Tokenization Unlocks a $400B Opportunity in Alternative Investments

• The alternative asset management industry, which has traditionally focused on institutional investors, is now also focused on wealthy individuals, whose portfolios are underrepresented in alternatives, partly because of the highly manual, often bespoke nature of such investments.
• Tokenization can streamline, automate, and simplify most stages of alternative investments, benefiting individuals and institutions alike. It could also improve liquidity and collateralization, automate capital calls, and enable portfolio customization.
• Unlocking these benefits represents potentially $400 billion in additional annual revenue for the alternatives industry.
• While several participants in the alternatives ecosystem could develop tokenization solutions, entities with established distribution models such as wealth managers and wholesalers may be best positioned to succeed.

Alternative investments (alternatives) such as private equity (PE), private credit, real estate, and hedge funds can potentially enhance returns and provide diversification for investors. They are often considered more complex than traditional assets and require a longer investment horizon—in many cases, 10 years or longer. As a result, these products are primarily marketed to sophisticated institutional investors that do not have immediate liquidity needs.

Given the lack of common infrastructure and standards among such funds, alternatives typically have been more cumbersome to manage from an operational perspective. Alternative asset managers thus often only find it economically attractive to accept a limited number of large-ticket investments (more than $5 million) into their funds. That floor essentially prevents many individual investors from accessing these products.

Despite the historical preference for institutional investors, alternatives managers have tried to expand access to individuals for years. Bain & Company research offers insights into the forces underlying this desired expansion:

Alternatives managers face growing fund-raising challenges from institutional investors as supply exceeds demand. Consider the fund-raising results from the first half of 2023, when, according to Preqin fund-raising data, PE fund-raising supply was three times higher than investor demand—the widest gap since the financial crisis.

Individuals control over half of global wealth, but only about 5% of their wealth is allocated to alternatives. Global wealth is essentially evenly distributed between institutional investors (such as pension funds and sovereign wealth funds) and individual investors, with individuals holding approximately $150 trillion of the $290 trillion global wealth pool. (Qualified investors in most countries are those with more than $1 million in investable assets. We define high-net-worth individuals as having $1 million to $5 million in investable assets; very-high-net-worth individuals as having $5 million to $30 million in investable assets; and ultra-high-net-worth individuals as having more than $30 million in investable assets.) However, high-net-worth investors are significantly under-allocated to alternatives, with only about 5% allocated in their portfolios (see Figure 1).