Apex is writing the guide to servicing the tokenised funds of the future
- Future of Finance
- Jun 18, 2024
- 30 min read
Updated: Jan 29
A Future of Finance Interview with Apex Group founder and CEO Peter Hughes and Head of Digital Assets Bruce Jackson.
The Apex Group has grown from an idea in the minds of two people in Bermuda just over 20 years ago to a global fund administration business employing 13,000 people across 112 offices around the world to look after assets under administration worth more than US$1 trillion. Such rapid expansion by acquisition was made possible by the support of major private equity investors – they include Genstar, Carlyle and Mubadala – but Apex is more than a classic roll-up story. The firm has retained its original bias to alternative strategies, but has moved far beyond fund accounting, transfer agency and management company services to embrace capital introductions, depositary and custody services and an Environmental, Social and Governance (ESG) ratings and advisory service. But what really distinguishes Apex from other fund administrators is its embrace of new technologies in general and blockchain technologies in particular. It has not only supported several tokenised fund issues but invested in a tokenisation engine (the Luxembourg-based Tokeny) and in the London-based FundAdminChain (which began as a fund tokenisation platform but morphed into an automated investor due diligence checking and on-boarding service). No other fund administrator has shown a comparable level of material commitment to a tokenised future for the funds industry. As Dominic Hobson, Co-founder of Future of Finance, found out when he spoke to Apex Group founder and CEO Peter Hughes and Head of Digital Assets Bruce Jackson, the enthusiasm of the senior management for tokenisation is not about intellectual curiosity but long-term survival and success.
Key Insights
Apex invests in the latest technology to maintain a competitive edge over its rivals and has secured the support of its private equity investors to do so, but tokenisation of funds must fit into the fundamental Apex strategy of helping its (mainly alternative) asset management clients to sell more funds to end-investors.
Apex has already supported the on-chain distribution of tokenised shares in a privately managed assets fund, not just because such funds are an early use-case for tokenisation, but because Apex services many managers of private equity, credit, real estate, infrastructure, insurance-linked and hedge fund strategies.
An open architecture means Apex clients can choose suppliers, but investments in Tokeny (a tokenisation engine) and FundAdminChain (investor due diligence tools) have enabled Apex to help clients by tokenising cash as well as funds, code governance into smart contracts and on-board investors without duplicate checks.
The cryptocurrency exchange-traded products that Apex supported are significant because they mean the most avant-garde segment of the digital assets industry are embracing conventional fund structures and distribution strategies (including stock exchange listings) that broaden access to traditional investors.
At Apex the house view is that the distinction between asset-backed fund tokens (ones where investors own a token signifying ownership of shares in an existing fund) and native fund tokens (where shares in the fund exist as tokens on-chain only) will not matter in the short term.
Apex is investing in tokenisation because it believes that blockchain technology has the potential to compete away its core businesses of fund accounting and transfer agency in their current form, and it must evolve into an independent validator of fund token transactions between asset managers and investors.
Apex believes a transition from risk-based investing (most products sold by asset managers today) to outcome-based investing (asset managers promising returns) is underway already and tokenisation techniques (such as reducing minimum subscription to as littles US$1,000) will enable the industry to adapt.
Tokenisation must be judged for the contribution it can make to improving the investment returns and resilience of portfolios, not just because reducing production and distribution costs is good in itself, but because the coming generation of digitally native investors will not tolerate traditional products.
Transcript
00:14 Dominic Hobson: Hello, I’m Dominic Hobson, co-founder of the Future of Finance. My guests today are Peter Hughes, founder and CEO of Apex Group, and Bruce Jackson, chief of digital assets at Apex Group. Our subject is the future of the funds industry and particularly the impact on that future of tokenisation. Peter, Bruce, thanks very much for joining us.
00:36 Bruce Jackson: Thank you. Pleasure to be here.
00:39 Dominic Hobson: Peter, could I start with you? Apex has now moved very far beyond its origins in Bermuda 20 years ago. It’s become a genuinely global financial services provider. Do you think that your experience over the last two decades has given you a distinct or just different perspective on how the funds industry needs to develop?
01:01 Peter Hughes: I think so. I mean, I think building a business from two people to 13,000 people over 20 years and being focused on having a complete set of solutions every step of the way has meant that I’ve had to stay in tune with all the latest developments, not just in one geography, but globally. And the industry has evolved a lot. And I think certainly it’s not ok just to have good tech, you’ve got to have the latest tech. And being privately owned now, as a large-scale player, we have an opportunity to be innovating on the tech side as asset management evolves, harder than most of our peer groups. And that’s really what we are focused on. So I think having grown through different phases, different financial crises and Covid you’ve got to be flexible with your model and you’ve got to make sure you adjust and move quickly in an ever-evolving industry. And if you just stay still you’ll get overtaken. So I think we’ve focused and learned through the years to make sure we keep evolving. And having been a CEO and founder all the way through the journey, I’m still very close to exactly what’s going on across all aspects of our business. And you were talking about the trip I did around Asia just earlier where you go to 12 countries in two weeks and you see what’s going on locally and that gives you a flavour for how you adapt your business to make sure you’re not just covering off what’s required in one area, but you’re covering off what’s required in different ways in different places. And I think that attention to detail on a global scale is really valuable.
02:43 Dominic Hobson: Bruce, one of the things which Peter has just said is that it’s been important to keep up with every development in the funds industry at the global as well as the local level. And tokenisation has obviously emerged in recent years as a potentially game changing technology in the funds industry. So what’s the Apex strategy when it comes to tokenisation of funds?
03:06 Bruce Jackson: Yeah. So we approach it from, I guess first from the client’s point of view, what’s the purpose of tokenisation? And really if we accept that our goal is to help them sell more of their product, really to expand their fund product distribution and recognising that the digital share of the digital buyers of product is a growing share class. As Apex, Peter mentioned, we’ve got this incredible depth and breadth of technology but we’ve got a depth and breadth of operational capabilities, plumbing if you will. And we’ve got a depth and breadth of regulatory knowledge in compliance and overall let’s call it the governance brand that we have. Our strategy is really integrating that technical, technological, regulatory, operational know-how to enable our clients to sell their product into digital channels and creating an expanding digital channel – meaning help our clients who are more alternative fund managers use this tokenisation strategy and we’ll get more into the details of how we do it to put their product into wealth management accounts. And that’s the strategy. It is really focused on helping our clients sell more product.
04:29 Dominic Hobson: Peter, you said in your opening remarks that it is not good enough just to have the best tech. You want to have the latest tech as well. And that obviously means continuous investment. How committed are the Apex shareholders? You said you’re now a privately owned company. How committed are those Apex shareholders to the strategy of tokenisation which Bruce has just outlined?
04:54 Peter Hughes: It is important and certainly we’re trying to evolve and innovate faster than our competitors who generally are large banks or listed businesses. So out of the gate we have an edge because we’re not those and we’re large scale, but privately owned and having the right backers, as you mentioned, is really important. So we’re backed by Genstar Capital, TA Associates, Carlisle and Mubadala. So really blue-chip institutions are behind us. But what we’ve really had is their support, since Genstar invested almost seven years ago, is full support to really create the biggest product set there is in asset servicing and then apply that in as many geographies as we can. So there’s been no holdback from my sort of innovation to say, `Well, actually, we can’t afford to do that.’ I suppose we are focused on making sure we’re building our own tech, becoming a FinTech and services, which is pretty unusual. So most people are just buying off-the-shelf tech and then trying to fine-tune that. I think that’s valuable in itself and allows us to move more quickly. But also some of those investors have only invested two years ago. So we’ve got a long runway of creating value for our investors. And some people think that if private equity investors are behind you, you’re not going to be investing. And even some of our clients may feel that, `Oh, if they’re a private equity owned, they won’t invest hard enough or fast enough.’ But our opportunity, if we do, is really to have the leading infrastructure in terms of how asset servicing will be serviced. It also allows us to become a partner to our clients by creating technology which will enable them to create more products which are more attractive to a broader section or cross-section of investors, which Bruce was alluding to. So we are really focused on being a partner to these leading asset managers, rather than just a service provider with some of the tech we’re able to create now, and there’s no short term or exit plans, and you have to do this or you have to do that. It’s just about being empowered to build the best business we can build. And I have full support from the shareholder base to do that, having been the CEO for a long time, and I think I have trust from my board and investors.
07:19 Dominic Hobson: We’ll come back a bit later to some reasons why your investors might be anxious about tokenisation as well as excited about it. But before we do that, I’d like to ask you, Bruce, privately managed assets, these have emerged as an early opportunity for tokenisation because infrastructure is missing there and, of course, investors of different sizes would like to diversify into those asset classes. And private managed assets are, of course, and have long been, a large client group at Apex. I wonder how enthusiastic your existing clients are about that privately managed asset tokenisation opportunity. And perhaps you could tell us a bit, if they are excited about it, how you can help them.
08:01 Bruce Jackson: Yeah, I think a large sub-set of them are beyond excited. I’ll qualify that by saying a large sub-set of large asset managers have in-house digital asset expertise. That’s in some cases been on board for three, four or five years. And that in-house expertise has direct link into their C-suite, not unlike it does here at Apex. It’s not just a capability they built, but it’s a capability that has the backing of their executive committee. But we realised just how incredibly interested they were about two months ago, [when] we press released a transaction that took us about 13 months of internal grinding to get through, so we could launch an on-chain distribution of a private asset fund. The fund was the Hamilton Lane GPA Fund directly into the accounts of Sygnum Bank, which is a Swiss private bank. What’s incredible about that is even though these clients of the bank are all accredited, so all of these distributions went into accredited accounts, it went straight from the asset manager, we used the blockchain as the book of records, so we created, effectively, a digital share class of the fund, and we settled straight into the digital accounts of the bank. And they look into their account and they see their Hamilton Lane private asset fund. What’s incredible about that is that we were able to get the regulator to agree that they can take as little as US$1,000 worth of this tokenised version of the fund into their accounts. At the end of the day, the regulator enabled us to do that because we convinced them that, `Hey, it’s just a share class, and the blockchain really is just a registry, and we can rely upon all of the relationships we have with regulated entities to manage the distribution, the subscription, the tokenisation, the on-boarding, and then ultimately the subscription, the administration and TA [transfer agency] of that fund using a blockchain.’ So they’re really excited when they actually saw it in work. Not just a research project, not a proof of concept, which we have not done. We haven’t. We have focused on actually helping our clients raise money. So, yeah, they’re pretty excited. We’ve got a very long list of things we’re trying to. And the other aspect you should say is they’re not all doing it for the same reason. You hear people saying that tokenisation is liquidity driven. That’s part of it. We’re working on another project where we’re tokenising a money market fund for a large global asset manager. Why would you tokenise [a] money market [fund]? It’s already liquid. Well, you’re tokenising because you’re enabling them to collateralise it. There are places where digital capital might want a risk-free rate of return. They’re very excited for different reasons.
10:58 Dominic Hobson: The transaction you mentioned with Sygnum Bank, this is the one we did with Hamilton Lane, is it?
11:02 Bruce Jackson: Yes, that’s right.
11:03 Dominic Hobson: Shares on the Polygon blockchain, is that the one you’re referring to?
11:07 Bruce Jackson: That’s correct, yes.
11:08 Dominic Hobson: Okay, so is that an idea which you’re going to find transferable to other clients?
11:13 Bruce Jackson: Absolutely. Absolutely. We’ll replicate that transaction for other asset managers. We will replicate that transaction in other jurisdictions with that same client and with others. We basically … If you understand how Apex works, for us to get the CSSF [Commission de Surveillance du Secteur Financier, the Luxembourg regulator] on board to do this, we created an operating model. We have it captured in our risk appetite. The regulator can look inside and see all of our testing of every element of admin[istration], TA [transfer agency], distribution that was done on-chain. We have a workflow. So what clients are discovering is that we’ve actually got a very detailed operating model that enables them to hit the road. And so we’re transferring this … Europe through Luxembourg, Switzerland, we’re working on project in Cayman, we’re working on a project in UAE [United Arab Emirates], working on a project in Australia. So definitely transferring this.
12:13 Dominic Hobson: You mentioned that one of the benefits of that transaction was to get the minimum subscription amount down to as low as US$1,000, which means even impecunious journalists can suddenly start investing in Hamilton Lane funds. I have never seen a subscription amount that low. So is that the test of success in this area, or are there other tests of success, such as creating a liquid secondary market in registered shares?
12:41 Bruce Jackson: Yeah, I think that is a key test of success. Let’s step back. When Peter and a group of us originally white boarded this whole thing, we looked at our clients, and our clients, by and large, manage hedge funds, private debt, private equity, real estate, infrastructure funds, insurance-linked securities funds. So [they] tend to be illiquid assets. And if we measure this, our success, by somebody being able to look at their smartphone and look at their, you know, if they have a US$25,000 account and they’re looking at their representation in each of these asset classes on their smartphone, we’ll know that tokenisation has done its job. We’ve been able to deliver straight to the end shareholder, the alpha that’s being delivered by these alternative managers. And absolutely getting …. We fought hard. We actually took an extra four or five months just to get the CSSF [Commission de Surveillance du Secteur Financier, the Luxembourg regulator] to agree to let us do it down to US$1,000 increments, because we knew that was long term critical if we are really going to democratise alternative funds.
13:49 Dominic Hobson: Peter, you mentioned, of course, that you have to keep up with everything that’s going on, including the technology. A very interesting manoeuvre which Apex has made is to acquire the Euronext stake in Tokeny. I just wonder what new options, what new capabilities, Tokeny brings to Apex.
14:11 Peter Hughes: So as Bruce was alluding to, actually having the ability to go with a combined solution, a complete set of solutions, all with one message to regulators in terms of actually how this is going to enable that democratisation that Bruce was talking about. Having that in-house capability to be actually having a tokenisation engine is really valuable for us. It gives us more speed, more flexibility, but also more ability to craft, together with Tokeny, the needs of large GPs [General Partners] and pivot and be flexible. Whereas if they were a third party, it would be much harder to get the speed and the nuances which each GP might need. So it is incredibly valuable. It brings that tokenisation engine, but it also brings things like tokenising cash and how payments will change in time as well. So the movement of fiat, where it takes two days for money to arrive somewhere, or it takes a day and a half of approval to send a wire, that will change at some point in the future too. So we want to make sure that we’re future proofed on cash movements as well. It’s not to say Tokeny is our only option in terms of actually how we want tokenise for our clients, because we are open architecture on that. But certainly having that in-house solution allows us to move very quickly.
15:35 Dominic Hobson: And Bruce, when you talk to clients, Peter just mentioned that what Tokeny brings is a tokenisation engine, is that he’s also mentioned you’re an open platform, as it were, as well. So people can use their own tokenisation engines if they really want to, but still work with you in other ways. But how excited are the clients about the fact you now have that tokenisation engine in-house, [so] you can do this for them. Is that something you think asset managers are going to keep asking for? They don’t want to do this themselves?
16:03 Bruce Jackson: Yeah, it depends. So if the client is an asset manager and the client … What we bring to the table is an ability to help them sell a bunch of their product. And at the end of the day, it’s showing how we can distribute that product in …You work backwards all the way from basic digital on-boarding of the client data, all the way straight through to the TA [transfer agency] at the end. You have to have a framework, you actually have to have a core operating model that you can execute because they quite often will want you to do that. So yes, it’s critical. The fact that Tokeny is themselves … Their real value-add, if you get beyond what you think tokenisation is, their real value-add is capturing governance in, let’s call it the closet, that is the token, that is the smart contract. It’s capturing all this governance. Long term, we want to be able to automate this process of what we’re doing of distribution and administration. And every day is a governance day in digital assets. Every day is a regulatory compliance, legal day. And capturing all of those requirements in the definition of the product in the tokenised version is critical. But that doesn’t mean, hey, if a bank comes to us and say we have US$100 million in demand, or US$500 million in demand, for this fund, and they want to encourage a digital share class, but you have to use my chain, well, we say, yes. If the client wants to sell US$500 million worth of product, we’re going to enable that transaction to happen.
17:48 Dominic Hobson: Peter, Tokeny is not the only deal which you’ve done recently. You also taken a majority stake in FundAdminChain (FAC), which was a London based fund tokenisation start-up which was working with a bunch of asset managers here. It’s changed direction a bit since then. But what was the attraction of taking that stake in, majority stake, in FundAdminChain?
18:09 Peter Hughes: It’s a similar theme. We want to have experts driving technology change. And, internally, so we really have a majority stake in Fund AdminChain, and the ability that gives us is actually they were trying tokenise or put the whole of the UK transfer agency on-chain and connect that up into the stock exchange, etc.. And they had some very good traction on that, but it was just too early in terms of actually the moving parts of large TAs [transfer agents] and banks and the stock exchanges to be able to coordinate and connect that. So we’ve really pivoted it into a really valuable way. And actually it’s a digital on-boarding tool across all of our clients, and actually can sit across multiple TAs and on-board an investor once and then that be applied and used by all the different TAs that large GPs [General Partners] may have, rather than having that investor having to send the same AML [Anti Money Laundering] information nine or ten times. So we’re really using it to make sure we streamline what’s always been a very difficult part of the process, which is digital on-boarding and AML, and taking that away from manual processes, putting it on-chain, digitising it, getting workflow for not just the investor coming through and wanting to invest into different ranges of funds, but also giving a portal for the actual GP to assess where each investor is in that journey, and as the transfer agent/administrator to also assess where they are in the journey. So it’s really taking a problem in the industry, which actually probably sucks up 30 per cent of global staff in an industry, in a firm like ours, and digitising that and making that a seamless journey, but also a better experience for the end-investors of our clients. And that can only improve how many will therefore want to use our clients because we’ve got the right technologies to on-board them.
20:11 Dominic Hobson: Peter, you mentioned that one of the attractions of investments like FundAdminChain and Tokeny is you bring experts into the organisation. Buying businesses is one way to get experts, but you could also just acquire people in the marketplace as well. Have you as a company had to acquire lots of new people, or at least some new people, to execute your tokenisation strategy?
20:36 Peter Hughes: Yes, but there’s not as many as you think, because, as Bruce alluded to, much of it is governance and compliance, much of it is the AML [Anti Money Laundering] threat risk within tokens or tokenisation or digitisation or digital assets. So a lot of it has been out there for many years. There’s definitely a scarcity of that skill set as it’s such an evolving space. So we’re always trying hard to get new talent in. But it hasn’t been needing to get 200 specialists because many people are already following the principles of what was required anyway. But we’ve obviously brought in the Tokeny specialisation around how chains can interconnect and how open architecture chain is so valuable rather than a private chain. And also the skills in FundAdminChain in terms of actually how to get that digital on-boarding working well. And then we’re supplementing that with industry experts and even Bruce … He wasn’t a specialist three years ago, but now he’s one of the leading, I suppose, thought leaders in this space globally. So a lot of it is evolving in step as to how the industry evolves.
21:49 Dominic Hobson: Bruce, could we talk a little bit now about the cryptocurrency markets? I have to ask you about this because of the success of these spot bitcoin ETFs by some asset managers recently and some controversy obviously surrounding that. But to be specific, in the case of Apex, you recently completed an interesting transaction with Figment Europe to create this ETP listed on SIX [the Swiss stock exchange] to give investors access to staking rewards on Ethereum and Solana. Now what was the thinking behind that? What was the strategic value for Apex Group in that transaction?
22:33 Bruce Jackson: Yeah, that was a really cool transaction. A couple of reasons why. So go back to what you were saying about the spot Bitcoin ETF, and that was a year ago, it was a summer ago that it became evident that had to happen because of the Grayscale court case. They’re going to have to enable this to happen. And we have experience with exchange traded products [ETPs] and we know that the fees compress to zero really quick when the big guys get in. So let’s call it those passive ways to own digital assets, crypto, it was going to … The funds were going to very quickly compress the fee structure. But what’s really interesting is it enabled institutions or individual clients, wealth managers, to start to treat it just as a simple asset class and allocate some of this passive product into our clients. So jump over the pond where we primarily operate in the digital world, which is Europe and Asia, and our clients tend to be alternative issuers and their clients tend to want more active strategy, because that’s an active strategy. So in anticipation of these things happening, we developed a capability to do a quick turnkey on about eight or nine legal and other operational agreements that enabled somebody to launch a new product and list it on the SIX stock exchange or the Xetra in Frankfurt. Those are the ones that we chose to start with. But what’s really, and a pleasant surprise that came out of it, was that actually our target audience were DeFi [Decentralised Finance] institutions – Figment, Cardano, Crypto Finance. And what’s really, as I say, was a cool transaction. So here we have the DeFi community, which TradFi [traditional finance] DeFi … The whole concept of a decentralised financial services industry. We have these DeFi protocols and companies embracing conventional structures and listing on a conventional stock exchange. And I can tell you, because I was at the listing ceremony for Figment, we had a whole lot of 30-somethings jumping around, excited because they just got listed on the Swiss stock exchange. For a Defi company. What it was for us was just a clear message that this is an ability to put into regular accounts exposure not just to passive crypto strategies, but to active crypto strategies, but also just bridging the gap with what we do. What we do is build pipelines to take digital assets into conventional accounts, conventional assets into digital accounts. But this pipeline is going to be a very busy pipeline for the next few years. So to the client, it was also an incredible branding exercise for them. Like, when I was in Switzerland for the launch, everybody knew that it just happened. Back home, they hadn’t, but everybody in Switzerland knew what had just happened. A staking fund listed on the SIX stock exchange? That’s really cool. It’s a different asset class. It’s the beginning, I think, of a secular adoption of crypto exposure in conventional accounts.
26:02 Dominic Hobson: So I’m going to ask you a slightly unfair question now, having listened to you talk about a staking fund listed on SIX in the way that you have. You will have other clients who are managing cryptocurrency funds already. I don’t know how big a business that is for you. You will have clients doing that. My question is this. Do you see cryptocurrencies as part of the future of the funds industry or part of its past? And by that I mean tokenisation might survive, but will cryptocurrency? It’s a relatively small market. What is it, US$1.21.3-1.4 trillion market? Relative to a mutual fund industry of US$70-odd trillion, that is not much. But my question is, `Are you bullish about cryptocurrencies looking far into the future, or are you bearish?’
26:48 Bruce Jackson: Yeah, I’m extremely bullish, and I’ll tell you why. I’m not a crypto native person. I’m not a DeFi [Decentralised Finance] native person. I come from a conventional value-based research investment management background, but I know a secular trend when I see one. And the movement or the adoption of crypto as an asset class within a conventional asset allocation strategy is a powerful secular move. And we’re going to experience that for however long it takes to run its course. If ultimately there’s a realisation that crypto is not where people want to be, fine, that’s a [inaudible]. But I can virtually guarantee you in the short to medium term, there’s a secular move to increase exposure to this asset class in a lot of managed accounts, whether they be individual or whether they be institutional, so you, basically, you don’t fight the flow. There’s a huge secular flow of capital into that space.
27:53 Dominic Hobson: You just said you’re not a native crypto person. There is a debate going on in the tokenisation industry about whether the future lies with what I call native tokens. Let’s talk about funds only here. So the fund exists only on blockchain. It’s a digital object, an executable object on a computer system. It doesn’t exist in analogue form at all. It’s not just another share class like were talking about a minute ago. It is the thing-in-itself. And on the other side are all these what I call asset-backed token issues, where the fund continues to exist in its analogue form and it is just a digital share class, and all the investor has is a token saying he owns some shares in this pre-existing fund. Where do you sit in terms of how you think this industry is going to evolve? Because in the Future of Finance database, almost 100 per cent of the fund tokenisations we’ve seen have been of the asset-backed variety, very few of the purely native variety. Where do you think the future lies? Is it going to be an asset-backed or is it going to be in native token issues – in the funds industry?
29:03 Bruce Jackson: Yeah, you’re going to have a hard time differentiating the two for a while. There’s much … Like … We’re in the first pitch of the first innings, even on the asset-backed. The transaction we did in Luxembourg, for example, that was considered an on-chain distribution, where we’re actually administering on-chain. So that’s considered, you know, novel at this point. But the technology to do what you’re describing already exists. We have to metre ourselves to the realities of regulation, because these are securities first. Let’s go back to the beginning when Peter and I first discussed this two years ago. You know, ultimately straight from the manager to the end-client is how distribution is going to happen. And in the middle you have administrators, you have custodians, you have a lot of people like ourselves. We’re legitimately concerned that if we don’t stay ahead of the curve, that we could see blockchain as a technology, create an incredible competitor to our core business. We would rather be that competitor. Our goal is, long term, to see the core functions of administration and TA [transfer agency] executed using blockchain as the book of record. That’s significant efficiency to how it’s done now. But are we going to see actual projects where you see the functionality of what we do boiled down to some algorithms within a platform that enables an issuer to go into the platform and distribute straight to the client? Absolutely. You’re going to see that. And we’re already involved in a project where we’re testing that out, which is going to start to be talked about in 2025. Absolutely. That’s going to happen probably faster than we think, probably faster than we fear. So we are … Every day is a learning day, because we do worry about that and we’re getting involved in that.
31:14 Dominic Hobson: So you’re in the middle of a long transition here, but do you ever dare to look deep into the future, into that very long term, and ask yourself which are the things that a classic fund administrator would do today – fund accounting, TA [transfer agency], registration, the management companies – and ask yourself that, if tokenisation fulfils its promise completely, how many of those things are going to survive? It sounds like you’re very alive to those threats and preparing yourself pretty thoroughly for that. But is it clear to you yet what’s going to survive of what you do today and what’s not? This was the question when I promised to come back to Peter about whether the investors see this as a cloud on the horizon or a rainbow.
32:08 Peter Hughes: Well, I can jump in there if that helps, Dominic. I think certainly it’s going to evolve but having an independent provider and validator, in whatever form, of AML [Anti Money Laundering], KYC [Know Your Client], valuations of portfolios, that role may tweak, change, adjust, but the independence is really the governance and security for the actual end-investors, and you need that to be done independently anyway. I don’t think that’s going to change given the regulations and how the regulators are all focused, rightly so, on protecting the end-investor. And if these private markets assets become more retail, which we think they will do, again, the regulators will require us to make sure that we are at all times acting in the best interest of the end-investor. So completely agree it’s going to evolve from the traditional way of doing it. But the independence and the way we can control access to chains, for example, with AML requirements, and making sure AML is always up to date for investors to trade within chain, I think is always going to be critical, but it’s certainly going to change. I would agree with you there.
33:28 Dominic Hobson: That role of independent validation of what’s going on will always survive. Another way of asking this question is not just what might disappear, but what opportunities there are. The rainbow as opposed to the cloud. Is it clear to you yet what new opportunities tokenisation is going to create for a firm like Apex? Bruce, maybe you’ve been thinking about that.
33:56 Bruce Jackson: Yeah. So think of the token. Think of the tokenisation of a fund unit or representation of investment in something. Think of it as a closet, right? And think of the smart contract as things you hang in the closet and things that execute the future information that can be stored there. A big part of our ecosystem, excuse the pun, internally is a business within a business, is ESG [Environmental, Social Governance] compliance for funds, for asset managers, for things like this. It’s absolutely the case today that we can capture all that information, all of that compliance in the representation of a fund on the blockchain. It’s not something that you have to phone somebody to find out or Google it. It will be instantly recognised as part of the structure and part of the virtual tear sheet of each investment that you make. We just look at all levels of compliance, whether it be regulatory or business or client, objective or ecological, as being data that we can capture within the identification of an investment.
35:13 Dominic Hobson: Can I put you even further under the cosh and ask another long-term question here? Which is there is a discussion beginning in the asset management industry about whether it needs to move away from selling products which are basically market risk adjusted for the skill of the investor towards what might be called outcome-based investing. In other words, the asset manager actually guarantees to the investor, `We’re going to deliver this outcome for you, this sum of money on this date.’ That obviously has huge implications for the balance sheets of asset managers. They’re going to be taking on liabilities in much the same way as pension funds or even banks. So it has huge implications for how the industry capitalises and manages itself. But there is a thought that tokenisation makes it easier to move towards that model because you can also start to bespoke the outcomes you’re promising to the investors, because you can buy these smaller strips. Your US$1,000 minimum subscription is a good example. A bit of private equity or a bit of hedge fund. At that level, you can suddenly start putting together model portfolios made up of tokens. So if we move to this outcome-based model, you would certainly start to see today’s fund vehicles disappear, because those outcomes would be much more tailored to the individual investor. The so-called `portfolio of one,’ as it’s sometimes called. How much time do you at Apex spend thinking about the fact the industry might move away from what it does today towards an outcome-based model? And if we do have such a drastic change, how you can continue to be useful to your clients in that validation role Peter described, I guess?
36:54 Bruce Jackson: Yeah, our clients are very involved in that. You mentioned pension funds. So a lot of the large pension funds – I’m based in Bermuda, but I’m Canadian – the Canadian pension funds have been employing managers to do just what you’re talking about. If you suggest an on/off and …
37:15 Dominic Hobson: Defined benefit pension plans, by the way, I think, we should …
37:18 Bruce Jackson: Specifically, yeah, the defined benefit because they have such a long duration. They can do these things, but you only get paid if you add value on the specific thing. You don’t get paid to manage a fund per se, or to manage a portion of the balance sheet per se. It’s completely outcome-based. And that’s something that’s been a growing part of how the balance sheet of large pension funds and hedge funds that have been delivering this capability because of their basic ability to manage a delta. But we’re absolutely seeing that in the client base. We are seeing … For example, we’re involved in tokenising insurance-linked securities. And what is a reinsurance policy? Reinsurance policy is increasingly a smaller and smaller and smaller sliver of specific risk in a specific outcome, at a specific time after a specific hurdle has been met. The whole nature of tokenising those reinsurance contracts makes it infinitely more precise to isolate that specific risk/time event. And so outcome-based investing, outcome based tokenisation, as a way to help, to quantify, to organise, to deliver that, absolutely, it’s happening. And I direct you to the reinsurance business because they are just starting …. Well, we’re just starting to show them how we can use tokenisation to deliver that kind of isolation of outcomes to investors in their product.
38:56 Dominic Hobson: So your reinsurance business is …
38:58 Peter Hughes: Sorry, Dominic, just adding quickly. Also, I think there’s angle for ESG [Environmental, Social and Governance] as well. And we’re obviously passionate about ESG, where actually I do think that actually, say on the private markets or private equity or private debt side, if these managers are actually doing the right thing for their portfolio companies and making them improve for an ESG scoring point of view, then we talk about actually getting extra reward or less reward if they’re not doing the right things. So I do think it does tie into that angle as well in terms of, as you say, outcome-based, but outcome-based for good. And we’re seeing some particularly, I think, Swedish investors insisting that actually the reward of the GPs [General Partners] is tied into ESG scoring and benchmarking. And we’re obviously … That’s part of our offering. But I think it’s a good thing for the industry to be contributing in that way as well.
39:52 Dominic Hobson: Right. So the switch to outcome-based investing has started already and you guys are learning about it through your ESG [Environmental, Social and Governance] and reinsurance business that you’re transacting already today. It’s interesting. A final question. It’s really for you, Peter, but I’d be delighted if Bruce wants to chip in as well. It’s the big `D’ question and to some extent you’ve addressed this already, but in the end, financial services firms like Apex are going to be making money by helping asset managers make money. Do you worry that tokenisation, in the view of its extreme evangelists, if you like, it means this is going to become peer-to-peer. So the issuers, the investors, are going to not need or work through asset managers or fund administrators. Instead, they’re going to interact directly with each other. All that work, and Bruce, you did touch on this, all that work is going to be done by these smart contracts embedded in the tokens or sitting on the blockchains. And so there’s no need for intermediaries like yourselves. Do you ever worry about that? If so, how do you plan to manage the transition to a world in which things might go not pear-shaped, but peer-to-peer shaped?
41:05 Peter Hughes: Yeah, I think certainly it’d be interesting to see what the younger generation ends up doing in terms of actually how they think they’re going to invest. I think certainly the old traditional models of RIAs [Registered Investment Advisors] etc., where they’re putting very vanilla products into those portfolios, won’t be attractive to the younger generation. I think the whole theme of actually … If we can enable retirement portfolios to be fully balanced and not just be… Yes, have some long-only contributions to these large, long only GPs [General Partners] which aren’t expensive to use, but also have a blend of hedge fund allocation fund of fund allocation, private equity, private debt, infrastructure, real estate allocation into your retirement portfolio – and for everyone. Then people can retire being much more confident in their outcome and their actual future worth of what they worked for in their careers. And I think that’s what were excited about enabling. Is that security for retirees to have a proper balanced pension portfolio is a huge change. And that’s what were focused on enabling through how we’re thinking about evolving the industry and having our role to play in terms of the pipes and plumbing to enable that. And that’s what we’re focused on. I think we’re seeing disruption actually. You go B2C [Business to Consumer] not B2B2C [Business to Business to Consumer], i.e., the middle layer distributors I think will need to evolve their models because actually the cost or the ease of getting distribution, just product distributed to the end-customer, will be enabled by this technology and therefore they’re cheaper products to buy because there’s less distribution cost. That can only be a good thing ethically and from an ESG [Environmental, Social and Governance] point of view. So I’m already seeing that disruption. But the one I’m most excited about is actually to have people retire with proper balanced retirement portfolios, rather than just long-only portfolios where they stress [and] if the market goes down 2 per cent, then the value of their retirement has gone down 2 per cent. So we want to try and change that. And that’s what I’m excited about personally.
43:22 Dominic Hobson: Peter Hughes and Bruce Jackson of Apex Group, thank you very much for taking the time to share your knowledge and your experience with the members of Future of Finance.
43:32 Peter Hughes: Thank you, Dominic.
43:32 Bruce Jackson: Thank you and pleasure.
