Northern Trust’s technology creates records and documentation for investments by limited partners, creating a central record for the fund’s management.
The private equity blockchain allows the fund to transfer ownership stakes and be managed, serviced and audited on a transparent platform – thus every participant in the ownership or management of the fund receives the same version of fund information.
“Electronically, you and I could trust each other because we know inherently in the technology that if you say you have 100 units in the fund and if I say that I want to purchase 100 unites in the fund, I can know that I will buy from you and receive back what I’m purchasing,” said Chapman. “The data I’ve got will always be the same data you’ve got.”
Eventually, transparency and automatic transfer of ownership could help create a strong secondary market for private equity as more funds adopt blockchain administration, said Chapman.
Chapman said that blockchain also allows for easier communication between general partners and investors.
If more fund administrators adopt blockchain, private equity funds could be offered to more investors at potentially lower thresholds, but Chapman believes that demand will keep investment minimums high for the time being.
In the case of the Guernsey fund, PwC Channel Islands is able to access a “golden copy” or immutable master record of the fund’s records from their own offices, allowing auditors to transfer the required data to their internal applications to complete the audit process. Moving forward, audits will be able to be completed in real time as lifecycle events occur within the fund.
“Typically, private equity funds are audited once every 12 months, but by doing it on a real-time basis you end up with more robust governance around the fund itself, which gives confidence in the fund,” said Chapman.
Northern Trust’s blockchain was designed to support ease of compliance with regulators and the local government in Guernsey.
While the firm is identifying other potential uses for blockchain technology, Chapman said its investment applications should be confined to alternatives over the near term.