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In this episode, Oi-Yee Choo, CEO of ADDX, joins our host Bridget Walsh, EY Global Private Equity Leader, to discuss tokenization and democratization of private markets.
In this episode, Oi-Yee Choo, CEO of ADDX, joins our host Bridget Walsh, EY Global Private Equity Leader, to discuss tokenization and democratization of private markets.
Key takeaways:
Democratize investing private markets.
The fund management world, or the private equity world, would like to explore individual investing into private equity funds.
You can also listen to this podcast on Apple and Spotify.
For your convenience, full text transcript of this podcast is also available.
Teaser
Welcome to the EY Next Wave Private Equity podcast, where industry leaders come together to discuss emerging opportunities and industry trends shaping the global private equity landscape.
Oi-Yee Choo
I feel that the world will tokenize in different ways and different parts of that value chain will have to adopt it and be part of that.
Bridget Walsh
That's Oi-Yee Choo, CEO of ADDX, a private markets investment platform for non-institutional investors.
I'm Bridget Walsh, EY’s Global Head of Private Equity. In this episode Oi-Yee will be sharing her views on tokenization and the democratization of private markets. Hello Oi-Yee and welcome to the podcast. It's great to have you with us.
Choo
And great to be with you, Bridget.
Walsh
So perhaps we could start with you sharing a little bit with our audience around what ADDX does, maybe walk us through what the origins were?
Choo
Sure. ADDX is about five years old. We really started with a mission to democratize investing in private markets. And what do I mean by private markets, that's actually quite a big word. It really cuts across what we call alternative investing. So that's private equity, private credit. It could be hedge funds. Investment products that are generally not available to the public in a retail sense.
So that was actually one of the reasons why we started it, because we saw that a lot of private capital were making returns, you know, for example Pre-IPO companies. And we were trying to find a way to make that accessible to everybody, I mean like you and myself professionals who are sophisticated investors who want to diversify their portfolio. So that was the original intention.
The second thing that we concluded with at that time when we explored how to do this was really the growth of interestingly cryptocurrency and the technology that was underlying it, which is a distributed Ledger technology, also known as blockchain. And we have thought blockchain technology is going to change the way we think about the financial world in many aspects, but more importantly, it was very powerful platform for us to build on.
And so what we did was we put together the thinking around blockchain and how to do that for securities and funds, and layered on how do we use that to help private investors or individual investors look at alternative investing.
Walsh
Can you mention some of the funds you're raising capital for?
Choo
We do a lot of work with the local or the Singaporean names. For example, the Sea Town, which is part of Temasek. We also do work with the global names, so some of our supporters are Hamilton Lane. We work with Partners Group. Some of the news would have it, we're also working with KKR.
Walsh
There's been a lot of talk in our private equity world about the 80 trillion dollars of private wealth that is going to be the next explosion of private equity. You know, you enable, as you say, the private investor down to as low as possibly US$10,000 to invest. Where do you see this going? Do you see this 80 trillion as a huge opportunity?
Choo
From our observation, this world has been designed for very large capital providers. And so for I think for a few decades now private equity funds and how they approach structuring and distribution was very much towards sovereign wealth funds. You know, large life insurance companies and many of the bigger sort of asset managers, right? What happened was that individual investors didn't really get the opportunity to invest. But what's happening is, I think the fund management world, or the private equity world, would like to explore individual investing into private equity funds.
And the first thing they do is work with private banks. Obviously, that's a very large source of that, but increasingly I think even individuals, high-net-worth individuals, and at some point retail who hear so much about how exciting the private markets investment world is, will want to have some exposure as well.
Now think about the history of private equity, because the numbers are smaller number of investors but larger capital tickets, it means that you didn't need particularly sophisticated technology solutions for that. What is does mean is today for the average individual to be investing that needs to change. Both at a product structuring level as well as the way that these products are being serviced as well as the way the products are being distributed.
Walsh
And if I’m a Hamilton Lane, for example, you know I'll have my institutional investors today. Why do I turn to an ADDX?
Choo
Part of that, interestingly, was probably already happening in that, I think that's the very next natural source of capital as all of them start to grow their funding needs. And many of the large ones if you observe, are between Apollo, KKR, TPG, many of the big mangers have already started to work with private banks. And I think they see significant flows from that.
The second piece is the way that the world is starting to shift. The public market is no longer really offering the risk return that investors truly want and many of them seek private capital to add portfolio diversification and risk return diversification as well. And the issue there is how do you make sure that smaller ticket sizes get served. And many of them work with us because we have come up with a platform and a solution that breaks that down. But the idea is for an average individual like yourself or myself, we don't have US$1 million to be putting into private equity fund, right? What we want to do is think about a portfolio of you know 20,000 or 10,000 or 5,000 and we want to spread that across private equity, hedge funds, private credit. And therefore, that's why managers start to work with us, because they want to understand what potentially are some new ways of distributing capital and new ways of serving the average, high-net-worth individual.
Walsh
This small ticket size, this small investment size is really possible through the underlying technology you're using. It's underpinned by blockchain and tokenization. Do you want to delve a little bit into that and just explain to our listeners how that works in practice?
Choo
Yeah. So, there's a combination of a few pain points that we realize individual investing faces, right. If, let's say I only want sort of 10,000, there are three issues, three main issues that we try to solve. One is fractionalization. And what we mean by fractionalization is actually about right sizing the investment to your portfolio. For example, I just mentioned the ticket sizes, the ticket sizes help the end investor because they say, well, you know I don't need to commit US$250,000 or US$500,000 or a million to a 10-year fund, I can actually break that down into a smaller ticket size that may be a bit more relevant or appropriate for my net worth and my investment portfolio.
The second is liquidity. When I invest or anybody invests in a fund that’s 10 years, my financial needs are very different from the next investor. Unlike sovereign wealth funds and insurance companies who actually design the investment to be 10 years. For example, if I want to buy a new house or my children want to go to an expensive college, I might want to think about reallocating some of that portfolio and it makes it very difficult if the fund is a 10-year life.
The third is access because for the $10,000 investor he doesn't have a lot of choice. He either is, it has to be a private banking client, which of course now the limits of getting into a private bank get higher and higher because the cost of servicing, are higher and higher. So these are sort of the three pain points we try to solve. Is blockchain necessarily the solution? I don't think so. I think it is a solution.
And technology has to back that, right? So it doesn't matter whether it's blockchain or otherwise. And the reason is, I'll give an example. You don't really need blockchain to fractionalize, all you're doing is you're collecting orders from multiple investors of small ticket sizes, right. You could in theory do that on a spreadsheet. But if you're trying to combine a big number of investors with small ticket sizes and you allow them to trade with each other, you will need something more sophisticated than a spreadsheet. So as I say, it is sort of scaling fractionalization and liquidity which is where technology is required
Walsh
And on that tech side, if we stay with that, you know as an individual investor, then obviously ensuring the security, how do you view all of that?
Choo
What we did was we took blockchain and we designed a compliance layer on top of that. And the compliance layer, which is very much how MAS governs us, right. We have to think about the key risk tenets of any platform, data security, cybersecurity. So one of the first things we did was to create a private permission chain. And what does that mean? That means that us at ADDX, we manage and control all the nodes. So there's no external party that can come in and take information. And we separate obviously, the data that sits on the chain because what's on the chain is really information about the product. So if it's fund, it's the securities, what needs to happen if there's a payment? And the investors, the investors’ information, don't sit on that blockchain. So we have, you know segregation.
And I mean, that's just one example. The second example would be things like KYC and AML. So that's all built into a compliance framework that we operate along the blockchain that completely sort of takes care of that. And frankly for cybersecurity, I mean our security tokens are not useful outside of our platform. So we dramatically reduced risk of hackers even wanting or having an economic desire to come and hack and steal some tokens.
Walsh
When we look at your own business in ADDX, Oi-Yee, a lot of advantages, you know you're early to market, got your proprietary technology and there's an US$80 trillion market out there. How does this play out? What's your future prediction here?
Choo
We see this space slowly globalizing. I think we already have global banks who are looking at blockchain and how to apply that and apply that across different use cases.
For us, it's a wealth management use case. It's a private assets, how do we solve one of the most complex asset class for investors?
So I think from a growth perspective, the idea of having sort of different players, the ingredients have to be right. I think that's or the space has to be right. Right now because as I mentioned, regulators are not harmonized completely on how this is going to happen, I think eventually the real prize is how do we get alternative investments to a size and shape that makes sense for the average retail investor?
And third is, as you say, how does that play cross-border, how do players grow? How the players grab, you know either regional price or global price? And that's something that has I think a long, long way to develop.
So I think all the fund managers and everyone in this space need to understand the evolution of this. And it may not go in a straight line, it may not go from, let's say, someone like us and then you know, we be the eventual model of it. That may not look like that at all.
So many of the managers we see experiment through partnerships or trying to do a bit more on their own. I feel that the world will tokenize in different ways and different parts of that value chain will have to adopt it and be part of that chain. I mean metaphorical sort of chain.
The question is how the value chain is chopped up, right? Is it the structuring that needs some work, or is it the distribution that needs some work? Do we have different blockchains actually now speaking to each other, so that for example, if a big manager like, I may make this up, right, TPG or KKR or Apollo create a fund token, how do they then transfer the fund token from their fund administrator to the end investor? It doesn't matter whether their investor is a big institution or a small-high-net-worth individual, or possibly even a retail client at some point. And so the more that I think we see the experimentation and the adoption, I think the much better it is for us because in these US$80 trillion that you're speaking about, blockchain doesn't create new investment products. Structuring and the distribution still come from traditional thinking. It's the way we digitize, the origination and the subscription process that is going to make this really powerful.
Walsh
How did you end up in this fascinating world, Oi-Yee?
Choo
I came from a traditional investment banking background and to observe what was happening from a trend perspective gave me a very good view and a very good lens about where wealth was heading and how global family offices and ultra-high-net-worth individuals had all these opportunities to invest, but yet they were not really applied across to, you know, the full investor base, as it were. That really fascinated me. It was, how do we take this new asset class and bring it and democratize it and bring it to more investors? And I do love how we can make impacts. I do love how we are participating in a global exercise.
I do love how we're, you know, helping to reshape some of what the technology or technology in general will do to the future of securities, not just in Singapore, but globally.
Walsh
Oi-Yee, this has been a fascinating discussion. Thank you very much for your time and I look forward to watching the ADDX journey in this hugely high-growth market. Thank you very much.
Choo
Thank you for your time, Bridget. This has been fun.
Walsh
That's it for this podcast but do subscribe for more insights from the PE industries top professionals. From me, Bridget Walsh and Oi-Yee Choo, thanks for listening and goodbye.
Teaser
Thanks for joining the EY Next Wave Private Equity podcast. For more insights and perspectives, visit ey.com/privateequity.
End of podcast.
