How tokenization in asset management is driving meaningful opportunity

Tokenization has gained significant traction throughout the financial services industry, particularly in the asset management sector.

In brief

• Tokenization, the process of using blockchain technology to convert an asset or ownership rights of an asset to digital form, is drawing substantial interest. 
• Investors indicate they are interested in allocating 7% to 9% of their full portfolio to tokenized assets by 2027. 
• Investing in tokenized alternative assets, particularly real estate and private equity, is an area of interest for institutional and high-net-worth investors.

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.

Conclusion

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:

• Develop their product strategy now – evaluating their route to market via internal capability build or partnering. 
  • Thirty-seven percent of institutional and 61% of HNW investors plan to invest in tokenized assets this year (2023) or next (2024).
• Consider how tokenization may help raise capital from HNW retail and small institutional segments.
  • HNW investors plan to allocate 6.3% to tokenized assets in 2024.
  • Institutional investors with <$1b in AUM plan to allocate 4.1% to tokenized assets in 2024 vs. 2.3% of those with >$1b in AUM.
• Plan piloting tokenization with the most in-demand asset classes, namely private equity and real estate.
  • Sixty-three percent of institutional and 59% of HNW investors ranked private equity as the first or second tokenized alternative of interest, with real estate a close second.
• Understand the competitive advantage they have as the market has demonstrated a clear preference for traditional players vs. FinTechs/digital native players.
  • Eighty percent of HNW investors and 77% of institutional investors want distribution of tokenized assets through traditional financial institutions.
• Evaluate a tokenization pricing strategy with an understanding that they may be able to charge a premium in the retail segment on alternatives, but may need to reduce fees to entice institutional investors. 
  • Fifty-five percent of HNW investors want access/better access to alternatives.
  • Forty-five percent of HNW investors would be willing to pay higher fees to access direct real estate equity; of these, the majority would pay between 0 and 50 bps.
  • Fifty-seven percent of institutional expect lower fees on tokenized assets vs. comparable traditionally issued assets.
• Analyze deal structures in which real estate investors don’t have voting rights over real estate property, but can enter at lower minimums.

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.