Tackling integration of new digital solutions with existing real world systems
Once an institutional asset manager realises the potential power of blockchain technology to enable the distribution of their private markets products to investors in the private wealth segment, they may ask themselves, “where do we go from here?”.
Below, we run through the 3 foundational questions that need to be answered when we sit with an institutional asset manager and their counterparts who want to use Hedgehog’s blockchain technology to facilitate the distribution.
Asking the right questions
When approaching Hedgehog, the asset manager brings with them other key parties necessary for the successful launch of a private markets product tailored towards private wealth clients:
- Distribution partner(s) with the private wealth clients
- Service providers — fund administrator, transfer agent, depositary who conduct the necessary product operations to run the fund
The answers to the questions we ask these parties at the outset will feed into the subsequent work streams and lay the foundations for the blockchain solutions to be utilised. They will influence product structure, product operations and integrations between the parties, as well as the benefits that can be realised using blockchain.
“What is the product vision?”
Structuring will be the starting point. The asset manager may have internal resources dedicated to legal and operations, however, Hedgehog can provide specialist consulting on private wealth product structuring, regulatory compliance and associated product operations necessary to run a successful product.
Before Hedgehog can provide any advice, the asset manager must decide on a few things such as, if the products they want to focus on will be open or closed ended, what the target client looks like, what the target client jurisdictions are, if the product will be fully paid in or not, and any liquidity mechanisms, if applicable.
Hedgehog’s integration at this point is mostly manual, advising on how to best organise the product and its operations in order to make something digitally native, ready to unlock the benefits of blockchain.
“What’s currently working and what isn’t?”
The main point to understand is how all parties currently involved manage their own internal product operations and processes, and how they interact with each other when running a fund product. Understanding these processes, as well as how to improve them, are key to utilising blockchain technology to its full potential.
These benefits — typically realised in decreased costs and risks — are numerous. So the asset manager and the other parties need to define which benefits they seek to realise during this partnership. Hedgehog can, of course, advise what can or should be sought, but a lot will become clear through more probing questioning, i.e. how does the distribution channel operate, do they use pooling vehicles, do they want individuals to have any autonomy over their investments, how are the investors onboarded, how are the assets custodied, how are payments facilitated, which other service providers may need to be integrated (i.e. banks, specialist reporting providers, auditors), etc.
Once the current operational processes and interactions are mapped out, Hedgehog can accurately diagnose the pain points. The engineering, structuring and compliance experts within Hedgehog can then advise how these pain points can be overcome using blockchain technology, design a roadmap to implementing the proposed solutions and deliver the product. Data standards will also need to be agreed so the solutions proposed work as intended.
“Which off-chain processes will need to exist alongside the on-chain ones?”
While blockchain technology provides the platform for automation, efficiency and scalability, there are still tasks which must be manually carried out, such as valuations, calculating NAVs, fee calculations and regulatory reporting. A major off-chain process, for the time being, will be the payments clearing and settlements process, for example. The parties must agree who takes care of the tasks that require human input and cannot be automated, and — together with Hedgehog’s engineering team — define the relationship and interoperability between the on-chain and off-chain processes and data.
Building a universal framework
In the end, all parties involved in the partnership should be aligned from an operational perspective, utilising the same blockchain network to manage the operations for the private wealth product and its distribution. The data should be standardised, and many of the tasks that previously required human interaction, will be automated — reducing costs and risks.
But it doesn’t stop there. Ideally, this framework should then be expanded using the collective network weight of the asset manager, the distribution partners and the service providers to form a standardised blockchain network that can be adopted and used throughout the private markets industry. Not only does this prevent siloed private networks from recreating the same framework we have today, it also enables the exponential scale necessary to provide private wealth products to private wealth clients. And that’s exactly what Hedgehog’s mission is all about.
