KKR Blockchain Access To $4 Billion Fund Opens Door To Crypto Investors


As the US Securities Exchange Commission (SEC) cracks down on non-compliant Wild West cryptocurrency firms, a new breed of blockchain application is emerging, designed from the ground up as securities to meet demand. This month private equity giant KKR
KKR
& Co opened a portion of its $4 billion Health Care Strategic Growth Fund II (“HCSG II”) for tokenization on the Avalanche (AVAX) blockchain, giving investors access to the asset class with a fraction of the assets normally required

This effort is the latest move toward blockchain for the investment firm, which goes by the name of The Barbarians at the Gates in the 1989 book of the same name. And companies around the world are working on more compliant blockchain applications.

While the first generation of financial firms to use what crypto-hardliners derided as enterprise blockchain focused almost exclusively on so-called permissioned versions like Hyperledger Fabric and Corda, this latest movement is proving to be open to a wide range of technologies , including public blockchains that anyone can build on.

“Longer term, blockchain has a fair amount of applicability across the private markets value chain,” said Dan Parant, co-head of KKR’s US wealth business. “And so I think that blockchain will make it easier for wealth managers and other players in this space to operate and manage private equity funds, from capital calls to distribution to capital statements, which we’re going to eventually make blockchain a good thing.” .”

Although New York-based KKR, which manages $491 billion in assets, is one of the few – and perhaps first – US private equity firms to open one of its funds to tokenization on a public blockchain, it is an iCapital-led consortium exploring similar opportunities with 18 members including US-based BlackRock
BLACK
, BNY Mellon and others. In separate projects, Singapore-based Addx partnered with US private markets investment firm Hamilton Lane and Switzerland-based Partners Group to source investments in Asia.


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KKR’s secret to being early in the game dates back to 2018, when Parant said the firm held a competition among its employees. There, Parant and his team first identified the possibilities of fractionating investments using tokens on a blockchain, thereby reducing the amount required for investments and expanding the potential universe of financiers. Without blockchain, the typical HCSG-II investor was worth around $100 million. While the tokenized version of the fund was still not accessible to mom and pop types, it was available to investors whose net worth was just $5 million, and for a minimum of just $100,000.

To accomplish the feat, KKR partnered with San Francisco-based Securitize, a broker-dealer who raised $85 million from Morgan Stanley
MRS
and others to issue securities on a variety of blockchains. After an early meeting between Parant and Securitize, billionaire co-founder and then co-CEO of KKR Henry Kravis, who is still co-executive chairman, invested an undisclosed amount of his own money in the ParaFi Fund, a crypto investment and Technology company run by a former KKR CEO Ben Forman.

In September 2021, a month before Kravis and his co-CEO resigned from the company they founded 45 years ago, the company itself officially invested in ParaFi and launched a working group dedicated to researching blockchain applications. By the end of the year, KKR demonstrated that it would stay on the course set by its co-founder by making its first fund investment in a crypto company and leading a $350 million investment in Anchorage Digital, a crypto custodian that received conditional approval Bank received for operating as a crypto custodian.

Demonstrating the sheer breadth of the potential impact blockchain could have in private markets and beyond, KKR launched in 2022 by joining a consortium that included financial giant Apollo Global Management
apo
Black Stone
BX
, Carlyle Group, Institutional Capital Network, Morgan Stanley, State Street, UBS and WestCap to explore how blockchain and other distributed ledger technologies can improve the $13 trillion alternative investment sector. Investment data firm Prequin estimates that number will reach $23 trillion by 2026.

But until earlier this month, KKR’s crypto work was limited to investing and team building. That all changed with the partial tokenization of the HCSG II fund. Although Parant and Securitize refused to share the value of the tokenized portion of the investment, they said it was in the millions of dollars, a tiny fraction of the $4 billion dollar funds from healthcare companies; was offered under SEC Reg D 506(c); and consists exclusively of qualified buyers, which means that Securitize knows who the investors are and they are not violating securities requirements.

Since July, the SEC has identified 10 crypto tokens as securities, and in early September announced plans to review crypto asset filings. Domingo isn’t concerned about the raid. “It is very important that we comply with the existing regulatory framework,” says Parant.

Though Securitize doesn’t share revenue numbers, CEO and founder Carlos Domingo expects it to double revenue this year and has enough capital to last at least two years without additional sales. The firm’s 250 employees now connect 1.2 million investor accounts to 3,000 investment opportunities and can build compliant financial instruments on approved blockchains Quorum, Corda and Hyperledger, as well as public blockchains such as Ethereum, Algorand and Polygon. Securitize has eight tokenized assets listed on its alternative trading system, which is also licensed by the SEC.

Though a recent report showed that the cost of compliance could make some crypto projects unsustainable, Domingo says the cost of failures like Celsius and Voyager, which recently filed for billions in bankruptcies, is even higher. That advantages Creating assets on blockchains, on the other hand, far outweighs the resources needed to get started.

“I think it’s fundamentally wrong that retail people aren’t being offered the best investment opportunities,” says Domingo. “I should be able to invest the same as a Harvard endowment, right? And I think these laws need to be changed, relaxed and improved. However, the compliance rules are there for a reason. They serve to protect investors. And I think in crypto people have realized that the lack of investor protection has actually caused a lot of retail people to lose a lot of money and that’s wrong. So companies, especially companies that make a lot of money, should have invested more in compliance to protect their investors, because ultimately it is the investors who suffer.”

Other potential blockchain applications could involve entirely new ways of structuring public funds, according to Miles Radcliffe-Trenner, KKR vice president of public affairs. “We’re very much in favor of this first offering, which closely follows how other private funds are being offered in the market,” says Radcliffe-Trenner. “We want to make sure we’re doing this right. We want to make sure investors have a great experience. But there is definitely an opportunity going forward to think about other structures that might actually reach a wider audience of investors and be able to tokenize those structures as well.”

Ironically, as the technology was first adopted by privacy advocates and criminals for its supposed anonymity, Parant says that blockchains could eventually help businesses more easily comply with anti-money laundering and know-your-customer legal requirements. Domingo goes further, claiming that issuing securities on a blockchain reduces the likelihood of missteps like the Dole stock crisis of 2013, when phantom stocks were discovered and no one knew where they came from. He expects lessons from decentralized borrowing and lending protocols like $1 billion Aave and market makers like $2.5 billion Uniswap to be integrated into traditional finance.

“These are very novel blockchain protocols that have tremendous applicability in a massive trillion-dollar market that is the world of securities,” Domingo says.



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