One of the world’s largest wealth managers, Northern Trust, has launched a blockchain system for private equity funds alongside IBM that may disrupt how lawyers work in that industry.
Northern Trust, which has $940 billion under management, has teamed up with IBM and its Hyperledger Fabric blockchain technology to create a system to provide more efficient sharing and communication of a private equity fund’s contractual, regulatory and financial information.
The first commercial use of the technology is with a private equity fund domiciled in UK Crown Dependency and offshore centre, Guernsey (pictured above). The fund itself belongs to Swiss asset manager, Unigestion, which has around $20 billion under management.
Northern Trust said that the move was because although private equity as a means of investment was still very effective, a range of operational inefficiencies in running funds held them back. Part of these inefficiencies, in the view of Northern Trust, was the need for certain legal tasks that slowed down fund management and investment activities.
Peter Cherecwich, president of corporate and institutional services at Northern Trust said: ‘Current legal and administrative processes that support private equity are time consuming and expensive.’
He added that amid the manual paperwork and shuffling of private equity documentation from one party to another there was ‘a lack of transparency and….lengthy, duplicative and fragmented investment and administration processes’.
The answer, Northern Trust believes is to use a blockchain’s unique ability to allow all permissioned parties involved in a business, or in this case a private equity fund, to see a complete picture of transactions and other activities, such as the execution of contracts, with full transparency and also simultaneously around the world.
The blockchain solution allows the fund to transfer ownership stakes and be managed, serviced and audited throughout the investment lifecycle on a transparent platform offering ‘one version of the truth’ to participants who gain access via secured means. Initially, Northern Trust will make the solution available to clients on a selective basis.
The end result is a transparent and very low cost method for sharing legal and financial data and executing business decisions within the fund and among its investors, without the need to funnel all this data and communication through a third party, for example, a law firm.
That said, the system will not necessarily cut out lawyers when needed for more value-added input and instead may actually help communications between funds and legal advisers, as well as other parties such as accountants and other professionals involved in fund oversight. With regard to this point, Northern Trust added: ‘This is an important first step to connecting participants much more effectively, including investors, managers, administrators, regulators, advisors and auditors.’
It is understood that although this is a blockchain system it is not designed to be used for cryptocurrencies, such as Bitcoin, instead the blockchain is there primarily to support data, not money.
Bridget van Kralingen, Senior Vice President, IBM Industry Platforms, added: ‘Blockchain is an ideal technology to bring innovation to the private equity market.’
Meanwhile, Guernsey is understandably proud to have taken part in the ground breaking blockchain private equity venture.
Chief Minister of Guernsey, Gavin St Pier, said in a statement: ‘As a jurisdiction we continually monitor new technologies…and provide a supportive environment where products can not only flourish, but be first-to-market.’
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