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Moody’s sees tokenization opportunity in private capital, alternatives

tokenization asset management funds

At the recent Digital Securities and Tokenization event, Moody’s Rajeev Bamra highlighted the shift in demand towards illiquid assets in pursuit of higher returns, with tokenization as an enabler. German asset manager Union Investment’s Christoph Hock said Generation Z has a desire for more investment choices.

Surveys show tokenization sweet spots

Before exploring the panel, recent research reinforces these positions. Citi Securities Services published a survey earlier this week that addressed the Moody’s point. It highlighted a mismatch between the sell side, which sees benefits from the tokenization of listed equities and public debt, versus institutional investors who see the appeal of tokenization for private equities and debt.

Late last year, Bank of America published its survey of wealthy Americans, which indicated divergent investment interests based on age. Real estate was popular across the board but little else. Listed equities failed to make it into the top five investment preferences for those aged 21-42. The leader was crypto and digital assets (this was pre FTX collapse). Direct company investments, private equity and ESG filled out their favorite five.

The contrasting interests is relevant given an estimated $84 trillion in wealth will pass to younger generations in the next 22 years in the U.S. alone.

Tokenization – democratizing access

One of the goals of tokenization and digital assets is to lower the cost of issuing and administering funds. Historically, illiquid assets have had high minimum investment sizes from $500,000 to $2 million, which meant they were only accessible by pension funds and other institutions, not accredited investors or high net worth individuals.

Moody’s Bamra pointed to the potential of tokenization to support fractional ownership – smaller investment sizes – which in turn expands the investor base, generating greater liquidity. 

He noted that recent research (Preqin) predicts that global assets under management for private capital will almost double to $18 trillion by 2027.

“With a market that is exponentially growing, tokenization can potentially drive growth in private asset investing, generating new flows and leading to revenue expansion for the industry overall,” said Bamra.

Hedge fund uses tokenization to expand investor base

Another speaker was from Fasanara Capital, a $4 billion London hedge fund. One of its specialities is private credit loans that it securitizes.

“What tokenization offers is instantaneous messaging, reconciliation and settlement at the same time. It’s not a synchronous process, it takes place in real time,” said Matthew Low from Fasanara. 

In the past they dealt with pension funds with $2 million ticket sizes. The efficiencies of tokenization means “you can start going to accredited investors who have $5k in their pocket.”

Generation Z driving change

Union Investment’s Christoph Hock believes Generation Z and the expectation of accessibility built through smartphone usage are drivers of tokenization.

“With Gen Z as a driver you see changing investor behaviour in retail. It’s more the individualization factor, lifestyle investing,” said Hock. Performance matters, but these investors also expect more choice.

Meanwhile, for years Carlyle owned fund distribution firm Calastone has been talking about tokenization enabling investment personalization for asset managers. Since 2019, part of its infrastructure has been blockchain-based. Now, it is working with Schroders exploring using public blockchain for personalization as part of Singapore’s Project Guardian.

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