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Tokenization, the process of converting an asset or the ownership rights of an asset to a digital form using blockchain technology, has gained significant traction throughout the financial services industry. Investors suggest they may allocate 7% to 9% of their entire portfolio to tokenized assets by 2027. Seeing this opportunity, some of the largest financial services companies are investing heavily in the space and bringing offerings and investments to market.
To gain a deeper understanding of investor sentiment, preferences and plans regarding tokenized assets, EY-Parthenon practice conducted two surveys encompassing 251 accredited/high-net-worth (HNW) investors and 78 institutional asset investors in the United States. The HNW investor group consisted of those with >$1m in investable assets and the institutional segment comprised asset owners, including endowments, pension funds, foundations, family offices, insurance general accounts and sovereign wealth funds (with assets under management (AUM) ranging from >$500m to <$50b). The results revealed valuable insights that shed light on the attitudes and intentions of these investors, insights that may help asset managers and other financial services companies in preparing for increased demand and allocation.
HNW and institutional investors are overwhelmingly interested in tokenized assets, with 17% of respondents already investing in them, 25% planning to invest in them and 35% expressing a keen interest in learning more about this asset class. Furthermore, 55% of the surveyed investors expressed plans to allocate funds to tokenized assets within the next one to two years. Their motivation for this strategic move stems from the perceived advantages associated with tokenization, including increased liquidity, lower transaction costs, improved performance and enhanced transparency.
In terms of asset allocation, institutional investors are projected to allocate 5.6% of their portfolios to tokenized assets by 2026. HNW investors anticipate an even higher allocation of 8.6%. This suggests that HNW investors are at the forefront of adopting tokenization, with smaller institutions and investors leading the way. These projections highlight the increasing significance of tokenized assets as a component of investment portfolios, as both institutional and HNW investors recognize the potential value and benefits they offer.
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Read moreDespite the growing interest and enthusiasm surrounding asset tokenization, there are hurdles to widespread adoption that need to be addressed. Regulatory uncertainty emerged as the primary perceived obstacle, with 49% of institutional investors and 24% of HNW investors identifying it as a significant challenge. Given the tumultuous events of the second half of 2022 and early 2023, it is unsurprising that the second-biggest perceived hurdle was a lack of trusted players in the market (selected as top reason by 12% of institutions and 24% of HNW investors).
Similarly, the survey revealed that both institutional and HNW investors prefer accessing tokenized assets through traditional intermediaries, presenting an opportunity for established asset managers to enter. These institutions include brokers/dealers, exchanges and wealth managers. This preference for established distribution channels indicates the importance of leveraging existing infrastructure and trusted intermediaries to facilitate the integration of tokenized assets into investment strategies.
The survey revealed a particular interest in tokenized alternative assets, with 62% of HNW and 86% of institutional investors ranking it as their first asset of choice, compared with equities, fixed income, cash and money market funds. Within this category, private equity and real estate emerged as the top choices among investors, with 59% of HNW and 63% of institutional investors ranking private equity as a first or second top alternative, and 49% of HNW and 56% of institutional investors doing the same for real estate.
The appeal of these tokenized assets for HNW investors and smaller institutional investors lies in the potential to access this traditionally exclusive asset class with greater ease and lower minimums. A significant 55% of HNW investors expressed a desire for better access to alternatives. HNW investors often face challenges when it comes to accessing alternative assets, particularly those with fewer investable assets. Among survey respondents, only 38% of HNW investors with <$10m in investable assets felt they had adequate access to the asset class, whereas 58% of investors with >$10m said the same.
Looking ahead, a substantial number of investors have plans to invest in tokenized real estate. Sixty-five percent of HNW investors and 32% of institutional investors have expressed their intention to allocate funds to tokenized real estate by the end of 2024. Interestingly, there is a slight preference among investors for direct access and ownership of a specific real estate asset, rather than ownership through a fund. For institutional investors, 33% preferred direct access, compared with 22% that favored ownership via a fund. Among HNW investors, the preference was 33% for direct access vs. 30% for ownership through a fund.
Furthermore, institutional investors would consider investing in real estate without voting power over decisions related to the property. For example, 63% of institutional investors would contemplate direct real estate investments where they do not have voting power over decisions such as selling, renovating or making improvements to the property if it meant a lower investment minimum.
In terms of paying for access, 45% of HNW investors expressed a willingness to pay more for direct real estate equity investments if it got them access. Among this group, a majority (55%) would be willing to pay the equivalent of more than 10 basis points for such opportunities.
The demand for better access to alternatives and the appeal of private equity and real estate as tokenized asset classes underscore the changing landscape of investment preferences. Understanding and catering to these preferences will be crucial for asset managers and institutions seeking to meet the evolving needs of investors.
A significant 64% of HNW investors and 33% of institutional investors have plans to invest in tokenized bonds by the end of 2024. This grows significantly through 2026, during which an impressive 91% of HNW investors and 83% of institutional investors anticipate allocating funds to tokenized bonds.
When it comes to preferences within the tokenized bond market, institutional investors and HNW investors alike show a preference for tokenized corporate bonds. Specifically, 70% of institutional investors and 69% of HNW investors prefer tokenized high-yield bonds. This indicates a focus on bonds with higher potential returns, reflecting the risk appetite of these investors.
A majority of investors, both institutional and HNW, require a higher yield to participate in the tokenized bond market. Approximately 80% of institutional investors and 83% of HNW investors seek a higher yield compared with traditional bonds, with the majority expecting a 5 to 10 basis points (bps) increase. The requirement for higher yield may stem from the perception that tokenized assets are more operationally efficient, and, as such, investors expect some amount of operational savings to be passed on in the form of lower fees or higher yield.
The survey findings highlight the growing interest among HNW and institutional investors in tokenized assets and reveal a clear trend toward meaningful capital allocation to tokenized assets. Asset managers evaluating tokenization should:
Asset managers, and financial services firms in general, need to stay informed on this technology, as tokenization has the potential to reshape the investment landscape. Understanding investor preferences and addressing regulatory challenges will be key to unlocking the full potential of asset tokenization, while leveraging traditional distribution channels to cater to investor needs and preferences.
Brendan Winkler, Scott Mickey, Lauren Valla and Pranav Saravanan contributed to the article.
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