Exploring Northern Trust’s PE blockchain tech transfer
At the end of last month, Northern Trust announced the transfer of its distributed ledger technology (DLT) platform for private equity, to fintech company Broadridge.
According to both firms, the move is designed to accelerate the delivery of an industry-wide PE blockchain solution.
In February 2017, Northern Trust premiered the industry’s first ever blockchain technology for the PE industry, with a platform developed for Swiss fund-of-funds Unigestion, in collaboration with IBM.
The fund administration platform, managed by Northern Trust and IBM, enables access to all relevant parties, including regulators when necessary.
Speaking to The Drawdown at the time, Justin Chapman, Northern Trust’s global head of market advocacy and innovation research, explained: “The platform is there to reduce some of the frictional challenges that exist between GPs, LPs, legal firms, auditors, and other stakeholders: creating an ecosystem for these to operate while filling in the gaps with technology.”
The platform supports the transfer of ownership stakes, fund servicing and auditing. Furthermore, it handles fund registration, capital calls, distribution and documentation.
Northern Trust and IBM had worked with Unigestion, its GP board members and regulators from the start of the project, in order to deliver a product with security and control levels stakeholders were comfortable with, while demonstrating the value of a blockchain system.
“To actually have the first deployment of blockchain for private equity was a real forward step for both the PE space, but also for us so we could demonstrate to our partners, clients and regulators that we have a real, valuable solution for the marketplace,” said Chapman at the time.
In March 2018, Northern Trust expanded the blockchain platform to auditors, enabling their own blockchain node, which provides access to relevant fund data, enabling real-time auditing.
To mark the expansion, Northern Trust, PwC and other audit firms in Guernsey, proved that auditors could access fund data held on the PE blockchain to audit specific events.
Transfer to Broadridge
Last month, Northern Trust announced that it was transferring the PE DLT to New York-listed fintech firm Broadridge Financial Solutions.
Broadridge provides investor communications and technology-driven solutions to banks, broker-dealers, asset managers and corporates.
According to Eric Bernstein, head of asset management solutions at Broadridge, Northern Trust approached the fintech firm to support the build out of the platform. “Northern Trust recognizes Broadridge as the best potential partner given our demonstrated blockchain success, scale in the financial services industry and strong relationship with NT. Broadridge has also worked with Northern Trust on Broadridge’s successful blockchain/DLT initiatives, including a proxy vote pilot,” he explains.
Following the transfer, Broadridge is now working on establishing an administrator-agnostic platform, which leverages the DLT. “When fully built out, the technology platform will be available to all PE value chain participants; GPs, lawyers, auditors, fund admins, regulators, LPs and others – all of whom will benefit from direct access to the fund data on the platform. In addition, Broadridge will be developing consumption tools and other applications for all industry participants related to PE,” says Bernstein.
What does it mean for PE?
While this kind of technology appears to be just the solution the industry is in need of – fully transparent and real-time transfer of fund data, what does it actually mean for an average PE fund?
Bernstein explains: “It starts with a contract that occurs between a GP and an LP, and all subsequent operations that occur for all participants will all be on DLT. Any participant that is entitled to see the information will have access to that single record, so there is no duplication of data.”
Bernstein acknowledges that the industry has been slow to develop and adapt to this kind of technology because of the typical outsourced approach. “As a result, GPs and LPs have not required transformation, as although not terribly efficient, it has been working for them.”
For Bernstein, the success of PE-specific DLT depends on positive investor outcomes. “Change in any industry is always hard to get user adoption, but we feel that this change will have such a positive result that the challenges are somewhat mitigated.”
Future“Ultimately, we see this as an opportunity for all alternative assets to utilize DLT. With private equity, we are starting with the most unstructured in terms of data and process and will end with something more efficient, including other potential asset classes like private debt, real estate, infrastructure and hedge funds,” concludes Bernstein.