Blockchain could create a bigger, leaner private equity market, but the technology is still in its early stages.

In February 2017, Chicago-based Northern Trust launched the first commercial deployment of blockchain technology for the private equity market in a  fund managed by Geneva, Switzerland-based Unigestion that is domiciled in Guernsey, the self-governing island located in the English Channel.

“Private equity firms are interested in innovation and delivering better solutions to their clients, like a new way of doing a particular process,” said Justin Chapman, global head of market advocacy and innovation at Northern Trust. “An asset class like private equity is expensive. There’s a lot of work that’s done bilaterally multiple times and very manually. We decided to try to build this technology and use it to the benefits of all the fund participants.”

More than a year later, Northern Trust’s blockchain experiment has proven that the technology can be effective in creating more efficiencies in private equity investing.

The blockchain was built in conjunction with IBM, based on the company’s existing technology. A blockchain is a “distributed ledger” in which all participants simultaneously edit, store and verify information related to transactions. It is also the underlying technology of bitcoin and other cryptocurrencies that have taken the investment world by storm since last year.

“The way we looked at this was that this is a database technology at the end of the day,” said Chapman. “What’s more interesting is that it creates ecosystems and collaborative environments, databases with shared records where everything recorded becomes one version of the truth. We have complex transactions that require trust and legal certainty, and this is database technology that allows trust to be inherent in the process rather than bilaterally agreed upon between two parties.”

Private equity was a good place to test blockchain investment administration due to the limited number of participants and low transaction volume.

A common complaint about private equity is that it is opaque, time-consuming to invest in and lacking a substantial secondary market. Blockchain is viewed as something that can bring greater transparency and efficiency to the private equity market while increasing the security of transactions.

That’s because the blockchain’s distributed ledger provides real-time information and transparency to all participants, including fund managers, investors and regulators.

“The blockchain controls subscriptions, distributions, calls to the end investor all through the lifecycle,” said Chapman.

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