Blockchain technology is affecting commercial life in multiple ways, including how investors tap into private equity.

Swarm, which calls itself the “blockchain for private equity”, is gearing up for the first closing of its debut fund in coming weeks, arguing that its approach widens investor access beyond a privileged circle of large institutions.

The distributed ledger technology of blockchain, associated most prominently with the controversial Bitcoin currency, is being used in fields as varied as medical records, fine art transactions, legal documentation, as well as back-office transactions by major banks. The technology is seen as revolutionising transactions because it eliminates third-party authentication. 

Palo Alto, CA-based Swarm spoke to this publication ahead of today’s announcement that it is enabling an investment in the FarmCoin pan-African financial and commodities ecosystem over its platform, opening the chance to invest in “unbanked” markets. FarmCoin is a joint venture between FinComEco (a subsidiary of GMEX Group) and Block Commodities (formerly African Potash). FinComEco provides services, financing, capacity building and enablement solutions from supply to demand. Block Commodities concentrates on building a platform for mining, producing and distributing fertiliser.

“This puts Swarm in one of the most exciting places for crypto - ground zero for much of the world’s unbanked,” Philipp Pieper, chief executive and co-founder of Swarm, said in a statement.

FarmCoin is intended to provide financial opportunities for the 700 million unbanked subsistence farmers across Africa who currently struggle to obtain loans or who borrow at exorbitant rates. FinComEco is already engaged with 20+ countries across Africa with four countries contracted to its model.

Swarming ahead
The venture sheds light on the development of Swarm, which opened its fund to HNW investors in January this year, having been operating for about 18 months. It issues security tokens to replicate returns of the underlying private equity assets. There are already 20,000 investors on the platform; at present the firm is working through KYC and related checks for these persons, who in total come from more than 60 countries, Timo Lehes, co-founder of Swarm, told this publication.

Clients of the asset management platform include those in the private banking and high net worth individuals. The tokens represent a fraction of a LP unit and these tokens are freely tradable, within regulatory restrictions; the structure cuts costs and makes access to alternative investment classes far wider and easier to a mass investor base, he said. The tokens issued on Swarm so far are denominated in $. The typical initial issuance is for a token value of $1. There is no minimum. The platform is open to accredited investors.

With private equity, a common - sometimes risky - feature is use of debt. Lehes was asked if the private equity assets Swarm hosts on its platform use leverage. “Typically not, however if a sponsor has a proven track record for a leveraged strategy, we would take such a fund through the normal process of approval on the Swarm platform.”

With alternative assets such as private equity, they are typically less liquid than listed shares on the stock market. The illiquidity premium is a reason why investors earn more yield so if these [Swarm] tokens can be bought and sold easily in a secondary market, does that create an issue?

“In a secondary market, f it turns out that there is strong demand for LP units in a particular fund and buyers are paying a premium over NAV, then yes, this would reduce yields for such on investment. However, fundamentally, it is the underlying fund strategy and execution that sets the yield in any PE fund, so for primary issue of Fund units, I don't see that tokenisation would change the return potential,” Lehes said.

Lehes said it was up to investors to decide what areas might next be affected by this technology, but he added: “One element that we see is that instead of taking positions in existing PE/Alt funds, investors will be able to pool capital for a particular purpose on the Swarm platform, such for the purpose of financing some infrastructure project or a real-estate investment.”

Controversy around crypto-currencies - such as around massive gyrations in price - is a distraction from the underlying benefits of blockchain technology, Lehes said, when asked if the turmoil was a problem.

“The fact that there are still a plethora of Crypto projects and therefore also crypto-currencies that make absolutely no sense and that will disappear, is not of any help to us. It is sometimes keeping people on the fence, until we are able to explain how investors on Swarm both get a direct legal ownership in the assets, as well as direct governance over the SPV that holds the assets. This usually brings the discussion away from the general crypto markets, to specifically how our platform works, which is what matters to us and our investors,” he added.