There are plenty of barriers to entry for Asian investors who are not big enough to buy directly into the many alternative investment opportunities around the globe, the deals that span the spheres of private equity, venture capital, real estate, infrastructure, private debt and hedge funds.
Aside from often requiring single commitments of USD20 million or more, they are illiquid and not especially transparent. They are also long-term commitments, often of 10 years, perhaps more.
But fintech start-up Xen, co-founded by Cokeng in late 2018, has created a solution which allows fractionalized access and tradability in these alternative investments. Xen is therefore opening up a world of opportunity for such investments to accredited investors in Asia. And as the market is estimated to be worth more than USD18 trillion, the potential for pooling these sources of private wealth in Asia is immense.
Xen’s creators believe this is the first-of-its-kind digital securitization platform that provides a one-stop solution for access and liquidity in alternative investments.
The endgame is to issue blockchain-enabled digital securities for private investments that turn the illiquid to liquid assets, and partnering with licensed exchanges for trading of digital securities in a compliant environment.
“What we do is provide access and tradability and top tier alternative investment opportunities, private equity funds, venture capital funds, and hedge funds to accredited investors in Asia,” Cokeng explains.
She started Xen in Singapore in November last year, and right now the firm is in final proof of concept stage, with about 16 staff globally, 13 in Singapore, two in Hong Kong, one in New York.
Cokeng is nothing if not focused and dynamic. Within two months of launching Xen with her co-founder and COO, Manish Sansi, they had developed and launched the initial beta, then securing a strategic investor to fund the first year of operations, and obtaining initial commitments of USD1.8 million from VC investors in a seed round in early 2019.
“We are currently in the process of closing the first USD100 million of investments from accredited investors and family offices in Asia, who are investing in about five top tier funds within private equity, venture and hedge funds,” she reports.
Democratising the alternative space
With a vision of unlocking quality, global alternative investments for a more democratised cross-section of wealthy Asian investors, Xen’s premise is that it is transforming the asset management industry by empowering licensed, high-performing alternative investment managers to raise capital with improved scalability, efficiency, transparency, security, compliance and credibility. And all achieved through a user-friendly, compliant onboarding platform.
Matching supply and demand
Cokeng sees Xen as a platform to serve both the supply and demand sides. “For the supply side, we approach it as a fund of funds,” she elucidates, “with no demands on the private equity firm or the hedge fund to change the way they do things. Our value to them is that we come in as a single counterparty, as we aggregate money from different accredited investor sources in Asia, so we can meet their minimum cheque size.”
And for the investors, she maintains that Xen is helping them adapt to new market dynamics. “Private is becoming the new public,” she observes, “because a lot of companies are taking longer and longer to go to IPO, and then many unicorns underperform on the listing, so our investors want to get in earlier to this fascinating world of private investments.”
Asia’s wealth dynamics
Add to this the rapid growth in wealth in Asia and intergenerational transfer of that wealth, and Xen is deeply engaged with family offices, mostly single-family offices, which represent an accredited investor community which is increasingly sophisticated, but of a size that also needs to aggregate with other sources of money in order to access the large-ticket investments in some of the stellar, brand name alternative investment vehicles around the globe.
Cokeng notes, for example, that to buy into a top tier private equity fund might require a minimum commitment of perhaps USD20 million. “We create a feeder vehicle like a Cayman SPV to buy in, and we feed in accredited investors who might want to put in anywhere from USD100,000 each,” she reports. “Our mission is to enable investors to access institutional-quality opportunities that have a proven track record of at least five years, and a strong investment thesis,” she explains. “We have an investment process, we conduct due diligence, we have an investment committee.”
Making the illiquid tradable
But the vision does not end there. “Once they are in,” Cokeng reports, “we can open up a market for investors to buy and sell the LP interests in our own feeder vehicles. For the LP, they get the USD20 million for the lifetime of the fund, such as 10 or 12 years, but our investors can trade in and out. In short, we create a secondary market for these illiquid LP interests.”
Xen is adopting blockchain technology to facilitate this. “Because we are new,” Cokeng explains, “we have the luxury of building our platform using all the latest technologies and blockchain is a way to create essentially digital shares out of illiquid assets. That will ultimately make the buying and selling of these illiquid limited partnership (LP) investments more accessible in a secondary marketplace.”
Xen is already licensed as an asset manager with a Cayman-domiciled fund of funds and is also in the process of acquiring a company that holds a full Monetary Authority of Singapore Capital Markets Service (CMS) Licence.
“All the underlying products are still funds, in other words collective investment schemes or securities, which means Xen has to be regulated as a distributor of securities,” Cokeng reports. “We follow all the fund administration, custody, and KYC compliance protocols as if we are marketing securities, which is exactly what we are doing.”
The Xen investors have real, part ownership through the Cayman SPV. “We only use blockchain and smart contracts as a way to effectively codify the terms of the fund, the lockup period, the margin fees and the carry and any marketing or investor restrictions,” Cokeng elucidates. “For example, if there are certain funds that don’t want to take US investors, we encode that into the terms of the security in order to make it easier for buyers and sellers to transact on our platform, but the underlying is still exactly the LP interest, so any holder of the security is listed as holder of that particular vehicle.”
Cokeng explains that the type of funds that Xen targets are professionally organised and report a quarterly or monthly NAV, depending on whether they are PE/VC fund or a hedge fund investment.
Bringing it to light
“We then publish these NAVs on our dashboard,” she reports, “just as in the institutional markets, and investors might then want to buy in at discounts or premiums to NAV during the lives of those investments. For the most popular funds, I must admit we seldom actually see discounts, because there is constant demand, but for closed-end vehicles, such as private equity and venture capital, we sometimes see some slight discount to NAV when sellers dispose to new buyers.”
Cokeng notes that there are many issues with private investments and the potential lack of transparency. “By improving transparency in the space, especially if we offer fractionalised access, tradability and liquidity, these investments can become more suitable for accredited investors, and maybe even retail investors down the line,” she comments. “The ecosystem needs to some extent to reflect some of the strengths of the public markets, in terms of safeguards, research, investor protection, and liquidity.”
They will never be as volatile as public securities because of the lack of daily NAVs and massive market makers (like the huge hedge funds for the public markets) – for example just look at how closed end funds trade on the markets, these are often quite illiquid and trade at big discounts to NAV.
Cokeng adds that there are wider efforts in the industry to apply these concepts to very illiquid assets like art, wine, and some single asset real estate, but Xen prefers to stick to its core market.
Strict focus on target markets
“We are highly focused on our target segment, we are not a fund-raising platform,” she reports, “so we want to stick to institutional opportunities that can be opened up for accredited investors. The reason we are starting with funds with collective investment schemes is that there are a lot of ecosystem measures in place, there are fund administrators, there are custodians, there is a way to assess NAV and essentially the price to value of these assets. With art, for example, there are many other factors in play, for example storage, valuation, verification of ownership, insurance and so forth.”
Cokeng says that there are platforms similar to Xen in North America that enable accredited investors to access funds, but they are more focused on B2B, meaning they tend to serve the private banks who want to aggregate their customers.
“But we want to look beyond the private banks to a broader market in Asia, where wealth expansion is so dynamic, especially from the entrepreneurs and business owners who are more price sensitive, and at the same time are looking to generate alpha in various ways.”
She says that the major global private banks do use a similar type of technology and platform to help aggregate their smaller investors into specific investments that require scale.
The competitive comfort zone
“That is how they aggregate their private banking customers into the USD100 million to even USD300 million single commitments into some of these mega buyout funds or hedge funds,” she explains. “But we don’t see ourselves as being in competition there, as we are targeting a different segment of customers. And for those banks, the way compliance requirements are today and given their cost structures, it is difficult for them to target the lower high net worth and affluent accredited investors we deal with, which is really our key target segment. The banks are taking USD10 million and above per private investor. They won’t come into our market segment, as the economics really won’t work for them.”
The proof is in the pudding…
Cokeng’s first priority from here is to fully confirm proof of concept. “We are targeting to reach the first USD100 million of customer assets,” she reports, “and successful onboarding to our platform and getting them into the top tier type of oversubscribed funds. We must prove that we are able to generate enough demand from clients in Asia, and then we can build out in the middle a scalable platform that will eventually yield more transparency, fractionalised access and eventually a secondary trading marketplace for our investors. Those are the three things - high-quality products, enough investor demand and then an easy to use kind of platform marketplace.”
Bringing on the heavy hitters
Looking to the future, Xen has also been hiring some heavyweight supporters to help authenticate and drive the business forward.
The former Managing Director of Singapore’s Government Investment Corporation (GIC), Bernard Phang, joined the Board of Advisors in May this year, lending his deep experience in alternative investments globally. Phang is a veteran of the investment industry, having worked for GIC in USA, Asia and Europe for over 25 years, investing in real estate and private equity.
Phang will focus on advising and providing feedback on Xen’s business and growth strategy, as well as their portfolio design. At GIC he played an instrumental role in setting the strategic direction of GIC’s real estate portfolio and was responsible for the portfolio design, market research, benchmarks and risk management framework, according to a release in May.
“He brings with him an impressive wealth of experience and a unique perspective on the global alternative investment landscape,” says Cokeng. “His deep understanding of the industry, particularly in real estate investing, will serve us well as we partner with more high-performing alternative investment managers and connect a wider group of investors with quality opportunities.”
Phang had said on joining Xen: “Currently, most accredited investors in Asia are shut out of attractive alternative investment opportunities due to high minimum investment levels, illiquidity and a lack of transparency. Xen’s aim is to curate a portfolio of high-quality opportunities from the alternative investment space, including private equity, hedge funds, real estate and venture capital, and make them readily available to accredited investors. Xen’s unique business proposition has the potential to fill the gap between the needs of a big segment of the investor market and the opportunities offered by attractive private market investments. This is a very interesting and exciting opportunity.”
Phang joined another leading light on the Xen Advisory Board for Asia. Xen had already attracted Yong Hak Huh, former CIO of Private Markets and Direct Investment at Hong Kong Monetary Authority (HKMA), who joined as an Advisor in January 2019.
The operational team is also being built out. In late July, Tim Janke joined Xen as Chief Financial Officer. Based in New York, Janke is now responsible for the firm’s overall financial strategy, including financial planning and analysis, financial reporting, accounting, tax and regulatory reporting matters. Janke joined Xen from State Street Corporation where he was a Senior Vice President and brings to Xen more than 20 years of finance expertise, a broad knowledge of the global asset management industry, and a decade of leadership roles in Asia, including having been Blackstone’s first Asia CFO.
“Xen is at the forefront of a revolution in the asset management industry, providing accredited investors in Asia access to alternative asset classes and managers that have historically been the province of large institutional investors,” Janke commented in July. “I am excited to be joining Xen at this pivotal time as the business continues scaling for growth.”
A market ripe for change
“The successful launch of Xen underscores how the alternative asset management industry was ripe for change,” says Cokeng in closing the discussion. “Accredited investors in Asia demand increasing access to alternative opportunities to diversify their portfolios, especially as they prepare for the late-cycle.”