KKR Blockchain's Arrival in a $4 Billion Fund Opens Door for Crypto Investors

KKR Blockchain’s Arrival in a $4 Billion Fund Opens Door for Crypto Investors

As the US Securities and Exchange Commission (SEC) cracks down on non-compliant crypto companies in the wild west, a new breed of blockchain applications, built from the ground up as securities, are emerging to meet demand. This month, private equity giant KKR
& Co. has opened a portion of its $4 billion Healthcare Strategic Growth Fund 2 (“HCSG II”) to be tokenized on the Avalanche (AVAX) blockchain, providing access to the asset class for investors who own a fraction of the normally needed wealth.

The effort is the latest blockchain move by an investment management firm called Barbarians at the Gates in the 1989 book of the same name. And more compatible blockchain applications are in the works by companies around the world.

While the first generation of financial firms to use the technology — somewhat ironically dubbed Enterprise Blockchain by crypto hawks — focused almost exclusively on so-called licensed versions such as Hyperledger Fabric and Corda, this latest move is proving to be a broad open of technologies, including public blockchains that anyone can build on.

“Long-term, blockchain has a lot of applicability across the value chain for private markets,” says Dan Barrant, co-head of KKR’s wealth business in the US. “And so I think, for asset managers and other players in the space, that blockchain will make it easier to operate and manage private equity funds, from capital calls to distribution to capital account data that we will eventually move to the blockchain we will.”

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

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KKR’s secret to being early on in the game dates back to 2018, when Parant says the company hosted a competition among its employees. There, Barrant and his team first identified opportunities for hashing investments using tokens on the blockchain, reducing the amount required to invest and expanding the potential world for financiers. Without the blockchain, the typical investor HCSG II would be worth around $100 million. Although the mom and pop genres were still inaccessible, a token version of the fund was available to investors whose net worth was as low as $5 million and as low as $100,000.

To accomplish this feat, KKR partnered with San Francisco-based Securitize, a broker-dealer that raised $85 million from Morgan Stanley.
and others to issue securities on a variety of block chains. After an early meeting between Parant and Securitize, billionaire KKR co-founder and co-CEO Henry Kravis, who remains co-CEO, invested an undisclosed amount of his money in ParaFi Fund, a crypto investment and technology firm founded by former KKR manager Ben Forman.

In September 2021, a month before Kravis and his co-CEO will step down from the company they founded 45 years ago, the company formally invested itself in ParaFi and unveiled a working group dedicated to exploring blockchain applications. By the end of the year, KKR showed it would continue the path established by its co-founder, making its first fund investment in a crypto company, and leading a $350 million investment in Anchorage Digital, a crypto custodian who has conditionally agreed to serve as an administrator. bank.

Showing the huge scope of the potential impact that blockchain can have in private markets and beyond, KKR kicks off 2022 by joining A consortium that also includes finance giants Apollo Global Management
Black stone
and 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 the number will reach $23 trillion by 2026.

But until earlier this month, KKR’s crypto work was limited to investment and team building. With the partial coding of the HCSG II box, that changed. Although Parant and Securitize declined 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 healthcare companies’ $4 billion fund; Filed under SEC Reg D 506(c); It includes exclusively qualified buyers, which means that the securitization knows who the investors are, and they do not violate the requirements of the securities.

Since July, the Securities and Exchange Commission has designated 10 crypto tokens as securities and in early September announce Plan to review filings involving crypto assets. Domingo is not worried about repression. “It is very important that we follow the current regulatory framework,” Barrant says.

Although Securitize does not share revenue numbers, CEO and founder Carlos Domingo says it expects to double revenue this year and has enough capital to stay afloat for at least two years, even without any additional sales. The company’s 250 employees now connect 1.2 million investor accounts with 3,000 investment opportunities and can build compliant financial instruments on Quorum, Corda and Hyperledger licensed blockchains as well as public blockchains including Ethereum, Algorand and Polygon. Securitize has eight token assets included in its alternative trading system, which is also licensed by the SEC.

Although a recent report showed that the cost of compliance could make some crypto projects unacceptable, Domingo says the cost of failures like Celsius and Voyager, which recently filed for billions in bankruptcies, is even higher. The Benefits On the other hand, it far outweighs the resources needed to get started.

“I think the fact that we don’t offer the best investment opportunities to retail people is a fundamental mistake,” Domingo says. “I should be able to invest like a Harvard grant, right? And I think these laws need to change, loosen and improve. However, the compliance rules are there for a reason. They are to protect the investor. And I think the crypto people have realized that the lack of investor protection may It actually resulted in a lot of individuals losing retail money, which is a mistake. So companies, especially companies that were making a lot of money, had to invest more in compliance to protect their investors because the investors who ended up suffering were the investors.”

Other potential blockchain applications may include entirely new ways of structuring public funds, according to Miles Radcliffe-Trainer, vice president of public affairs at KKR. “We are very interested in this first offering, and are following up on exactly how other private funds are coming to market,” Radcliffe-Trainer says. “We want to make sure we get this right. We want to make sure investors get a great experience. But there is definitely an opportunity in the future to think about other structures that might actually reach a wider audience of investors and be able to code these structures as well.”

Ironically, for a technology that was first adopted by privacy advocates and criminals due to their supposed anonymity, Barrant says that blockchain could eventually help play a role in helping companies more easily comply with anti-money laundering and know-your-customer regulatory requirements. . Domingo goes further, arguing that issuing securities on the blockchain reduces the possibility of errors such as Dole Stock Crisis of 2013When phantom stocks were discovered, no one knew where they came from. He anticipates lessons learned from decentralized borrowing and lending protocols like Aave, which is worth $1 billion, and market makers like $2.5 billion Uniswap that will be incorporated into traditional finance.

“These are very new blockchain protocols that have great applicability in a huge multi-trillion dollar market, which is the world of securities,” Domingo says.

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