets.

Blockchain-based private-equity funds may face the stigma of high-profile crypto blowups because of the underlying technology, said Hugh MacArthur, chairman of the private-equity practice at Bain & Co., a consulting firm that advises private-equity managers.

While there is “a huge difference” between cryptocurrencies and blockchain-based private-equity funds, “that doesn’t mean that the latter will avoid a halo of scrutiny and negativity,” he said.

For major alternative-asset managers, blockchain-based funds are one of several different routes being explored to gain access to wealthy individual investors, a huge and still largely untapped source of capital. Most private-equity firms raise virtually all of their money from institutional investors such as pensions and endowments.

With institutional investors under severe economic pressure, however, firms are stepping up efforts to reach individual investors by any means possible.

Strategies to reach this group of investors include wooing financial advisers to rich families; launching vehicles on platforms such as those run by Institutional Capital Network Inc. or iCapital, and Moonfare GmbH; using feeder funds, business-development companies and mutual fund-like structures; and even attempting to crack the 401(k) market.

Using blockchain technology and “tokenized” funds is another attempt in the same vein, say people who work on the funds.

Hamilton Lane is among the firms that has most enthusiastically embraced blockchain. In October, the private-fund manager announced plans to offer three tokenized vehicles in partnership with Securitize Inc., which operates a blockchain-based trading system for digital assets. Hamilton Lane hasn’t set a target size for these vehicles but Mr. Shaw, who oversees regulatory compliance and risk management activities at the firm, expects it to be in the tens of millions of dollars initially.

“We’re in the adoption and understanding phase right now,” he said. “These things have to start small.”

Firms are taking different approaches to put assets on blockchains. Last year, Partners Group tokenized a portion of an open-ended investment fund on the ADDX digital-securities exchange, with a lower investment minimum than in typical private-fund structures. KKR also teamed up with Securitize to tokenize a portion of a fund that invests in healthcare businesses.

Hamilton Lane and Apollo separately said last month they will set up tokenized offerings with digital-assets specialist Figure Technologies Inc., running on the Provenance public blockchain.

Apollo, Partners and KKR didn’t say how much money, if any, their blockchain-based funds have raised so far.

Buyout firms say that investors in their blockchain funds require the same legal checks as those who invest the traditional way. Firms operating tokenized funds have to verify the identity of an investor, determine that they meet legal requirements to invest in private markets and conduct other background checks.

“This is not a way to do an end-run around the private-placement rules,” Mr. Shaw said.

But once an investor goes through this on-boarding process, blockchain-based funds can be purchased and sold more readily than a traditional private-equity investment, he said. All the paperwork of a traditional private-markets fund investment “is essentially reduced to a buy button on their app,” he said.

Balanced against these potential long-term advantages are the difficulties of trying to replace a tried-and-true method of investing in private funds—one with established legal and regulatory structures—with a relatively new technology that is often associated with cryptocurrency volatility and fraud.

For Bain’s Mr. MacArthur, the biggest barrier to these funds’ taking off is the aura of insecurity—the lack of clear rules and regulations, and possible doubts about the security of assets on blockchain ledgers.

“There has been a very strong argument put out for years that because of its decentralized nature, the blockchain is more secure” than holding assets with traditional financial institutions, he said. “Is that true? There will be questions asked, and people will have to feel comfortable that it is secure.”


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