Is ADDX the Betterment of the Private Markets?
Over the past decade, the US led the adoption of `Robo Advisors` which have now become mainstream. Now is the decade, for the mainstream adoption of Digital Investing in Private markets and it will be led out of Singapore. History indicates that it will probably take less time to penetrate the current layers of distribution channels that provide access to Private market investments to the various investor classes.
Data speaks and without any doubt, both private banks that serve institutional investors and ultra HNW individuals and Consulting firms analyzing the Wealth Sector for decades, report that:
- Institutional investors have been steadily increasing allocations to Alternatives
- Asset under management in Private markets have been growing over the past 15yrs at nearly double the growth rate of public markets
- Alternative assets have lower correlations to public markets, an increasingly valuable characteristic
Investing in Private markets is not new, but the Democratization of such investments is recent and still at an early stage. In the investment world parlance, we Tag allocations to private markets as `Alternative assets`. Both Private markets or Alternative assets are umbrella terms used interchangeably for investments in
- Private Equity
- Private Debt
- Real Estate
- Infrastructure
- Commodities & Natural Resources
Typically, institutional investors gain exposure to these investments through structures that are costly, with complicated numerous clauses, and difficult to transfer. As a result, they are restricted to large investments (minimum denominations of hundreds of thousand or even one million in several cases).
Despite these frictions, the flow of capital into the private markets is unprecedented. In the annual Global Asset management report, [1] BCG reports that assets under management have been growing annually at a rate of 11% between 2003 and 2020 (compared to 6% in public markets).
The first half of 2021 is a record year for Venture Capital, as c. $280-$300 billion was raised, which is over $110 billion more than the second half of 2020. [2] Bain & Co calls the phenomenon of favoring private markets, the Big Switch.
Fintech is making the Big Switch sustainable. It is shyly but surely, allowing for fractionalization, increased access to construct a diversified allocation that includes all private market subclasses, and more transparency.
Up to now, it was only pension funds, superannuation schemes, sovereign wealth funds, banks, insurance companies, governments and agencies, and a variety of family offices, that could afford to build a diversified portfolio of alternatives.
Fintech is lowering the barrier to enter these markets, starting with offerings that are accessible to accredited investors but with substantially lower minimums — circa $20k — so that diversification and dollar-cost averaging are both feasible. As private markets are still less liquid and in alignment with a long-term investment horizon, consistently allocating over time to this diverse asset makes a lot of sense.
The last two decades have demonstrated that the way for investors to position themselves to capitalize on megatrends such as Fintech, ClimateTech, AgriTech, HealthTech, Aging population, Smart cities, ESG, Artificial intelligence and the other Technologies of the 4IR, is by investing in private markets.
The Monetary Authority of Singapore (MAS) has recognized the importance of this trend. Singapore is the hub for several ventures that are shaping up the democratization of private markets so that it becomes mainstream. [3] The Singapore Exchange (SGX) is a shareholder in both the newly launched Digital Securities exchange of DBS Bank and ADDX, the regulated well-funded Fintech startup.
ADDX has been working on democratizing Capital markets since 2017 and is now licensed by MAS and live with a dozen choices for qualified investors from real estate, private unicorns, Venture Capital funds and Hedge fund tokenized alternatives. They are deploying distributed ledger technology and smart contracts to reduce the inefficiencies of private markets and offer increasing transparency.
Here is a diverse selection of investments on the ADDX app that caught my attention and that provide a taste of the kinds of investments that are only shown to top tier private bank clients:
- A fund focused on pre-IPO tech unicorns in the US, Europe and Asia
- An actively managed, long-only fund by a top Korean asset manager with ESG specialization (50% global — 50% South Korean)
- A Chinese top Venture Capital firm with expertise in the enterprise SaaS (Software as a Service) and productivity solution sectors
- A hedge fund focused on short term equity & debt investments in Asia ex-Japan region
- A European commercial real estate fund designed for stable and resilient income, managed by a seasoned asset manager
Individual and corporate accredited investors that meet the MAS requirements of an accredited investor, can create a diversified portfolio from these offerings.
BCG expects that the Private Equity alternative asset class will strongly outperform over the next five years. In their Chapter ` Private Markets Winning the Next Decade` they outline the reasons that the megatrends of ESG, Data & Analytics, and the rise of Retail investing, are major Private market plays. They also turn the spotlight to Private Credit.
Even though Real Estate has underperformed in the recent prolonged economic slump due to the pandemic, there continue to be opportunities especially for investors with a consistent and disciplined allocation to alternatives.
Think of ADDX like Betterment in the Robo Advisory space. ADDX shows to investors and issuers the way the next generation of exchanges will operate. The back end and middle office architecture of all exchanges will combine elements of Distributed ledgers technology and smart contracts technology.
Think of ADDX like Coinbase or CashApp in the Crypto currency space. Individuals and institutions can download an app and invest with a front-end look and feel that is digitally native but offers the security of a seasoned regulated financial entity in terms of custody and life-cycle management of the investments.
Unlike the other Digital Regulated Exchanges, ADDX is exclusively focused on the tokenization of private markets and any investable structure that provides such exposure. ADDX is not a cryptocurrency exchange.
The process of closing the gap between private markets exposure of institutional investors and the Rest, has started. Peqin reports (9/2020) that Family office allocations to private markets are around 50% (the highest compared to other institutional groups), while foundations allocate around 30% and banks around 10%.
Fintech is enabling `the Rest` to build diversified private market exposure combined with a digitally native user experience.
Last month I spoke in detail with Oi Yee Choo, the Chief Commercial Officer of ADDX on the topic of `Transparency & Access to Private Markets`.
ADDX is a client.
[1] BCG Global Asset Management 2021
[2] Startups have never had it so good — via TechCrunch https://buff.ly/3hRmH7E
[3] Singapore emerges as Asia’s digital securities trading hub https://buff.ly/2OQVg2H
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