We’ve spoken before about our dislike of the term ‘democratisation’. We’ve also spoken at length about why retail investors are the next major growth engine for private markets. And one does tend to be inextricably linked to the other. To capitalise on the £17.2trn opportunity presented by individual investors, private market assets need to get a lot more accessible. 

The problem with democratisation is that it normally follows hot on the heels of another buzzword; disruption – a fundamental change to an industry brought about largely by technological advances. The fintech sector has made a point of laying claim to this particular label, but it’s not one you could reliably level at incumbents. While the majority of the largest asset managers have established funds to serve individual investors, the mass influx of retail into private markets – or indeed funds into retail – has failed to materialise. Incumbents don’t have the technological infrastructure to scale these offerings effectively, or extend them beyond high net worths and into true retail; a hugely limiting factor.

The technology problem

On paper, a push into retail markets is a no-brainer for asset owners. Individuals are massively underrepresented in alternative investment funds and have a growing need to diversify now bonds and stocks are positively correlated. Yet, for many institutions, individual investors represent a small part of their assets under management, and look set to remain that way. 

Legacy tech stacks built to service a small number of large investors lack the capacity to onboard and manage huge volumes of individuals. Disseminating real asset investments to individuals also creates additional operational challenges throughout the distribution lifecycle that asset owners simply haven’t had to contend with before. 

The technology solutions proposed to help institutions bridge that gap and facilitate their entrance into this new market have been drastic, demanding a complete infrastructure overhaul. As unsuitable as existing tech is when it comes to supporting individual investors, it remains serviceable for large investors, and there’s an understandable hesitancy among institutions to rip out and replace solutions that still serve the majority of their current business needs. 

The need for partnerships

Blockchain capabilities like tokenization are particularly compelling for anyone seeking to open up private markets. This tech can decrease capital requirements through fractional ownership, facilitate a secondary market to increase liquidity, and automate the asset management process. 

Crypto natives are no strangers to disruption, and are already embarking on projects to develop this use case. The recently announced Tokenized Asset Coalition unites a veritable who’s who of the crypto world to bring real world assets (RWAs) on chain – yet not one member of the line up represents traditional interests. Battle lines are being drawn. Incumbents on one side, crypto natives on the other. 

Which further perpetuates the issues around opening up private markets to private wealth. Blockchain innovators can deliver the necessary technical infrastructure, but are starting from scratch when it comes to sourcing investment opportunities. Institutions can deliver the AUM, portfolios, and regulatory structures to back these use cases, but lack the ability to overhaul their systems in favour of the new tech. If both groups continue to explore these opportunities separately, neither will be able to meaningfully crack retail markets anytime soon.

Evolution not revolution

The solution then is a modular approach to system upgrades, integrating new functionality with existing systems. 

Blockchain, with the ability to facilitate fractional ownership and increase liquidity, will undoubtedly be the means by which institutions address the issues currently barring their entry into retail markets; but it's a left-field solution for an industry unfamiliar with disruption. The nascency of this sector also creates additional risk; standardisation has yet to be established and a lack of interoperability, coupled with the sheer volume of protocols available, means building solutions on blockchain could easily backfire. 

Institutions aren’t in a position to fully embrace blockchain tech in one fell swoop, but they can start integrating it into their stack to address issues around security, transparency and efficiency. Modular blockchain solutions can, for example, be leveraged to streamline auditing, automate AML and KYC processes, and enhance data security. These digital processes can reduce costs and lower risk, providing tangible benefits in the near-term while the industry waits for some of the long-term benefits to be realised.

The future is now

The infrastructure layer that the financial industry was built on is changing, fast. That innovation brings with it solutions and new opportunities, particularly for institutions seeking to tap into the retail market, but it also presents challenges for a sector that’s not faced fundamental change for a very long time. 

In reality, opening up the private markets to individuals will take a combined effort between incumbents seeking to innovate and tech partners that understand both what the eventual destination for the sector will look like, and the technical challenges they’re dealing with now. 

At Hedgehog, we know that blockchain tech can unlock additional industry value, providing a much-needed infrastructure upgrade for financial services today, while laying the foundations to unlock additional growth opportunities tomorrow.

To find out more about our modular approach to system upgrades, contact us today. 

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