Whether you are a fund manager or a capital allocator you’ve probably spent some time thinking about liquidity. Both managers and allocators want to free up trapped capital to undertake additional investments. While some are content with capturing the illiquidity premium, others prefer to mix things up and strive to optimise capital utilisation. While this is true of both fund participation and credit portfolios, today we will focus on liquidity for high-performing credit portfolios. As a manager, is tech-enabled securitisation a viable strategy for your credit portfolio? As an allocator, do you treat this as you do other securitisation products, or does it change things for you?

The traditional avenues for managing and exiting these investments often come with significant friction, limiting agility and capital efficiency.

Unless you’ve been living under a rock, you’ve probably heard the terms tokenisation, blockchain and artificial intelligence (AI). However, what is less clear is how to leverage these technologies to drive new products or gains in existing portfolios.

Before we dive into what and how to leverage technology to facilitate more affordable securitisation, it is important to define their commonality. Traditional securitisation and tokenisation both aim to transform illiquid credit exposures into investable assets. The big difference is how tokenisation leverages blockchain technology to transform digital rights of real-world assets such as credit portfolios into unique transferable tokens. In addition to providing a proof of ownership in a digital form, tokenisation enables programmability (think compliance, redemptions etc.), fractionalisation (think smaller minimums and new investors) and governance.

A secondary market for your high-performing credit portfolios

For decades, securitisation has been a cornerstone strategy for transforming illiquid assets, such as mortgages and various forms of credit, into tradable securities. This process, while effective, has historically been complex, resource-intensive, and often more accessible to larger institutions. The market has evolved significantly since its early days, now encompassing a diverse range of assets from private credit and commercial loans to real estate debt. Yet, for small to medium-sized asset managers, the operational burden and cost associated with traditional securitisation can still be prohibitive, hindering their ability to dynamically manage their portfolios and access broader investor bases.

What option then, do small to medium-sized asset managers have, to access secondary markets? Enter technology facilitated securitisation. In reality, it is but a collection of next generation tools and often equated with tokenisation as a catchall term. 

Unlocking liquidity and efficiency with next-generation tools

Imagine a world where the operational bottlenecks that plague credit portfolio management are significantly reduced, and new avenues for liquidity are readily available. Advanced platforms, powered by AI and distributed ledger technology (DLT), are making this vision a reality.

Artificial Intelligence (AI) is revolutionising the front and back office. AI-driven analytics can sift through vast amounts of data, identifying optimal portfolio compositions, assessing risk with greater precision, and even automating due diligence processes.

For instance, AI-powered document review can rapidly analyse loan agreements and transaction documents, ensuring compliance and consistency far faster than manual methods, thereby reducing cycle times and operational costs. This efficiency gain is crucial for managers looking to scale their operations without proportionally increasing overhead.

Blockchain and Distributed Ledger Technology (DLT) offer a paradigm shift in transparency and operational efficiency. By creating immutable records of asset ownership and transaction histories, DLT can significantly reduce reconciliation costs and enhance trust among participants. The most exciting development for credit portfolios is asset tokenisation. This process converts rights to underlying assets into digital tokens on a blockchain, enabling fractional ownership and creating a more liquid, accessible secondary market. For asset managers, this means the potential to:

• Enhance liquidity: Tokenisation can transform traditionally illiquid credit assets into highly divisible and transferable digital units, making them easier to buy and sell. This opens up new exit strategies and allows for more dynamic portfolio rebalancing.
• Broaden investor access: Fractional ownership lowers the barrier to entry for a wider range of investors, potentially increasing demand and improving pricing for credit assets.
• Streamline operations: Smart contracts, self-executing agreements embedded on the blockchain, can automate many aspects of asset management, from interest payments to collateral management, reducing administrative overhead and human error.

While the adoption of these technologies is still evolving, early indicators are promising. The ability to significantly reduce the costs and complexities associated with traditional asset transfer mechanisms is a game-changer for asset managers seeking to optimise their credit portfolios. Early adopters have reported substantial reductions in operational costs and improved efficiency in structured credit transactions, highlighting the practical benefits of these innovations.

Navigating challenges and building resilience 

Embracing these new technologies also means addressing inherent challenges. Interoperability between different technological platforms and existing legacy systems requires careful planning. Data privacy and robust cybersecurity are paramount, especially when dealing with sensitive financial information. Furthermore, the regulatory landscape for digital assets is still maturing, necessitating a proactive approach to compliance.

However, these challenges are being actively addressed through industry collaboration and technological innovation. Developing common standards, implementing stringent data governance, and engaging with regulators are crucial steps. The focus is on building secure, transparent, and compliant ecosystems that foster confidence among investors and market participants.

What this means for allocators

Tokenisation facilitates access to new products from new managers. It also reduces minimums and facilitates liquidity. Depending on the risk appetite it allows investors to play in tradition or DeFi markets. Access to these securities is enabled through Alternative Tradition Systems (ATS) or decentralised exchanges (DEX). However, creative managers can utilise well known and reliable investment wrappers that allow these securities to trade alongside traditional products in the OTC Markets. As this market evolves, we can imagine a world where allocator derivatives can be freely traded.

Allocators need not fear this world of tokenisation. It is an evolution of the traditional securitisation with better access, transferability, programmability and liquidity.

The future of credit portfolio management

The integration of AI, blockchain, and tokenisation is not just about incremental improvements; it’s about fundamentally reimagining the possibilities for credit portfolio management. For asset managers, particularly those in the small to medium-sized segment, these tools offer a pathway to greater liquidity, reduced operational friction, and expanded market access. By embracing these innovations, managers can unlock new levels of agility and value creation, ensuring their high-performing credit portfolios can thrive in an increasingly dynamic and interconnected financial world.
 

The most exciting development for credit portfolios is asset tokenisation. 

This process converts rights to underlying assets into digital tokens on a blockchain, enabling fractional ownership and creating a more liquid, accessible secondary market.