Financial services group Northern Trust has its first blockchain service live and deployed in the private equity market to automate manual processes out of transactions, and aid transparency for clients and regulators.
The Hyperledger Fabric-based system is now in use on a private equity fund that’s managed by Geneva’s Unigestion, which has $20 billion in assets under management.
“We sat down and said let’s find a problem that needs fixing for our clients and for the marketplace,” says Peter Cherecwich, president of corporate & institutional services at Northern Trust. “Rather than doing proof of concepts to see how the technology would work, we thought let’s look at what problems we could solve and if the technology applies to it.”
According to Cherecwich, private equity is still a very manual class of assets – with a lot of documents going back and forth. The company started to think about developing the platform roughly eight months ago, and in the last six months worked together with IBM to actually deliver it.
Now the Unigestion portfolio can be managed and audited at every stage of an investment with a distributed ledger system that IBM describes as “one version of the truth”. This includes auditors and regulators as well as Northern Trust and the client.
The immediate benefits are in increasing the speed of transaction verifications and transparency across those transactions.
“If you look at it from the general partner side, they have a private equity fund, and the ability to invest the dollars for their clients take a long time from once you set up a fund to be able to go through all the processes until you can invest,” Cherecwich says. “This speeds up the process so that there’s more money flow in the marketplace sooner, because the process is more automated.
“That helps the general partner because the partner has a less costly process but also gets to invest the dollars and get their managing fee,” he explains. “It helps the end client that’s the investor, because they’re able to take advantage of the investment sooner. From our perspective, we are able to be a leader in the fund administration business and help both our private equity clients as well as custody clients.”
In short, transactions in the blockchain are performed and verified immediately, whereas with a more traditional database system in place a transaction can’t be completed until third party verification. Feedback from clients has been positive and others are enquiring about when the system will be made more generally available, Cherecwich says.
Northern Trust says it picked IBM for the project because it was looking for a global partner that was willing to invest and collaborate on the platform each step of the way.
The development of the system was built to support compliance with local regulations. For example, this particular fund is domiciled in Guernsey and so the access keys to the platform also have to be located in the domicile, or risk losing the tax status. But if a fund was created in Luxembourg, for example, Northern Trust would be able to place the keys in that location.
One thing the regulators like, according to Cherecwich, is that they are a node on the chain – so the regulator is automatically able to see all the data that they require. “We’ll work with them so that we can pull the data out and they can get the reporting they need right from the application,” Cherecwich says. “So it will streamline the regulatory process a huge amount.”
Other business benefits could include the elimination of paper and Cherecwich thinks legal fees will decline in time too.
Although this deployment is being received well, Cherecwich warns that the hype around blockchain has been “too much”. See also: Blockchain has its benefits, but can it live up to the hype?
“I’ve been on the record saying that blockchain is not going to change the US settlement system any time soon,” he says. “But the technology does have uses and we can certainly learn from and utilise this.”
“People are inventing things every day, and it moves fast – so the key was to look in the marketplace, collaborate with our clients and the regulators, find where frictions exists, and then apply that technology to the friction. We’ve done that and it works.”
And there could be other uses for blockchain across the business. Cherecwich explains: “If you look at things that are manual peer-to-peer – over-the-counter derivatives, things in the securities lending industry – there are a lot of asset classes that are still peer to peer. And those ultimately I think are ripe candidates for this technology.”