Modern investor management through digital securities

This article is to explore how both sponsors and investors will benefit from incorporating digital securities behind the scenes of their investor management function.

Private real estate investing is complex, requiring sponsors to manage two separate businesses: managing the real estate and managing private investors. 

In today's competitive environment, generating above-market returns is challenging enough, and managing investors can be inefficient, complex and time consuming - particularly in terms of compliance and meeting rising investor expectations in competition with other alternative assets. 

The continued adoption of digital securities (separate from digital currencies) offer the potential to radically improve the investor management for sponsors.

GP Flow is one company working on this future, and the purpose of this article is to explore how both sponsors and investors will benefit from incorporating digital securities behind the scenes of their investor management function.

Sponsors: the challenge of managing private market securities

Investor management for sponsors includes sourcing investors, tracking information, communicating updates, and managing their positions across multiple properties and portfolios. Regulatory compliance is also critical - ensuring that all parties are acting in accordance with registration or exemptions like 506b and 506c, Rule 144 and other pieces of the law.

Tons of inefficiencies arise from these manual processes, information asymmetry and reconciliation costs between stakeholders - because of this, updates, transfers or flexibility of private securities is almost non-existent or requires distracting the GP  to sort through the headaches.

As an example - a sponsor with investors who want to buy or sell their ownership positions in a specific fund managed by the firm today needs lawyers, compliance checks, escrow, settlement, cap table reconciliation from all parties and a number of weeks to get the job done. 

Investors: rising expectations of alternative asset investing

Unlike stocks or bonds, private real estate is illiquid, which holds back many investors from getting involved in the asset class. Investors in private real estate are normally enticed to forgo their capital for 3- 7 years - even as their individual circumstances may change.

As more investors turn to alternative assets to diversify their portfolios, they are increasingly looking for investments that provide liquidity, transparency and flexibility. 

While real estate has traditionally been viewed as an illiquid investment, the rise of digital securities and blockchain technology has the potential to make real estate investing more comparable to other alternative investments such as stocks, bonds, and digital currencies, which are viewed as more liquid and accessible - especially for younger generations.

As investor expectations continue to rise, sponsors must adapt and embrace new technologies to remain competitive for capital and attract new demographics of investors.

Why digital securities make sense

Digital securities help GPs and LPs provide greater transparency, efficiency, and access  in the investment process. 

  • Transparency: Digital securities provide investors with real-time access to their investment data, including transaction records and performance metrics. This builds trust and helps investors make more informed investment decisions.
  • Efficiency: Digital securities automate many of the manual processes involved in investor management, such as the compliance, distributions, and the tracking of investments. This helps save time and reduce operational costs.
  • Access: blockchains can automate many of the compliance checks involved in investment management, such as KYC (know your customer) and AML (anti-money laundering) checks, ensuring that all parties are acting in accordance with applicable laws and regulations. This enables broader and lower friction access to real estate investments.

In light of these advantages, the Boston Consulting Group expects the tokenization of global illiquid assets to reach $16.1 trillion by 2030.

digital securities

Adoption is already here

Digital securities are already being used in a number of ways in the private real estate investment management industry.

  • RealBlocks is a platform that uses blockchain technology to create and manage real estate investment funds. They have $77bn on their platform.
  • RealT offers fractional ownership of real estate through tokenization. The company is based in the United States and is focused on bringing real estate investments to a wider range of investors by breaking down barriers to entry, such as high investment requirements and illiquidity .
  • HoneyBricks (our sister company) is a technology platform that connects investors with high-quality commercial real estate opportunities. We work with leading US real estate operators to enable fractional and transparent ownership of commercial real estate investments.

Overcoming the obstacles

Implementing digital securities requires a level of technological understanding, which is a challenge for adoption of investment managers.

Blockchains are generally transparent, which can be a concern for sponsors and investors who value privacy and there are also legal and regulatory implications related to data privacy and protection that need to be addressed.

Sponsors can overcome these challenges by partnering with companies that specialize in the process - ensuring that the implementation of the technology is streamlined and delivers on its promises.

Where to from here?

GP Flow is helping create the future in which most real estate syndications will be operating as digital security syndications, allowing investment managers to improve operational efficiency, reduce costs, and provide investors with better investor experiences.

As technologies continue to mature, we can expect to see more adoption in the private real estate investment community. As the commercial real estate industry continues to evolve, investment managers who successfully integrate better technology into their operations will be better positioned to thrive.

About the Author

Andy Crebar

Andy Crebar is the Co-Founder & CEO of GP Flow which is on a mission to unlock the potential of commercial real estate.

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