Structural issues challenging todays capital markets could be solved by the creation of a new type of registered investment token that embeds smart contracts into a blockchain harnessing artificial intelligence (AI) and big data technologies to administer the contract terms and enforce various investor and issuer rights, Citis Business Advisory Services find in their new survey, Industry Revolution – Investment Management in 2033, Part 1: The New Building Blocks. The new investment instruments, dubbed Ownits and Corpits, could change the foundational concept of ownership in real assets and the relationship between investors and companies, according to the surveys findings.
Citis Business Advisory Services partnered with Citi Ventures to solicit inputs from innovation chiefs at large investment firms, fintech-focused venture capital organizations, a broad set of emerging companies, academics studying the new platform economy, and other experts focused on the intersection of investment management and emerging technologies. The report, based on 60 proprietary interviews – is Part 1 of a 2-part Revolution series – and introduces the new building blocks that may displace equities and bonds over time.
The entire industry faces a demographic challenge from the growing needs of retiring baby boomers, working millennials, and the expansion of the global middle class. We are transitioning from a situation where the majority of assets are institutionally directed to one where an increasing share of assets is coming from individuals, said Sandy Kaul, Global Head of Business Advisory Services. A majority of this individual wealth is with investors that are prohibited from accessing private investments, limiting their ability to obtain yield and diversification to help fund extending life expectancies.
The survey focuses on three innovation trends that together provide a blueprint to address this situation. Crowd-investing features asset owners choosing to sell all or a portion of their asset to an outside entity. Unitization of such investment opportunities divide those assets into small enough bits that average investors can afford to purchase and sell such exposures. Tokenization of those units then allows for the terms to be memorialized in contracts that can be divided into smaller and smaller fractions to facilitate liquidity.
Behavioral changes and advancements in technology such as blockchain and AI are both accelerating and irreversible, not just in the investment landscape but across industries. Thinking about how new behaviors and technologies could come together is where the possibility of completely new solutions can be envisioned and competitive advantage achieved, notes Vanessa Colella, Head of Citi Ventures and Citis Chief Innovation Officer.
Citis survey lays out a framework for how these emerging technologies could be combined to create a digital token that combines financial rights, ownership rights and utilization rights to create a new type of liquid Ownership Unit or Ownit.
The appeal of Ownits is not just their regulatory transparency but the way they fit into todays primary issuance and secondary trading ecosystem, added Kaul. This could allow individuals to build highly diversified portfolios that span not only equities and bonds, but art, infrastructure, wine, intellectual property rights and more.
The report also lays out the case for a second type of registered token, extending the Ownit blueprint to companies: these Corporate Exposure Units are dubbed Corpits.
There has been a significant decline in listed companies over the past 20 years and in the overall number of IPOs. Concerns about increased short-termism in the public markets and access to nearly $1 trillion of dry powder in the private equity markets is encouraging more companies to remain private, and especially small companies that offer the greatest growth potential, Kaul notes. This restricts opportunities for individual investors and makes it more difficult for employees of private firms to monetize their equity stake.
The types of smart contracts embedded in the envisioned Corpit would differ, according to the report. Financial actions taken by the firm could be tied to growth plan milestones or to a companys behaviors in key areas such as environmental, social and governance or diversity. Obligations are likely to extend to investors as well. For example, different classes of Corpit could specify different minimum holding periods – from daily to multi-year – and offer commensurate variations in voting rights.
Corpits could also be used to offer exposure to different elements within a company that are currently impossible to target such as their individual business units or supply chain.
With the growth of the platform economy, the survey finds that companies are embracing permeability. New business models like crowdsourcing are moving into the enterprise and intangible assets are becoming increasingly important sources of differentiation.
By decomposing a company into a portfolio of investment options, we could see a blurring of the lines between venture capital, private equity and public market investing. This could allow for enhanced portfolio construction and an explosion in new investment opportunities, Kaul concludes.
