Private capital markets have long been opaque and closed to all but a few wealthy investors. A host of new-generation capital market platforms are seeking to change that.
“The opportunities for most accredited investors are pretty small. In virtually all cases, a closed set of very wealthy and well-connected investors are shown everything, and the rest have no access,” says iSTOX co-founder and COO Darius Liu.
iSTOX is the first Monetary Authority of Singapore (MAS) regulated platform offering issuance, settlement, custody, and secondary trading of digitised securities. Backed by SGX, Hanwha Asset Management and Tokai Tokyo Financial Holdings, it claims it can help a wider pool of investors access investment opportunities such as private equity and debt that were previously out of reach.
It is one of Singapore’s private capital market platforms seeking to capture the rise in demand for secondary deals in the region. We explored these platforms in depth in our recent report, SE Asia Private Marketplaces 2020.
Edited excerpts of an interview with Liu:-
What was the impetus for you to start iSTOX and enter this business?
It started with the realisation that private markets are far too fragmented, opaque and have too many intermediaries to allow any but a very narrow sliver of possible investors to take part. I used to do asset allocation and I looked at my own portfolio as well. From an investor perspective, if I start from first principles and ask why somebody like me can’t get access to hedge funds or private debt, etc. — there’s actually no fundamental reason other than the fact that market infrastructure has evolved the way that it has.
The opportunities for most accredited investors are pretty small. In virtually all cases, a closed set of very wealthy and well-connected investors are shown everything, and the rest have no access. So it’s become one of those cases where the rich get richer and the rest of us lag behind in terms of opportunity and having the ability to diversify portfolios. This doesn’t just impact us as investors but the system as a whole.
At a broader level, frictions in the flow of capital around the economy also affect the wider enterprise ecosystem. Capital is like the blood that flows around the enterprise ecosystem. If blood cannot flow freely, the body suffers. Right now, there are various obstacles in the form of opaqueness, intermediaries and fees restricting the flow of “blood.”
If we can build a market that allows capital to flow more freely and facilitate broader and more equal access to a greater pool of participants, I believe the whole “body” will benefit. I’ve always personally felt there must be a better and fairer way – one that opens up access to a broader pool of investors and in doing so, also opens up new pools of liquidity and demand for companies that need financing.
What does iSTOX do that is different from private banks/brokers?
There are a number of key differences. With respect to private banks, first and foremost, our biggest difference comes down to accessibility. Like private banks, we allow our users to access opportunities across asset classes. But unlike them, we offer private market services to a clientele beyond the very wealthy and well-connected. Most private banks will not onboard an investor unless he or she has a net worth of tens of millions [at minimum]. Anything below that, you basically can’t get in as a client.
With iSTOX, you can get access to the same kinds of private market investment opportunities as private bank clients for as little as S$2,000-5,000. This opens up many new opportunities for the segments of investors who are currently underserved.
iSTOX is also set up to ensure our investors have more flexibility and freedom when it comes to both entering and exiting their investment via our integrated issuance, custody and secondary trading platform. Typically to do a private capital transaction, you would probably have to go through a private bank or broker who would probably charge you as much as 5 per cent to enter or exit a position, and potentially take up to months to settle that trade. With iSTOX, you can do a partial or full entry/exit, put in a buy or sell order for as many for as few tokens as you want to, and the trading fees will be about 25 basis points. We also offer instant settlement if and when the trade matches.
There are many other private market exchanges out there. What differentiates your business model from others?
I think the key differentiator is that we are truly multi-asset class. Many of the other emerging players in the private market space usually specialise in one segment or one kind of asset class. For instance, there are private market syndication entities that specialise in secondary share transactions of privately held companies. Others only do pre-IPO equity transactions. There are other smaller players who do real estate, and the list goes on.
Another key differentiator is that the securities that are issued, custodised and traded on iSTOX are truly digitised securities. This is different from, say, using a platform that runs on traditional securities issuance, custody and trading infrastructure, and then recording their transactions on the blockchain. In the latter instance, what the investors are buying into remains a security in a traditional form. The difference here is crucial. For digitised securities, because the security exists in the digitised format, we are able to allow features like instantaneous settlement of trades, fractional ownership, automation of actions such as bond coupon payout and so on, without having to plug into other intermediaries. This gives rise to efficiencies and productivity gains that ultimately translate into lower costs and a far better experience for all our users. For any other platform claiming to use blockchain in capital markets, I always encourage end-users to ask what their settlement time is – if it is not instantaneous, then it is not a true digitised securities platform.
Does your multi-asset structure include digital tokens?
We can allow exposure to almost any asset class or investment opportunity, provided the issuer can structure the issuance accordingly. For example, let’s say for a fund that has the underlying mandate of investing into digital payment tokens, we can accommodate that if we have a suitable issuer coming to do an issuance on our platform. If there is demand for such products from investors, it is a matter of time that issuers will provide offerings to cater to the demand.
Private banks understand the threat and are also exploring blockchain platforms for themselves. Do you think there is a possibility that you might let private banks plug into your platform to form a partnership?
Private banks care about AUM, and also about giving good opportunities to their clients. So if you can find a mechanic that allows them to recognise the AUM of their clients that are invested on iSTOX, and show them good products they can sell to their clients, they will join in. That’s what we believe. We are actually in talks to partner with a number of banks to give them access to the highest number of quality deals through our platform. We’ve also signed an MoU with CIMB and that is public. We are a neutral platform and open to partnerships with everyone.
What is your main source of revenue at the moment?
We charge investors when they subscribe and when they trade, and we charge issuers an initial listing fee, a fee for distributing and digitalising their issuance, as well as an ongoing platform fee annually. We have done our market research – for issuers, because of the use of technology on our platform and our streamlined processes, our fees are substantially less than other viable alternatives in the private market today. Our fee schedules are all public information.
What is the vision of the company? Where do you see yourself in the next few years?
We want to be the global leading private marketplace for digitised assets. So if you think about e-commerce websites like Alibaba and Amazon, everybody can come to these platforms and find things they want. Our vision of iSTOX is a multi-asset class platform where for each asset class, there will be products that range from the very conservative all the way up to the high-risk/high-return types, and everything in between. So all users can always find something – and quite possibly many things – that suits them. You’ll be able to invest in the sizes that you want. And you will not be penalised just because you are an ‘ordinary’ accredited investor rather than a very-high-net-worth-individual. It’s equal access.
What does your customer base look like at the moment? How many from Asia versus the rest of the world?
We are just about six months out of the MAS Regulatory Sandbox but we’ve grown a lot in that very short amount of time. The bulk of our user base is from Singapore at the moment, but we do have a very sizable non-Singapore user base as well, and I expect this will continue to grow both in numbers and as a proportion of our user base. This includes users from China, Hong Kong, Australia, Japan, South Korea, Europe, the UAE, Canada and so on. As you can see, we are able to welcome users from all over the world (except the US for the moment). Having a completely digital and greatly streamlined onboarding process is very helpful in this respect.
Who would you consider to be your biggest competitor/s?
While there are a number of other platforms out there offering access to private capital markets, I don’t think our real competitors will be one of the other private exchanges because we offer a fundamentally different product — integrated digitized securities issuance, custody and trading — than they do. I believe the use of digitised securities and having an integrated platform that covers the entire life cycle of an investment is a fundamental advantage that will allow us to scale much faster and in a more expansive manner – and bring the benefits of private market investing to a much larger and global base of users – compared to existing private market platforms.
A longer version of this interview originally appeared in DealStreetAsia – Research & Analytics’s SE Asia Private Marketplaces 2020 report.