February 22, 2017 | Written by: Kevin Pleiter
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Today, private equity tends to be an opaque, costly endeavor. Often, ten percent or more is spent on administration. In addition, the administrative activities are manual and can take a great deal of time to complete. In the past, this information (or its owners) was not trusted enough to be digitized.
So when Northern Trust (NT) was looking for an innovative way to modernize private equity, it brought together all the relevant parties: the asset manager, investment managers, general partners, limited partners, fund administrators, auditors, the local government, even the primary regulator. And a partner in IBM to collaborate with to radically rethink the way the industry can operate in the future. Over a relatively quick six-month period, we all worked together to bring the first instance of the Private Equity solution to market.
Paramount to our success was the need for security top to bottom. Without this as the table stakes, we would not have achieved all the parties’ participation. In fact, it’s fair to say that security was what brought together and united the group.
This is why I’m so excited about the announcement today that NT, in collaboration with IBM and other key stakeholders, has launched the first commercial deployment of blockchain technology for the private equity market.
The electronic ledger is deployed on an IBM blockchain high security business network with hardware-assisted cryptography, about which one participant said: “It puts the private back in private equity.”
I’m not talking about a proof-of-concept or prototype. This is a live, production environment encompassing the entire ecosystem. I’d say it’s a game-changer for private equity administration.
Blockchain, which is based on trust, transparency and security, eliminates much of the uncertainly, opacity and worry.
The security rich blockchain deployed by NT and IBM is based on the Hyperledger Fabric, which is an open-source project of the Linux Foundation. The Hyperledger Project has more than 30 highly regarded technology and financial members.
With blockchain, all participants are updated simultaneously with a record that cannot be altered or tampered with. Each change or new transaction creates an immediate, newly shared record.
In this private equity ecosystem, fund information is shared and accessed through digital keys and permissioning, and each participant has a unique ledger and node, creating a single version of the truth. Indeed, NT had an opportunity for which blockchain was the perfect solution.
The NT blockchain network provides real-time insight and transparency to the asset manager, Unigestion, a Geneva, Switzerland based asset manager with US$20 billion in assets under management.
Particularly innovative was granting the regulator – the Guernsey Financial Services Commission – access to the electronic ledger, as required. In fact, the solution was designed while keeping the local government and regulator closely informed.
Ultimately, it makes sense for financial services companies to treat regulators as partners rather than adversaries and to use blockchain and even artificial intelligence to share regulatory compliance across the industry. Compliance is rarely if ever a competitive differentiator requiring the time and expense of specialized compliance expertise within individual institutions.
For more information on IBM blockchain solutions, go to https://www.ibm.com/blockchain/