Digital Assets: a Ticket to Family Office 2.0

Alexander Tkachenko, CEO, VNX Exchange, recently took part in two major events in the UAE to talk about alternative investments, digital assets and the role they play for family offices. The Annual Investment Meeting in Dubai featured prominent speakers, including the president of Bolivia Evo Morales; Massimo Falcioni, Chief Executive Officer, Etihad Credit Insurance; Dr. Mukhisa Kituyi, Secretary General United Nations Conference on Trade and Development, discussing digital globalization and foreign direct investment in the Middle East and beyond. AIM Summit in Abu Dhabi had various speakers talking about securitization; among them were Saber Farooqi, COO, Dalma Capital Management Limited, and James Fierro, CEO, ECO Capacity Exchange Ltd.

Family offices often invest into what they know and understand best: real estate, art, gold and other “safe” financial instruments. But with the advent of “smart investing” even the most conservative family offices now venture into asset backed digital financial instruments and cryptocurrencies to diversify their portfolios.

Total crypto market capitalization currently stands at around  $174.5 billion. Daily trading volume of Bitcoin as of April 10 stood at $14 billion with the market cap of $92.8 billion, according to CoinMarketCap, a market metrics provider. And cryptocurrencies are on the rebound right now. But digital assets are not limited to digital currencies, they belong to a much more sophisticated group of financial instruments built with the help of blockchain.

Let’s take a step back. The current capital markets layout is a complex system with layers upon layers of regulators and intermediaries. Digital assets, on the other hand, offer a system much better equipped for safe and transparent investing because they rely on distributed ledger technology. With the help of proper regulation, these assets offer unique opportunities for investing that may yield better financial returns than fiat-based financial models.

As regulated digital asset exchanges become the new norm, this added layer of legal clarity ensures that these trading platforms can offer better security of investments and pave way to a new class of assets. Asset backed securities are not related to ICOs that burned countless retail investors, they do not involve working with murky intermediaries. The new generation of digital asset platforms use real tangible assets. So instead of tokenizing a chair, such marketplaces can tokenize venture capital portfolios, for example, a solid entity on its own backed by the expertise and money of venture capital partners. VNX Exchange is a good example of such a trading platform: it is a marketplace for tokenized VC funds’ portfolios but there are other examples on the market too. Investing into such tokens offers a whole new realm of opportunities not pegged to the value of Bitcoin or Ethereum but instead to real-life assets, a concept familiar to family offices.

The family offices of today are an evolving institution. Just a few months ago they were featured prominently on the cover of The Economist and in the piece titled “Family Offices Become Financial Titans”. A survey of 311 family offices in a special 2019 report by UBS has shown that “nearly half of family offices (45%) are embracing a balanced preservation plus growth-oriented strategy, while a third (32%) are focusing more purely on preservation and a quarter (23%) on growth.” Interestingly enough, North American and Asia-Pacific family offices find a growth-focused approach more appealing. Digital assets with inherently higher growth potential fit perfectly into this investment strategy.

What’s more, private equity, as a subset of these alternative investment opportunities, continues to play a major role in the average family office portfolio according to the report. It has also shown that globally in 2018 alternative investments played a significant role for family offices, with 46% of the average family office portfolio dedicated to investments including private equity, hedge funds and real estate.

Private equity and venture capital, as a subset, is attractive to family office managers partly because the investments PE and VC firms make are backed by expertise, and in the case of VCs, by the knowledge of technology industry trends and experience of running a business.

Venture capital as an asset class is a new phenomenon promising higher yields and better safety than real estate, for example, which is prone to overall market fluctuations. VC funds’ startup portfolios are diversified, which is why when one portfolio company fails, it doesn’t sink the whole portfolio.

VNX Exchange is a platform that tokenizes these portfolios and sells them to a broad pool of investors. This new type of digital asset can help forward-thinking family offices enter a new era of investing where they can not only focus on growth but also guarantee lasting impact and legacy by investing into cutting-edge technologies.