How Tokenization Can Fuel

a $400 Billion Opportunity

in Distributing Alternative
Investments to Individuals
Tokenization could revolutionize access to
alternatives, unlocking revenues for managers
and distributors while enabling higher-quality
portfolios for wealthy individuals.

By Tyrone Lobban, Nikhil Sharma, Dennis Cristallo,

Bernhard Marschitz, Mitch Port, Thomas Olsen,
Brenda Rainey, and Stephan Erni
 Onyx by J.P. Morgan | Bain & Company, Inc.

How Tokenization Can Fuel a $400 Billion Opportunity in Distributing Alternative Investments to Individuals

At a Glance

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.

Closing the supply and demand gap within alternative investments

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.

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How Tokenization Can Fuel a $400 Billion Opportunity in Distributing Alternative Investments to Individuals

• 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).

A November 2022 Bain study of 418 high-net-worth to ultra-high-net-worth individuals found that
53% of individual investors with $5 million or more in assets plan to raise their alternatives allocation
over the next three years, primarily for improved diversification (60% of respondents), for higher
returns (25%), and based on advisor recommendations (15%). The survey found that the main reasons
to accelerate allocations to alternatives are enhanced liquidity (59% of respondents), increased
holdings transparency (45%), better performance of alternatives (45%), and easier access to alterna-
tives products (38%).

The opportunity to expand into the individual investor segment has led major alternatives managers
such as Blackstone, KKR, Carlyle, and Apollo to sharpen their focus on individual investors for
future growth (see Figure 2).

Figure 1: Across all wealthy investors, alternative asset allocation averages about 5%

Global wealth allocations by investor type, $ trillions, 2022

Institutional capital High net worth+ Mass affluent

$135–$145T $60–$80T $70T
100%

80

60

40

20

0
Public Sovereign Insurance Ultra-high High
pension fund wealth fund net worth net worth
Corporate/private Endowments Other Very high Mass
pension and foundations institutions net worth affluent

Institutional: alternative assets Institutional: other assets Individual: alternative assets Individual: Other assets

Note: Investable assets include stocks, bonds, mutual funds but not value of primary residence, mature pension investments, or retirement assets
Sources: Preqin; Global Data; Bain estimates; Market participant interviews

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How Tokenization Can Fuel a $400 Billion Opportunity in Distributing Alternative Investments to Individuals

Figure 2: With alternative assets highly concentrated among institutional investors, asset managers
are looking for wealthy individuals’ capital to fuel growth

Global wealth, $ trillions, 2022 Percentage of new capital from individual

investors, 2021–2022

$287 $26
100% 40%
Individual wealth

80 Growth
Individual wealth 30 aspiration

60

20

40 Institutional capital

Current
Institutional capital 10 level
20

0 0
Total wealth Alternative assets Blackstone KKR Carlyle Apollo
under management

Sources: Bain Private Equity 2023 Midyear Report; Wall Street Journal; PE International; Bloomberg; Institutional Investor; SEC filings; Preqin; Global Data

Yet despite interest on both the demand and supply sides, offering alternatives to individuals in an
intuitive, seamless, and digitally native way has remained elusive.

As a result, fund managers and digital platforms have recently begun exploring tokenization of
funds to expand access to individuals. These early movers are testing whether tokenization can
streamline the operational processes required to distribute alternatives to individuals in a more
scalable manner.

Tokenization could catalyze modern operational infrastructure, which would benefit fund managers,
distributors, fund administrators, and investors through a more streamlined investment process, with
the added potential for enhanced liquidity, greater borrowing ability, and customization.

While individuals stand to benefit the most given their relatively low alternatives allocations and
smaller ticket sizes, these innovations could also benefit traditional institutional clients, which make
up 84% of alternatives investments globally.

This paper describes how blockchain and tokenization could directly address the distribution
challenges facing the alternatives industry and offers practical approaches to how tokenization
solutions can achieve scale. The goal is to enable a new paradigm for robust alternatives distribution
to both institutions and individuals, potentially yielding an approximately $400 billion annual new-
revenue opportunity.

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How Tokenization Can Fuel a $400 Billion Opportunity in Distributing Alternative Investments to Individuals

Complexity limits distribution to the approximately $150 trillion individual

investor segment
From the perspective of asset managers and distributors, the current workflows involving alternatives
are siloed and require handoffs among many participants, raising administrative burdens and
operating costs. Offering alternatives is a complex business that involves many parties, providers,
processes, and technology stacks, with limited standardization and automation across the end-to-end
lifecycle and with each participant having their own systems. This complexity is further compounded
by the variety of investment products available, each of which holds different asset classes (credit,
equity, real estate, venture, and so on). Each asset class has its own nuances, including how
investments are funded, how investors access their capital, and on what terms they do so. Connecting
this disparate information across a broad investor base becomes more complicated and costly as the
number of investors in each fund grows.

For a typical alternatives product, the key participants and providers are the following:

• Alternative asset managers create and structure investment products and set distribution and
investor servicing strategy. Alternatives management firms generally maintain their own sales
and investor relations teams, which market the firm’s funds directly to institutional investors and
through distribution platforms such as wealth managers to reach individuals.

• Wealth managers and other distributors identify alternatives offerings that fit the needs of
their client base, perform due diligence to assess the quality of the investment offering, structure
feeder funds (if needed), and market alternatives to investors and service investors throughout a
fund’s lifecycle.

• Investors make the final investment decision. High-net-worth individuals generally invest based
on a recommendation from their wealth manager, while institutional investors generally have
their own investment teams or hire investment consultants to identify attractive investments.
These investors provide capital to the fund in accordance with the fund’s terms and structure, and
earn returns based on the performance of the fund.

• Fund administrators and transfer agents maintain the books and records of the fund (including
the investor register, unit register, and asset register); process subscriptions, redemptions,
capital calls, distributions, and transfers; and maintain ownership of the know-your-customer
(KYC) process.

The end-to-end process undertaken by alternatives managers typically breaks down into at least the
following stages:

• Fund inception to develop the fund strategy, structure, terms, and business development plan.

• Fund setup to hire service providers (legal, fund accounting, audit, fund administration, transfer
agency, banking) and structure the fund vehicle.

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How Tokenization Can Fuel a $400 Billion Opportunity in Distributing Alternative Investments to Individuals

• Fund-raising and onboarding to develop marketing materials, initiate fund-raising efforts,

process subscription documents, onboard investors, and verify anti-money-laundering (AML)
and KYC documents.

• Fund operation to initiate capital calls or cash subscriptions, invest capital in accordance with
fund strategy, perform fund accounting, and distribute client reporting.

• Trading and liquidity to distribute capital or process cash redemptions and consider transfer
and secondary sale requests.

• Fund closing to notify investors, distribute capital as investments are realized, and maintain
fund operations through final liquidation.

Across each of these participants and throughout the fund lifecycle, there are a considerable number
of touchpoints, often taking place in a highly manual, bespoke manner, with multiple reconciliation
points along the way (see Figure 3). This complexity results in higher costs and slower settlement
times, which can hinder the managers’ ability to expand their offerings to a broader set of investors.

A standardized workflow and common platform that market participants could access would alleviate
many of these pain points but has not yet been established.

Figure 3: The existing alternatives process has ample room to streamline and automate

Participants Manufacturing Servicing Distribution Servicing

Fund Fund Fund-raising/ Fund Trading and Fund

inception set-up onboarding operation liquidity close

Alternative Develop strategy

Re- Owner-
asset managers Contract Initiate Capital Operate
purchase ship
Exit or
Offering materials
asset servicers fund-raising call fund shares reports extend
Identify investors

Wealth Define strategy

managers Identify Request/get Collateralized
general partners capital loans
Recommendations
to clients
Advice to clients

Investors Commit Redeem liquidity

capital
Collateralize
WM investment Receive
transfer
“Buy and hold” returns
capital
Trade limited
partner interest
Request
Asset Administrative/ and receive Capital calls Support
servicing firms operational support documents Clearing/settlement liquidation
Fund-raising

Establish Collect fees Fund

support

KYC/AML
accounting records accounting
Reporting
Compliance and Set up Reporting Manage
governance banking Fund accounting distributions

Sources: Moonfare company website; Pitchbook; Duane Morris; Preqin; Cepres; Bain analysis; CFI; Investopedia; Capital fund law; SEC; Titan; Family Wealth Report

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How Tokenization Can Fuel a $400 Billion Opportunity in Distributing Alternative Investments to Individuals

Education, access, and utility prevent adoption among individuals

While it is complex for managers to service individual investors, it is equally challenging for individuals
to access alternatives.

This does not mean individuals are not interested; in fact, the November 2022 Bain study indicated
that more than half of very-high- and ultra-high-net-worth individuals and nearly 40% of high-net-
worth individuals plan to increase their allocation to alternatives over the next three years, mainly
in expectation of improved diversification and higher returns.

Demand from this large, mostly untapped investor base clearly exists, yet several barriers impair their
seamless participation in alternatives. These barriers include the following:

• Education: Some 40% to 50% of individual investors in the Bain survey said limited education
about alternatives prevents them from investing. Alternatives strategies can be esoteric and
difficult to understand, and they often provide limited transparency to investors. This makes
them one of the more difficult asset classes for distributors to sell to individuals.

• Access and sourcing: Accessing alternatives can be opaque, cumbersome, and costly. There is
no industry-wide marketplace, so individuals have to rely on advisors and relationships to source
deals. Another challenge is that the minimum investment sizes can be $5 million or more, often
too high to allow sufficient diversification within alternatives and at the overall portfolio level.
In addition, certain jurisdictional regulations have criteria that define who can access which
investment offerings. In the US, for example, investors must be qualified purchasers ($5 million
or more in investments) or accredited investors (more than $1 million in liquid net worth) to
access most nonregistered investment offerings, according to Title 17 of the Code of Federal
Regulations Parts 230 and 240.

• Liquidity: Current arrangements provide limited liquidity options, with the total term on PE
funds often extending beyond 10 years—longer than most individual investors are willing to
lock up capital. Furthermore, capital calls are unpredictable and are usually issued with short
notice, making it difficult and stressful for investors to manage their liquidity.

• Operational and administrative: Compared to traditional investments, the overall process of

investing into alternatives can be daunting. Subscription documents are long, requiring patience
and attention whether completed electronically or manually. Funding investments typically
involves sending wires two to three days prior to being recognized as an investor. Fund
administrators can have significant onboarding processes, and reporting is not as timely
compared to that of traditional assets.

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How Tokenization Can Fuel a $400 Billion Opportunity in Distributing Alternative Investments to Individuals

Current solutions fall short of a seamless experience

The industry’s efforts at overcoming barriers to broader access to alternatives have involved building
products tailored for individuals, namely the following:

• Feeder funds shift the operational burden to distributors, while imposing additional administrative,
audit, legal, and other fund costs on investors

• Funds of funds provide diversification and reduce servicing needs, but still mostly rely on
manual, disparate systems. In addition, they lack customizability and add a second layer of
management fees, performance fees, and fund costs.

• Registered funds add regulatory filing and reporting burdens for managers and introduce high
costs, relatively constrained liquidity, and full upfront funding that could negatively affect
fund performance compared with exempted offerings.

In sum, while these products provide individuals with access, they have effectively shifted the
operational overhead from fund managers to distributors, while adding costs for investors. Although
helpful today, these options do not inherently have the scalability, automation, or simplicity required
for a streamlined, digital, low-touch investor experience. Therefore, rather than being replaced by
new solutions, these structures could be enhanced by enabling broader, streamlined distribution
and reduced costs that could be passed on to end investors.

Distributors, for their part, face other barriers. Manually intensive processes create substantial
administrative costs and operational risks. Fragmented systems across intermediaries require
complex reconciliations that can result in delays. These firms have responded to increased volume
by investing in personnel and technology systems. However, this response falls short of addressing
issues of core workflow fragmentation, disjointed ownership data, and sporadic capital calls and
distributions.

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How Tokenization Can Fuel a $400 Billion Opportunity in Distributing Alternative Investments to Individuals

Tokenization offers a new, scalable approach

Tokenization and blockchain offer a potential solution to the challenges of fragmented, non-
standardized processes across multiple participants in the alternatives value chain. At its core,
tokenization can enable creation of a shared platform and workflow that enables more seamless,
automated order processing, settlement, ownership tracking, and data management.

Tokenization refers to representing ownership and properties of an asset as a programmable piece

of code—known as a smart contract—on a distributed ledger or blockchain (see Figure 4). A powerful
characteristic of smart contracts is that they contain both the records of ownership of an asset (how
much each investor owns) and programmable, automated rules for the updating of those records
(computer logic that defines how and when an asset can be bought or sold, for example). In the
context of alternatives, the assets to be tokenized are alternative fund limited partnership (LP)
interests. The actual process of tokenization involves specialized software that can create smart
contracts with the embedded information.

Since these fund tokens resemble ledgers that record ownership of LP interests as well as the rules
under which those LP interests can be transferred, tokens can act as an alternative recordkeeping
system that a transfer agent could use instead of a traditional registry of inscribed shares. When
combined on the same blockchain ledger with other forms of tokens such as deposit tokens that
represent fiat cash, it is possible to enable automated, instantaneous settlement, which would be a
material improvement on today’s lengthy, multiparty processes involving siloed data and costly
reconciliations.

When all relevant parties have shared access to these programmable on-chain records, a system can
be created with much greater automation, less operational friction, and a more seamless ability to
manage alternatives at scale, end to end.

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How Tokenization Can Fuel a $400 Billion Opportunity in Distributing Alternative Investments to Individuals

Figure 4: Anatomy of a fund token

• A fund token is like a digital certificate of ownership, similar to how share certificates in transfer agency systems represent ownership in
a traditional fund.
• Tokens on blockchain represent ownership pseudonymously. Sensitive shareholder information can be kept private by obfuscating
on-chain information, or storing identities and details offchain, or both.
• A key difference between a fund token and a traditional book-entry fund share is that a fund token holds both data and encoded
business logic.

Identifiers
Fund Name PE Fund L.P.
Share Class Class A
CUSIP/ISIN 78520M102

Data held on the token

Nav per share $50,000
Total number of shares issued 1,000

Holders KYC Commitment Sharing % Drawdown Commitment Drawdown

status ($1,000s) ($1,000s) date date

Investor 1 $5,000 10% $500 30.06.18 21.01.19

Investor 2 $10,000 20% $1,000 23.11.18 21.01.19
Investor 3 $5,000 10% $500 20.07.18 21.01.19
[…..] […..] […..] […..] […..] […..] […..]

Logic held on the token

Subscribe to the fund Logic to accept digital cash and issue shares
Redeem from the fund Logic to cancel shares and return cash to investors
Transfer fund shares Logic to enable compliant transfer of shares
Drawdown capital Logic to process drawdowns and update state of ownership of the token

• The token has a unique identifier allowing it to be invoked, an • Although the token may hold a unique ID mapping the
interaction akin to how a fund issuer would manage a fund investor details to ownership, the actual investor onboarding
through a transfer agent. information and details may be stored in other linked
databases to ensure privacy of investor information.

• The net asset value per share metadata in a token captures • Encapsulating details into token representation allows
the periodic valuation of shares and may be sourced from different views to be generated for reporting, tracking,
back-end fund accounting systems, as occurs today. ownership transfers, and so on. Having this information on a
• The total number of shares issued (supply of tokens) is shared recordkeeping system reduces need for constant
defined upfront, like issuing book-entry shares in fund reconciliations to agree on the state of ownerships.
issuances today. • Information about investments and expenses of the fund may
• The token includes details of the shareholders’ total capital be sourced from elsewhere but could be recorded in
commitment and their proportional ownerships in the fund. It consonance with the fund token to apportion them in the same
tracks the remaining capital obligation and the amounts drawn ratios as commitments into the fund.
down to date and total capital distributed to the shareholders
to date.

• Fund-lifecycle business logic can be encoded and held inside • Transaction rules can also be encoded into the token at a
the token. Such business logic acts on the ownership data granular level—for instance, KYC/accreditation approval
held on a token and updates the state of ownerships and before transfers.
balances. • All token transactions are recorded transparently on the
• The embedded logic ensures that the ownerships and balances blockchain that provides a digital audit trail, reducing the need
of the fund can be updated with limited human intermediation. for reconciliations and enabling process automation.

Note: This token design is illustrative only; actual components would vary based on specific requirements
Source: Bain & Company and Onyx by J.P.Morgan

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How Tokenization Can Fuel a $400 Billion Opportunity in Distributing Alternative Investments to Individuals

Figure 5: The building blocks of tokenization enable features and uses that are difficult or impossible
to implement today

New innovative use cases

Reimagining how fund and wealth management works

(such as novel ways to fund, customize, rebalance)

Liquidity Collateralization

Greater ability to sell (improved transfer and Greater ability to borrow (improved workflow to perfect
reconciliation workflow) collateral and liquidate if needed)

Data management

Shared information (ownership data) lowers

coordination cost and complexity, enabling liquidity
and collateralization features

Tokenization

Greater mobility and utility (ability to represent, track,

update ownership)

Source: Bain & Company and Onyx by J.P.Morgan

Tokenization could revolutionize alternatives

Tokenization can enable the following feature improvements and innovations (see Figure 5):

• Data management: At its core, tokenization involves data standardization, workflow mutual-
ization, and process automation. Streamlining the sharing of information boosts efficiency and is
required to enable investor-friendly features. Mutualizing workflows and data reduces the need
for manual reconciliation costs and complexity. Having ownership conferred automatically
through smart contracts upon payment reduces the manual burden of recording and transferring
ownership.

• Liquidity: Selling an alternatives position is a manual, bespoke, and laborious process.

Simplifying ownership recordkeeping could improve liquidity at scale and enable transactions
of smaller ticket sizes, which are economically and operationally infeasible today. Tokenization
could make illiquid investments more cash-convertible for individuals—overcoming a key barrier.

Note that enhanced settlement and better ownership records alone will not create liquidity;
a sufficiently robust network of buyers is essential. This could come from existing holders or
secondary funds that would have the opportunity to purchase the new supply of smaller positions
in a familiar fund at a discount to net asset value. Or, potentially, a new class of market makers
may emerge to provide liquidity in illiquid assets.

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How Tokenization Can Fuel a $400 Billion Opportunity in Distributing Alternative Investments to Individuals

In addition, while tokenization could simplify the sale of illiquid assets, creating and sustaining
liquidity requires aligned incentives across stakeholders. The sale of LP interests is an example
where the incentives of the fund manager, distributor, and investor are not aligned. Although
distributors and investors are generally open to selling LP interests, fund managers typically can
veto sales of LP interests at a discount, which is where illiquid secondaries tend to price. While
distributors could circumvent this scenario by establishing feeder funds, tokenization could offer
an alternative solution: Smart contracts could embed fees that would be automatically paid when
fund tokens change hands, providing a previously nonexistent source of revenues to fund
managers and give an incentive for their participation in secondary transactions.

• Collateralization: Only select firms offer collateralized loans against fund interests today and
only to their wealthiest clients, given the effort required and underwriting risks involved.
Tokenization can rectify this situation, owing to the following characteristics:

– Blockchain records could quickly and reliably prove provenance to establish ownership of
collateral.

– Smart contracts and blockchain data can improve collateral monitoring by restricting token
transfers, which is critical for loans collateralized by actively distributing funds. Consider a
loan collateralized by a PE fund holding. Currently, there isn’t an intuitive mechanism to
monitor fund holdings until the repayment of the loan to ensure proper collateral is in place.
Therefore, if a fund distributes capital, the investor (the borrower) can effectively walk away
with the distribution from the manager, while the lender is left with no collateral securing
the loan.

– Enhanced liquidity through secondary markets could mitigate illiquidity risks should a
lender need to sell their collateral and convert it to cash.

• Innovative use cases: Data management, liquidity, and collateralization form the foundation
for new capabilities that are otherwise difficult or impossible to implement today. Such new
capabilities could include the following:

– Tokenizing underlying investments (e.g., individual company shares within a PE fund) to

enable partial divestments;

– Negative screening (for instance, limiting exposure to the oil and gas industries) or positive
screening, such as ensuring an environmental, social, and governance focus;

– Programmatic rebalancing of discretionary model portfolios; and

– Automating capital calls.

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How Tokenization Can Fuel a $400 Billion Opportunity in Distributing Alternative Investments to Individuals

Two such transformational capabilities that could be enabled by tokenization are:

– Automating capital calls: Capital calls are a significant point of friction in alternatives
today since they are unpredictable, time-sensitive, and manual. The process requires fore-
casting and having precise liquidity levels to avoid missed capital calls (which would result in
penalties or losing access to the fund) or setting aside more capital than called (which results
in a cash drag and the opportunity cost of deploying cash elsewhere). In a future state where
cash is kept on chain, tokenization could automate this process, improving the investor and
advisor experience while reducing the need for reconciliations.

Beyond simply improving the current state, tokenization could also create a new paradigm
for capital calls. If an investor commits capital to a PE fund, they could temporarily invest
the same amount into a liquid tokenized investment vehicle that aligns with their overall
financial goals. When the PE fund calls capital, a smart contract could enable the automatic
redemption of the liquid tokenized investment, using proceeds to satisfy the capital call.
This could be done with limited human intermediation and serve the dual purpose of
automating the capital call process while eliminating the cash drag and opportunity cost
associated with the current subscription process—benefiting both managers and investors.

– Scalable customization: Once the foundational layers are in place, smart contracts could
enable scalable customization of tokenized portfolios. These could include funds of funds
focused on alternative investments or blended discretionary portfolios combining tokenized
traditional and alternatives funds. (See Onyx’s recent report: “The Future of Wealth
Management: Ultra-efficient portfolios of traditional and alternative investments powered by
tokenization.”)

Blockchain-based discretionary portfolios could revolutionize the wealth management

industry by enabling automatic, ongoing rebalancing and harmonizing the treatment of
different asset classes. This could allow alternatives to be included in discretionary model
portfolios, improving the overall quality of client portfolios and providing a competitive edge
for pioneering wealth managers.

In the longer term, alternatives managers could also tokenize underlying investments (as
opposed to LP interests) to better distribute individual deals or access asset-backed financing.
While co-investments and individual deal distribution exist today, tokenization could enable a
deeper degree of personalization and customization. For example, an investor whose wealth
is concentrated in a software business could work with an advisor to build a bespoke PE
portfolio while avoiding further tech exposure.

While the initial benefits of tokenization may accrue to individuals, mass customization aids
institutions as well. Consider asset management firms that build customized portfolios of
alternatives for large institutions. These firms could leverage scalable, transparent platforms
to simplify manual processes, enabling them to reinvest in higher-value functions like
manager due diligence.

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How Tokenization Can Fuel a $400 Billion Opportunity in Distributing Alternative Investments to Individuals

Overall, tokenization could address persistent frictions around ease of investing, enhance exit time-
lines, support broader borrowing against holdings, and enable customizable portfolios. However,
tokenization will not address all aspects of the alternatives investment lifecycle (see Figure 6).
Investor onboarding, AML/KYC checks, and reporting requirements could be improved by
complementary technological solutions. Accreditation requirements such as those described in
Section 3(c)(7) of the Investment Company Act of 1940 in the US, which provide stringent guidelines
on the eligibility of individuals investing in nonregistered alternatives, would remain in place
regardless of how the investment is accessed.

Figure 6: Tokenization can address many but not all barriers to broader adoption of alternatives by
individual investors

Barriers to expanding alternatives among wealthy individuals

Sufficient liquidity Lower cost/fees Streamlined reporting Product

(through trading, (e.g., through more efficient and tax filing knowledge
redemption) workflows)

Collateralization Predictable cash flow Seamless

ability (from better capital call/ onboarding process
distribution process)

Addresses Addresses “cost/ Addresses Addresses

liquidity barrier predictability” barrier accessibility barrier education barrier

Added features Improved experience

via tokenization via tokenization

Source: Bain & Company market participant interviews

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How Tokenization Can Fuel a $400 Billion Opportunity in Distributing Alternative Investments to Individuals

Tokenization could unlock a potential $400 billion revenue opportunity

A markedly improved investor experience and additional features could enable more widespread
adoption of alternatives by eligible individuals while providing new streams of revenue and cost
efficiencies for fund managers and distributors. The incentive to introduce tokenization is compel-
ling: We estimate the full potential opportunity as approximately $400 billion in additional annual
revenue.

This calculation flows from our assumption that wealthy investors’ alternatives allocations could
increase from the current approximately 5% to 20% (market participants interviewed cited 15% to
20% as a reasonable allocation). This could result in the addressable market growing from $4 trillion
to $16 trillion (high-net-worth individual wealth of $80 trillion multiplied by an incremental allocation
of 15% (see Figure 7)). The bulk of the opportunity stems from increased distribution and assets under
management as companies across the value chain generate incremental fees, though new revenue
from liquidity markets and collateralized loans could account for up to $30 billion in additional
annual revenues. New revenues would accrue mainly to fund managers, wealth managers, and
wholesale platforms, with additional benefits to other firms such as fund administrators and transfer
agents. The details are as follows:

• Fund managers’ $270 billion opportunity: Fund managers may attract more capital by
expanding their investor base, leading to increased assets under management and revenues
from management fees and carry. New revenue streams may arise from secondary transactions
or partnerships with distributors, while administrative simplification could also generate cost
savings.

• Wealth managers’ $100 billion opportunity: Wealth managers could benefit from broadened
distribution and revenue share arrangements with fund managers. Higher secondary trading
and collateralized lending provide additional revenue upside, while simplified operations could
also enable wealth managers to flatten the marginal asset servicing costs for every additional in-
vestor. First movers could differentiate on technology, thereby gaining early market share and
customer loyalty.

• Wholesale platforms’ $30 billion opportunity: Wholesale platforms that differentiate them-
selves from competitors can expect to expand assets under management, secondary transaction
revenue, and potentially other fund services. These providers also stand to gain from
administrative and operational simplification.

• Fund administrators’ and transfer agents’ $5 billion opportunity: These firms, along with
software providers that adopt tokenization solutions, could increase market share, asset servicing
revenues, and profit margins through cost efficiencies. Simplified operations could help unlock
scale and value across the entire investment lifecycle.

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How Tokenization Can Fuel a $400 Billion Opportunity in Distributing Alternative Investments to Individuals

Figure 7: Methodology for the $400 billion revenue opportunity

Key figures Methodology

20% target allocation • Market participant interviews cited 15%–20% as a target alternatives allocation
to alternatives • Ultra-high-net-worth investors have 19% allocations
• Average allocation across unconstrained institutions (endowments, foundations, and sovereign
wealth funds) is around 40%

$400 billion full-potential • High-net-worth individuals have $80 trillion in investable assets
revenue opportunity • Assuming an increase from 5% to 20% results in $12 trillion in flows to alternatives (15%
multiplied by $80 trillion)
• Revenue derived from fees associated with incremental assets and additional liquidity and
collateralization features (such as increased management fees and carried interest for
fund managers)

Revenue drivers • Fund managers: • Wholesale platforms:

Management fees, carried interest Platform fees, trading fees

• Wealth managers: • Fund administrators and transfer agents:

Revenue share with fund managers, Increased assets under administration
lending revenue, trading fees

Note: Additional information regarding revenue sizing is available upon request

Source: Bain & Company and Onyx by J.P.Morgan

Establishing the pathways to tokenization

For the industry, progressing beyond proofs-of-concept and small experiments will require a thought-
ful distribution and implementation model. Realizing the full potential of tokenization may entail
greater industry coordination and multiyear commitments. Commercially successful tokenization
efforts will likely come from incumbent firms evolving their infrastructure, rather than from emerging
challengers. However, early successes could flow from meaningful collaborations between these
two groups.

With these dynamics in mind, several pathways could lead to wide-scale tokenization of alternatives
and their broader distribution to individuals. Specifically, initiatives could be led and defined by
different participants in the alternatives value chain: Fund managers, wealth managers, wholesale
distribution platforms, or industry consortia could all step forward as initiative leaders to spur
adoption. In this context, initiative leader refers to the participant or consortium that would lead or
coordinate the tokenization solution’s development, governance, and operation, including defining
token standards and technology choices.

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How Tokenization Can Fuel a $400 Billion Opportunity in Distributing Alternative Investments to Individuals

Each tokenization model has different implications in terms of which specific capabilities a firm needs
to develop, their role in the value chain, and the resulting economics. Models led by wealth managers
and wholesale platforms appear to be the most straightforward and promising, as they can design a
system that enables a common set of features across their fund offerings, and with extensive investor
relationships, these groups may be best positioned to spur adoption. For large distributors, even a
private tokenized marketplace deployed exclusively to their client base could sufficiently unlock
benefits such as enhanced liquidity and customization, providing a new competitive edge. Below are
the details of all such models:

Wealth manager-led: Wealth managers are perfectly positioned at the intersection of supply and
demand. Their demonstrated ability to raise capital could enable them to persuade alternatives man-
agers to participate in tokenization initiatives. In situations where fund managers are less receptive,
wealth managers can create tokenized feeder funds to build their roster of on-chain funds and
demonstrate benefits to fund managers over time. On the investor side, wealth managers serve as
trusted advisors and can help educate clients on the benefits of tokenized funds, while providing an
improved investment experience. Wealth managers’ relationships, credibility, and advisory status
provide advantages throughout the value chain. As a result, they have the foundation to propel market
growth, spur broader tokenization of alternatives, and increase alternatives distribution to individuals.

Wholesale-led: Wholesale platforms could also emerge as leaders. Like wealth managers, they connect
funds to investors and distributors and benefit from diverse product shelves, enabling them to identify
offerings conducive to tokenization. Their existing focus on technology and user experience provides
a meaningful head start. If properly implemented, the familiar self-service user experience coupled
with added features could lead to a higher adoption rate of alternatives, driven by tokenized invest-
ment offerings.

Fund manager-led: A key requirement for successfully broadening alternatives access to individuals
lies in distribution channels. Fund managers have an advantage in that they manufacture alternatives
products; however, they typically partner with distributors to market these products. As opposed to
setting up direct-to-investor channels, leveraging distributors is a lower-cost approach for managers
and is more consistent with how individuals invest in alternatives today. Many fund managers have
already taken the fund manager-led approach by tokenizing smaller funds, so we see these initiatives
achieving the most success where fund managers find and partner with technology-forward, well-
established distribution partners.

Consortia-led with ecosystem-driven standards: Standardized market infrastructure could pro-

foundly affect alternatives by aligning participants on features, efficiency, access, and liquidity.
Interoperability solutions that enable connectivity across blockchain networks could also play a role
in a consortium approach. However, ecosystem-led approaches seem unlikely to proliferate given
challenges with governance and incentives alignment, combined with the potential difficulty getting
agreement on standards and features.

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How Tokenization Can Fuel a $400 Billion Opportunity in Distributing Alternative Investments to Individuals

Start small, establish proof points to create buy-in and adoption

A pragmatic, step-by-step approach removes the need for material upfront investment and allows
for a more targeted approach to unlocking benefits. Tokenization solutions don’t necessarily require
overhauling existing systems, strategies, and relationships. With off-the-shelf solutions available,
firms could start with targeted applications focused on distribution, transaction management
(subscriptions and redemptions), or capital call pain points for a few investors. These narrow use
cases could demonstrate tangible benefits before scaling tokenization more broadly.

Wealth managers and wholesalers should first identify the biggest pain points in delivering alternative
investments to clients. The concept of tokenization can prompt foundational questions as to why
current models persist despite limitations. Beginning the analysis to uncover constraints in current
systems and processes would likely reveal the opportunities that tokenization could introduce
through cost reduction and new revenue. Both groups benefit from their proximity to individual
investors and their diversified shelf of offerings, making it easier to find familiar and receptive
partners and clients in this endeavor.

It is also important to consider the jurisdiction in which to explore tokenization. A number of countries
have fewer regulatory requirements or lower investor accreditation thresholds relating to individual
investors. Singapore, for instance, requires either net worth over SGD 2 million, net financial assets
over SGD 1 million, or income of SGD 300,000 or greater (prescribed by the Monetary Authority of
Singapore, Securities and Futures (Classes of Investors) Regulations 2018). It is also worth noting that
most high-net-worth wealth resides in the US, according to the Credit Suisse Global Wealth Report 2023.
Therefore, starting in the US may offer the best return on investment despite higher initial hurdles.

Fund managers starting out should first identify their goals. Firms that want to take meaningful steps
into tokenizing their products might first want to tokenize a portion of a widely distributed flagship
fund vintage, potentially after a smaller experiment, such as tokenizing one feeder fund with one
wealth manager. Implementing tokenization via a share class in an existing structure rather than a
feeder or new fund is likely the most efficient and client friendly. Another alternative could be to pursue
tokenization internally with employee investment offerings—providing the added benefit of gathering
useful, actionable color on the life cycle activities of a tokenized fund without the risk of a poor client
experience.

Regardless of approach, firms should take the following actions to best position their initiatives for
success:

• Dedicate time and resources to understand the technology’s capabilities and limitations. Leverage
existing innovation or corporate strategy teams to explore trends in tokenization and how the
technology could be applied within the firm.

• Take inventory of existing processes and identify which pain points limit the growth of alternatives
to individuals. Spend time with the professionals who deliver alternatives to individuals in order
to validate hypotheses. Explore new designs for existing processes to achieve greater scale.

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How Tokenization Can Fuel a $400 Billion Opportunity in Distributing Alternative Investments to Individuals

• Understand how to serve the unique client base better. Bain survey data indicates that liquidity,
transparency, and access are three key reasons that individuals are underinvested in alternatives,
but these findings should be validated within a firm’s own client base. Begin discussions with
key clients to understand which potential features could be added to increase allocations to
alternatives.

• Define success for the initiative with well-defined milestones. What parts of the existing process
are in scope, and by when does the firm expect to demonstrate potential benefits? If successful,
does the project extend to additional aspects of the investment process, or does the firm broaden
its focus to additional funds?

• Understand what is and is not possible under current regulations and identify a suitable
jurisdiction for early use cases. Plan for other key considerations such as obtaining requisite
licenses, filling gaps in technological capabilities, deciding on the most appropriate target fund
and access point, and implementing new workflows.

• Upskill relevant staff to educate and support clients serving as early adopters. With complexity
already being a barrier for individuals’ access to alternatives, adding the concept of tokenization
could add nuance to client conversations. Client-facing professionals should be educated on the
benefits of tokenization and be prepared to handle client objections.

Tokenization has the potential to change how alternatives work by making it easier to distribute and
invest in funds and adding investor-friendly features to help bridge the gap between alternatives
managers and individuals. Tokenization will not lead to a complete democratization of the asset class,
such as access for retail investors, liquid 24/7 markets, or decentralized trading. Instead, it could make
alternatives more accessible and desirable for high-net-worth individuals, potentially increasing
allocations and consequently industry revenues by $400 billion annually. Given the sizable stakes,
interested firms should develop their tokenization strategy and begin testing and learning to ensure
they are well positioned for this emerging opportunity.

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