Automation of processes and standardization of inputs, outputs and formats are seen as data management areas that must be improved to maintain a competitive position for private assets managers. Managers know this. Investors are demanding it. There is certainly a will. But finding the way isn’t easy.
Only 40% of State Street survey respondents believe their data management capabilities are at a stage to meet the current requirements of the private markets. (State Street)
72% of respondents said private markets need to become more transparent to make them function on a par with public markets. (State Street)
66% said new products are needed. (State Street)
In today's data-driven world, standardizing processes and ensuring transparent access to information is crucial. Technological advancements play a pivotal role in achieving these objectives, with data lakes and blockchain technology emerging as promising solutions. This article explores how these innovations are revolutionizing the financial landscape and their potential impact on private markets and retail investors.
Unlocking the Power of Data Lakes
Data lakes are rapidly gaining popularity as an efficient means of centralizing and accessing data from various sources. These cloud-based storage environments offer unstructured repositories accessible to multiple stakeholders. Equipped with intuitive interfaces and powered by artificial intelligence, data lakes enable analysts to extract specific information from the vast pool of data. The resulting analytics can be conveniently displayed on communal dashboards, facilitating easy comparison and analysis across different teams.
Tokenization and Fractionalization with Blockchain
Another technological breakthrough with immense potential is blockchain technology. By leveraging the underlying principles of cryptocurrencies, this innovation enables the creation of liquid digital tokens for private assets or fractional shares of large illiquid assets. Tokenization and fractionalization have the potential to revolutionize the liquidity and accessibility of private markets, allowing for seamless digital trading and ownership of securities.
The Path to Mainstream Adoption
According to a State Street survey, tokenization is expected to become a mainstream practice in the private markets investment landscape, although opinions on the timeline vary. While 20% of respondents predicted adoption within two years, 38% believed it would take longer, and another 38% considered it unlikely within the next decade. Nevertheless, institutions recognize private markets as the primary beneficiaries of digital tokenization, with private equity, physical assets, and private credit identified as the top asset classes for potential tokenization.
Empowering Retail Investors
One of the most significant advantages of digital tokenization is the potential for retail investors to access traditionally inaccessible asset classes. The digitization of these markets offers online accessibility, cited as a top benefit of digital finance by over half of the respondents in another State Street survey on digital adoption and preparedness. Additionally, asset owners identified retail access as the primary advantage of this technology. The increased speed, liquidity, and lower cost of trading were also noted as important benefits.
Risks and Considerations
While technology opens up new possibilities, it also brings forth challenges. Institutions must address concerns surrounding cybersecurity and navigate evolving regulations that could increase compliance costs. Managing data use and strategy across the organization requires skilled and dedicated data staff who can integrate data throughout front, middle, and back-office operations.
Investing in Holistic Data Management
To fully harness the potential of technology, organizations must consider a holistic data management approach. This long-term investment requires substantial financial resources, with leading managers of private market assets typically spending millions annually on third-party solutions and software. Considering internal capabilities and talent, the costs can exceed $10 million per year, according to McKinsey.
Technology is reshaping the financial landscape, offering new opportunities for transparency and access to data. Data lakes and blockchain technology are revolutionizing the way organizations handle information and assets. As tokenization and fractionalization gain traction, private markets stand to benefit significantly, while retail investors have the potential to access previously exclusive asset classes. However, organizations must carefully manage the associated risks and invest in holistic data management solutions to maximize the benefits of these technological advancements.