The argument for blockchain adoption in private equity is very mixed. While the impact of smart contracts is not in – with many expecting them to take off in the next two years – blockchain’s role in the middle and back office at private equity is more up for debate as transactions are low volume.
“While we are investing heavily in technology, ideas like blockchain are not presently suited to private equity for no other reason than private equity investing and valuations are not a standardised process. Unless standardisation materialises within the industry, then blockchain will probably not be hugely relevant,” said Sarj Panesar, head of business development at Societe Generale Securities Services.
As blockchain implementation will be costly, some private equity managers do not see the benefits, and believe it is better suited in other sectors. “Private equity managers generally carry out three or four – albeit complex and unique– deals per year. I am unsure how a commoditised blockchain product will meet their needs,” said David Bailey, co-founder at Augentius, a private equity and real estate administrator. Many also concede that automation at providers is already fairly robust, so blockchain is unlikely to add much value.
While experts concede blockchain is an awkward fit for private equity, it may confer some benefits. “A lot of private equity managers spend their time highlighting their idiosyncrasies so the concept of using a standardised technology like blockchain can seem alien. However, there is a case for DLT playing a role in some parts of the business, particularly where there are a number of intermediaries. DLT can be used in real estate for document management and for other means of digitising data, for example,” said Priya Nair, global head of product management for private equity and real estate at RBC Investor & Treasury Services.
Some managers agree there is a strong case for blockchain in private equity reporting and document management. “While private equity employs sophisticated strategies – leveraged buyouts, venture capital, and growth capital – its transactions rely on manual processes,” says
Justin Chapman, global head of Market Advocacy & Innovation Research at Northern Trust, which launched the industry’s first commercial blockchain solution for the private equity fund administration market in 2017. “Because transaction volumes are relatively low in private equity, a blockchain solution can bring tangible benefits through the reduction of iterative processes and bilateral sharing of legal agreements and other paperwork. But increased efficiency is just the start – our experience has shown that blockchain can help build trust in private equity relationships through the development of a collaborative ecosystem that reduces errors and the need for constant reconciliation.”
Cynicism about blockchain in private equity is fairly entrenched. Private equity manages assets on behalf of pension funds and insurance companies, and many firms simply do not want to endanger their clients by adopting an untried technology at a time when cyber-security threats are becoming ever more sophisticated. A lot of the unease is, however, made worse by a lack of education about what blockchain is, with a number of managers still failing to distinguish the technology from crypto-currencies.
The distinction is likely to become clearer as financial services firms roll out distributed-ledger-based initiatives that are clearly decoupled from any association with Bitcoin and its digital rivals. At that point, private equity scepticism may begin to erode.