As institutions continue to dip their toes into the world of digital assets, KKR & Co. is the latest to enter the space by tokenizing a part of one of its private equity funds — a step that may provide institutional private market strategies to more individual investors.
“We’re big believers in blockchain technology and the role it’ll play in shaping future private markets,” Dan Parant, managing director and co-head of U.S. private wealth at KKR, said to TechCrunch.
KKR is one of the biggest investment management firms in the U.S., with $491 billion in assets under management as of June 30.
The fund, KKR’s Health Care Strategic Growth Fund II (HCSG II), which provides exposure to the investment firm’s health care growth equity investing strategy, will be tokenized on the layer-1 blockchain Avalanche by digital asset securities firm Securitize.
This fund has been a process four years in the making, according to both Parant and Carlos Domingo, the founder and CEO of Securitize.
“I met Dan in 2018,” Domingo told TechCrunch. “Using blockchain and tokenization as a way to democratize financial services has been in our mission since the beginning even before Avalanche existed. We shared that vision.”
But in 2018, there was no way for this to happen, Domingo said. “In the past four years we have collectively built the infrastructure to get to the point where KKR could take a step forward to doing this.”
At the time, permissionless blockchains were not scalable yet, John Wu, president of Ava Labs, said to TechCrunch. “Also, frankly, the world commercially wasn’t ready for it.”
HCSG II will first be opened to qualified purchasers — around 2.6 million people in the U.S., Domingo shared. Qualified purchaser status is reached when a person or a family business has an investment portfolio with a value of $5 million or more. “Hopefully we’ll start doing things for accredited investors then retail investors, but this one is for qualified purchasers.”
“The health care fund has a history of high-quality investing and health care as we all know is very supported as an asset class,” Wu said. “It’s also something uncorrelated to other markets, so it’s a good time to do this.”
In general, investments in private equity have been primarily available to only large institutional conglomerates or ultra-high-net-worth individuals, but by tokenizing this fund, it will provide broader access to private market investing, Securitize said in a statement.
“Historically, there has been so many barriers for making private markets hard to access and difficult to implement for individual investors,” Parant said. “Our mission is to provide individual investors with access to the same alternative investments and opportunities that institutional investors have had for decades.”
Institutions today allocate about 30% of their assets into private markets, Domingo said. But compared to individual investors and qualified purchasers — all the way down to retail investors — that percentage of allocation is “very low or close to zero” because there’s little to no ability to get into private markets, he added.
“Making these assets accessible will be a way for them to diversify their portfolio and not just invest in what they have today through crypto and public markets,” Domingo said. “This is a huge trend that could help asset managers in the space. … There’s a huge untapped pool of capital in the space as well.”
Parant said there will continue to be a shift toward blockchain to make it easier for individual investors to access and implement private markets in their portfolios.
“Even with the front end being automated a bit, there’s still improvements to be done,” Wu said. “With the back end, there’s a lot of inefficiencies and so many different participants are taking their little percentages out of the system, which could create a barrier for issuers to go after smaller tickets.”
Now that multiple layers of processes and some intermediaries can be eliminated, it could make it so it’s more economically efficient to make smaller investments, Wu said.
“The firms I’ve seen have giant floors dealing with everything in the back end. If you can make that process more efficient, it’s not only cheaper but also faster,” Wu said. “You need innovative people … and innovative technology.”
Over time, this will be a “big benefit,” even for intermediaries, Parant said. “Today there’s a lot of wealth managers out there where accessing alternatives is also inefficient for them. We think blockchain processes and tokenizations here will also be helpful for that intermediary market.”
Parant said he thinks blockchains will continue to play a role in the entire value chain of markets — everything from the front end to going through AML/KYC (that’s anti-money laundering and know your customer guidelines) to then all of the reporting for the fund and the secondary markets all on blockchains, he said. “Ultimately, I think all of that can move on the blockchain. There’s a lot of friction in that value chain so it’ll just make it more efficient for all, including institutions as well.”
“I’m expecting a lot of the other asset managers we’ve spoken to over the years will wake up to this and really start thinking seriously about doing the same thing,” Domingo said. “This is a pivotal moment in the industry in seeing tokenization taking off.”
As for KKR, Parant said the firm plans on focusing on HCSG II for the time being but is open to doing more tokenized funds in the future.
“This is just going to be bigger and bigger in bigger,” Wu said. “I think in five, 10 years, we’ll have hyper-tokenization. Anything that has value or cash flows can be tokenized.”
“The market is only going to grow. This is the very beginning,” Wu said.
Domingo agreed. “There’s a lot of stuff that will happen here that we don’t even know about yet.”