How Tokenization Can Fuel a $400 Billion Opportunity in Distributing Alternative Investments to Individuals
R24 TOKENS
R24 Tokens are digital assets in the Runic24 Café ecosystem, backed by $24M to fuel & elevate transformative experiences
Tokenization could revolutionize access to alternatives, unlocking revenues for managers and distributors while enabling higher-quality portfolios for wealthy individuals.
By Tyrone Lobban, Nikhil Sharma, Dennis Cristallo, Bernhard Marschitz, Mitch Port, Thomas Olsen, Brenda Rainey, and Stephan Erni
At a Glance
Closing the supply and demand gap within alternative investments
Alternative investments (alternatives) such as private equity (PE), private credit, real estate, and hedge funds can potentially enhance returns and provide diversification for investors. They are often considered more complex than traditional assets and require a longer investment horizon—in many cases, 10 years or longer. As a result, these products are primarily marketed to sophisticated institutional investors that do not have immediate liquidity needs.
Given the lack of common infrastructure and standards among such funds, alternatives typically have been more cumbersome to manage from an operational perspective. Alternative asset managers thus often only find it economically attractive to accept a limited number of large-ticket investments (more than $5 million) into their funds. That floor essentially prevents many individual investors from accessing these products.
Despite the historical preference for institutional investors, alternatives managers have tried to expand access to individuals for years. Bain & Company research offers insights into the forces underlying this desired expansion:
Alternatives managers face growing fund-raising challenges from institutional investors as supply exceeds demand. Consider the fund-raising results from the first half of 2023, when, according to Preqin fund-raising data, PE fund-raising supply was three times higher than investor demand—the widest gap since the financial crisis.
Individuals control over half of global wealth, but only about 5% of their wealth is allocated to alternatives. Global wealth is essentially evenly distributed between institutional investors (such as pension funds and sovereign wealth funds) and individual investors, with individuals holding approximately $150 trillion of the $290 trillion global wealth pool. (Qualified investors in most countries are those with more than $1 million in investable assets. We define high-net-worth individuals as having $1 million to $5 million in investable assets; very-high-net-worth individuals as having $5 million to $30 million in investable assets; and ultra-high-net-worth individuals as having more than $30 million in investable assets.) However, high-net-worth investors are significantly under-allocated to alternatives, with only about 5% allocated in their portfolios (see Figure 1).
A November 2022 Bain study of 418 high-net-worth to ultra-high-net-worth individuals found that 53% of individual investors with $5 million or more in assets plan to raise their alternatives allocation over the next three years, primarily for improved diversification (60% of respondents), for higher returns (25%), and based on advisor recommendations (15%). The survey found that the main reasons to accelerate allocations to alternatives are enhanced liquidity
The opportunity to expand into the individual investor segment has led major alternatives managers such as Blackstone, KKR, Carlyle, and Apollo to sharpen their focus on individual investors for future growth (see Figure 2).
Yet despite interest on both the demand and supply sides, offering alternatives to individuals in an intuitive, seamless, and digitally native way has remained elusive.
As a result, fund managers and digital platforms have recently begun exploring tokenization of funds to expand access to individuals. These early movers are testing whether tokenization can streamline the operational processes
Tokenization could catalyze modern operational infrastructure, which would benefit fund managers, distributors, fund administrators, and investors through a more streamlined investment process, with the added potential for enhanced liquidity, greater borrowing ability, and customization.
While individuals stand to benefit the most given their relatively low alternatives allocations and smaller ticket sizes, these innovations could also benefit traditional institutional clients, which make up 84% of alternatives investments globally.
This paper describes how blockchain and tokenization could directly address the distribution challenges facing the alternatives industry and offers practical approaches to how tokenization solutions can achieve scale. The goal is to enable a new paradigm for robust alternatives distribution to both institutions and individuals, potentially yielding an approximately $400 billion annual new-revenue opportunity.
Complexity limits distribution to the approximately $150 trillion individual investor segment
From the perspective of asset managers and distributors, the current workflows involving alternatives are siloed and require handoffs among many participants, raising administrative burdens and operating costs. Offering alternatives is a complex business that involves many parties, providers, processes, and technology stacks, with limited standardization and automation across the end-to-end lifecycle and with each participant having their own systems. This complexity is further compounded by the variety of investment products available, each of which holds different asset classes (credit, equity, real estate, venture, and so on). Each asset class has its own nuances, including how investments are funded, how investors access their capital, and on what terms they do so. Connecting this disparate information across a broad investor base becomes more complicated and costly as the number of investors in each fund grows.
For a typical alternatives product, the key participants and providers are the following:
Alternative asset managers create and structure investment products and set distribution and investor servicing strategy. Alternatives management firms generally maintain their own sales and investor relations teams, which market the firm’s funds directly to institutional investors and through distribution platforms such as wealth managers to reach individuals.
Wealth managers and other distributors identify alternatives offerings that fit the needs of their client base, perform due diligence to assess the quality of the investment offering, structure feeder funds (if needed), and market alternatives to investors and service investors throughout a fund’s lifecycle.
Investors make the final investment decision. High-net-worth individuals generally invest based on a recommendation from their wealth manager, while institutional investors generally have their own investment teams or hire investment consultants to identify attractive investments. These investors provide capital to the fund in accordance with the fund’s terms and structure, and earn returns based on the performance of the fund.
Fund administrators and transfer agents maintain the books and records of the fund (including the investor register, unit register, and asset register); process subscriptions, redemptions, capital calls, distributions, and transfers; and maintain ownership of the know-your-customer (KYC) process.
The end-to-end process undertaken by alternatives managers typically breaks down into at least the following stages:
Across each of these participants and throughout the fund lifecycle, there are a considerable number of touchpoints, often taking place in a highly manual, bespoke manner, with multiple reconciliation points along the way (see Figure 3). This complexity results in higher costs and slower settlement times, which can hinder the managers’ ability to expand their offerings to a broader set of investors.
A standardized workflow and common platform that market participants could access would alleviate many of these pain points but has not yet been established.
Education, access, and utility prevent adoption among individuals
While it is complex for managers to service individual investors, it is equally challenging for individuals to access alternatives.
This does not mean individuals are not interested; in fact, the November 2022 Bain study indicated that more than half of very-high- and ultra-high-net-worth individuals and nearly 40% of high-net-worth individuals plan to increase their allocation to alternatives over the next three years, mainly in expectation of improved diversification and higher returns.
Demand from this large, mostly untapped investor base clearly exists, yet several barriers impair their seamless participation in alternatives. These barriers include the following:
Education: Some 40% to 50% of individual investors in the Bain survey said limited education about alternatives prevents them from investing. Alternatives strategies can be esoteric and difficult to understand, and they often provide limited transparency to investors. This makes them one of the more difficult asset classes for distributors to sell to individuals.
Access and sourcing: Accessing alternatives can be opaque, cumbersome, and costly. There is no industry-wide marketplace, so individuals have to rely on advisors and relationships to source deals. Another challenge is that the minimum investment sizes can be $5 million or more, often too high to allow sufficient diversification within alternatives and at the overall portfolio level. In addition, certain jurisdictional regulations have criteria that define who can access which investment offerings. In the US, for example, investors must be qualified purchasers ($5 million or more in investments) or accredited investors (more than $1 million in liquid net worth) to access most nonregistered investment offerings, according to Title 17 of the Code of Federal Regulations Parts 230 and 240.
Liquidity: Current arrangements provide limited liquidity options, with the total term on PE funds often extending beyond 10 years—longer than most individual investors are willing to lock up capital. Furthermore, capital calls are unpredictable and are usually issued with short notice, making it difficult and stressful for investors to manage their liquidity.
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Operational and administrative: Compared to traditional investments, the overall process of investing into alternatives can be daunting. Subscription documents are long, requiring patience and attention whether completed electronically or manually. Funding investments typically involves sending wires two to three days prior to being recognized as an investor. Fund administrators can have significant onboarding processes, and reporting is not as timely compared to that of traditional assets.
Current solutions fall short of a seamless experience
The industry’s efforts at overcoming barriers to broader access to alternatives have involved building products tailored for individuals, namely the following:
In sum, while these products provide individuals with access, they have effectively shifted the operational overhead from fund managers to distributors, while adding costs for investors. Although helpful today, these options do not inherently have the scalability, automation, or simplicity required for a streamlined, digital, low-touch investor experience. Therefore, rather than being replaced by new solutions, these structures could be enhanced by enabling broader, streamlined distribution and reduced costs that could be passed on to end investors.
Distributors, for their part, face other barriers. Manually intensive processes create substantial administrative costs and operational risks. Fragmented systems across intermediaries require complex reconciliations that can result in delays. These firms have responded to increased volume by investing in personnel and technology systems. However, this response falls short of addressing issues of core workflow fragmentation, disjointed ownership data, and sporadic capital calls and distributions.
Tokenization offers a new, scalable approach
Tokenization and blockchain offer a potential solution to the challenges of fragmented, nonstandardized processes across multiple participants in the alternatives value chain. At its core, tokenization can enable creation of a shared platform and workflow that enables more seamless, automated order processing, settlement, ownership tracking, and data management.
Tokenization refers to representing ownership and properties of an asset as a programmable piece of code—known as a smart contract—on a distributed ledger or blockchain (see Figure 4). A powerful characteristic of smart contracts is that they contain both the records of ownership of an asset (how much each investor owns) and programmable, automated rules for the updating of those records (computer logic that defines how and when an asset can be bought or sold, for example). In the context of alternatives, the assets to be tokenized are alternative fund limited partnership (LP) interests. The actual process of tokenization involves specialized software that can create smart contracts with the embedded information.
Since these fund tokens resemble ledgers that record ownership of LP interests as well as the rules under which those LP interests can be transferred, tokens can act as an alternative recordkeeping system that a transfer agent could use instead of a traditional registry of inscribed shares. When combined on the same blockchain ledger with other forms of tokens such as deposit tokens that represent fiat cash, it is possible to enable automated, instantaneous settlement
When all relevant parties have shared access to these programmable on-chain records, a system can be created with much greater automation, less operational friction, and a more seamless ability to manage alternatives
R24 Tokens
Runic24 Café has launched R24 Tokens, priced at $1 each and totaling $24 million in tokenization. This initiative blends dining with investment opportunities, enabling patrons to engage in the café's blockchain efforts.
Key Features of R24 Tokens
Fractional Ownership: Token holders enjoy exclusive benefits at the café, merging hospitality with blockchain.
Investment Opportunity: The tokens offer a unique combination of dining experiences and investment potential, aligned with the café's long-term blockchain goals.
Cultural Inspiration: The café is inspired by 24 distinctive runic personalities, enhancing its thematic appeal.
This innovative approach positions Runic24 Café at the intersection of technology and culinary experiences, aiming to redefine customer engagement and investment in hospitality.
Overview of R24 Tokens
Value Proposition: R24 Tokens signify a shift in how users engage with dining and investment, valued at $1 each.
Adoption and Transformation: The tokens promote cryptic freedom, encouraging widespread adoption in the hospitality sector.
Technological Framework
R24 operates within a complex blockchain ecosystem:
Mining and Halving: Ensures sustainable token issuance similar to Bitcoin.
Satoshi, Lightning, and ASICs: Relate to cryptocurrency mining and transaction efficiency.
Nodes and SegWit: Maintain network integrity and scalability.
HODL and UTXO: Encourage long-term token holding and understanding transaction outputs.
Energy and Gas Fees: Important for blockchain transaction costs.
Layering and Peer-to-Peer Transactions: Enhance security and efficiency in exchanges.
Blockchain Security
The security of R24 Tokens is supported by robust cryptographic principles:
SHA-256 Channels: Ensure data integrity through advanced hashing techniques.
Exchanges and Blocks: Facilitate secure trading environments while maintaining transparency.
Wallets and Economics: Enable effective investment management.
R24 is not just a token; it represents a movement powered by technology and the pursuit of freedom, transforming both dining and investment experiences.
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