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Real Deals Q&A - Q&A: How Tokenisation can help create liquidity for funds in Ireland

12 May 2023

Tokenisation has been touted as a game-changer that will transform the private markets. In this Q&A, three industry experts discuss its potential to create liquidity for private funds based in Ireland.

At the table

Chris Thoume, Global head of digital innovation, Apex Group

Peter Walker, Partner, A&L Goodbody

Stephen Hannigan, Senior associate, A&L Goodbody

How does tokenisation provide liquidity to private funds based in Ireland?

Chris Thoume: Tokenisation is proving to improve and increase distribution across private assets globally – reducing friction in the distribution process for private funds and, in some cases, facilitating more cross-border distribution.

There are several different levels of liquidity and current use cases are more internally focused. For example, using tokenisation at the asset level to effectively rebalance diversified open-ended funds’ exposure to illiquid assets, or using it higher up the structure at the fund level to provide liquidity between a known pool of investors.

There are also future opportunities for wider liquidity with this innovative technology and regulatory collaboration. Regulators are increasingly open to the conversation. Luxembourg and Singapore often lead the way in terms of offshore jurisdictions, however the Central Bank of Ireland and FCA are not far behind.

Peter Walker: Current market conditions have not slowed the uptick of tokenisation and many asset managers are still actively pursuing the process. However, it has not yet gained much traction from an external investor perspective in Ireland. Having said that, there is both desire and enthusiasm to move it forward. If anything, issues around rising interest rates are motivating investors to look at better liquidity through tokenisation.


What are the benefits of tokenisation in this way, and how does it work in practice?

Thoume: It’s critical at this point to acknowledge that this liquidity is the perception of liquidity – the underlying asset is still often illiquid. It facilitates professional investors to transact in shorter timeframes than the typical lock-up period or investor transfer timeline of a closed-ended vehicle. It is now about offering private assets to retail investors, but enabling asset managers to transfer assets and rebalance their portfolios. 

There’s a scenario where we have a family of diversified open-ended funds that are looking to rebalance their exposure to private assets as capital flows into and out of the open-ended structures. Tokenisation facilitates easier transfer of those assets between funds. The outcome is that we are targeting a five times reduction in the amount of time to carry out a transfer and rebalance the fund.

This project is still in the MVP stage but this tokenisation will enable the fund to more easily maintain a larger proportion of higher-return illiquid assets and remain within their risk limits. Between Apex Group and A&L Goodbody, we started with the legal and regulatory framework as this is the foundation for the structure; we then began focusing on making sure the operational structure can accommodate or adapt to the fund’s needs.

Walker: In a normal bond construct, there’s a set lifecycle from issuance to maturity. For quite a few private managers who have multiple bonds and structures with varying levels of liquidity, the time and cost of transferring assets in the middle of the lifecycle can be quite extensive. The documentation is often extensive and managers need to coordinate the process between investors, lawyers, custodians and other agents of the bond issuer. Tokenisation is a really strong potential solution for overcoming these hurdles. 

Stephen Hannigan: Tokenisation can make that part of the lifecycle more agile, so much so that managers can change their positions more quickly. As a result, managers can be more reactive, both to market conditions and with implementing legal and regulatory changes. Through tokenisation, many of the processes that slow down the transfer process can be front-loaded, resulting in shortened timeframes, cost savings and overall a more streamlined process.


What regulations or legal requirements need to be considered here, as a result?

Walker: AML is a key consideration, due to investors entering and exiting a structure. Depending on the type of issuer, we need to consider and ensure compliance with certain key pieces of legislation, such as the Prospectus Regulation, Market Abuse Regulation, AIFMD and EIDAS.

From an investor perspective, managers need to consider how tokens are classified by regulators to ensure that the tokenised assets can be held by current and potential future investors in the same manner as traditional private bonds.

Hannigan: There have been great innovations made in recent years with the increase of digitalisation, with market participants becoming comfortable with the use of electronic signatures and the enforceability of electronic contracts. Much of our work is focused on making sure the legal requirements are hardwired into the smart contracts post- tokenisation. Smart contracts need to be automated processes and must have robust checks and balances to ensure compliance with all legal, tax and regulatory requirements.

Thoume: Alongside the governing documents, this forms the basis of the operational activities that the issuer must or can undertake. The effect is that many of the key operational requirements are also coded into the smart contracts. In this case we focused on digitalising the key bond activities: issue, transfer and redemption.

Historically, many of these activities (and associated tasks) would have been undertaken by either Apex Group or A&L Goodbody as part of each process, which is why it takes so long. With the consent of the investor (when they agree to subscription), you can achieve more standardisation and, therefore, digital processes, and a significant reduction in the event lifecycle.

Where an activity is infrequent or does not fit into the usual process, you can enable gates that facilitate a return to more manual processes, which enable a manager to retain the tailored nature of many private asset structures. The art is to maximise the number of digitalised activities while retaining this tailored product. This is where collaboration with your service providers is critical to delivering a favourable outcome for managers and investors. 


This content was produced in association with Real Deals  - http://realdeals.eu.com/article/qa-how-tokenisation-can-help-create-liquidity-for-funds-in-ireland

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