technology

Has Northern Trust Introduced a New Way of Administering Private Equity?

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February 22, 2017

Technology innovation in the private equity industry is always welcomed news – especially when it makes lives easier for private equity funds and their investors. Northern Trust has teamed up with the technology giant IBM to deliver one such solution: a blockchain for the private equity market.

 

The system is currently only being used by a Switzerland-based asset manager, Unigestion. Unigestion, which has around $20 billion worth of assets under management, is using the Hyperledger Fabric based system for the administration of its private equity fund domiciled in Guernsey.

 

What does the blockchain do?

 

The blockchain system works by recording documents and information related to transactions involving the fund. These could be investments by limited partners or transfers of ownership stakes. The system works real-time, providing transparent information for not just the investors and managers of the fund, but also the relevant regulatory authorities. Indeed, the blockchain network supports compliance with local regulations.

 

It first appeared in the market as the system underpinning cryptocurrency bitcoin. The transactions are not maintained or controlled by a centralised authority, but rather a network of computers in the ledger of transactions. This setup creates a vast source of data, which can reduce errors and enhance transparency.

 

Peter Cherecwich, president of Corporate & Institutional Services at Northern Trust, said in the official statement, “Northern Trust’s solution is designed to deliver a significantly enhanced and efficient approach to private equity administration.”

 

While various pilot concepts and systems of blockchain have been tested across the global financial industry, the current project has a major difference: it’s use of the IBM Cloud. Not only is the blockchain already in use in a real private equity fund, the Cloud allows the system to be more transparent and fast moving.

 

The system makes administrative tasks easier and more cost-effective since the transactions don’t need to be manually monitored or applied. In the future, the system could be used for managing capital calls and distributing capital.

 

Getting more regulators on board?

 

The biggest challenge for the project has been regulatory approval. Guernsey’s Chief Minister Gavin St Pier said in the statement, the government saw the right levels of commitment to ensure investor data is protected. Emma Bailey, Director of the Investment Supervision and Policy Division of the Guernsey Financial Services Commission, thanked Northern Trust for engagement and said the authorities are “pleased with the levels of openness and interaction”.

 

Northern Trust and IBM are now looking to take the system further. Cherecwich told the Australian Financial Review that the company is looking to have the blockchain approved in the US and Australia. “In order to be a fund administrator in a jurisdiction, you have to work with the regulator,” he told the paper.

 

Private equity funds are perfect for this kind of technology because they are still largely managed manually. IBM and Northern Trust also believe the relatively lower transaction volume, compared to some other asset class, works for the benefit of the sector in terms of using blockchain. If the technology gets regulatory approval elsewhere and its use proves positive signals, it could change the industry and cut down administrative costs.

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