Navigating Misinformation for 2024’s Decentralized Investment Strategy
The Digital Security world, aka the tokenization world, has seen a lot of hype, a lot of excitement, a lot of promise. Likewise, it has also not lived up to a lot of that promise to-date and is viewed with a certain level of skepticism by a growing percentage of the retail investor sector and the majority of the institutional investor sector, particularly.
This negativity can be attributed to a long list of factors, including bad actors playing in an ecosystem that lacks regulatory oversight, underwhelming product offerings, a lack of transparency, and no intuitive access to the ecosystem for anyone not yet ‘wired-in properly’.
While all these factors play significant roles, I believe the biggest source of negativity has more to do with unrealistic timing and expectations.
It’s the typical Tech Syndrome. Every major tech advancement, whether it’s the chip, the circuit board, the internet, search engines, smart devices, gene therapies…go down the list… all underachieved relative to short-term expectations and wildly overachieved relative to long-term results.
While we so too believed in the long-term promise of fractional asset ownership and frictionless ownership transfer, we were intrigued by the space more so because we also saw a complete void of institutional offerings listed on the various exchanges. We thought that we could bridge institutional real estate offerings into the space through our extensive track record on the institutional side of things and our pipeline of institutional real estate deals.
As we immersed ourselves and the Steelwave brand into the ecosystem, the exchanges all raced to align with us because they recognized the same benefit of hosting institutional offerings on their exchanges.
We quickly came to the conclusion that none of the exchanges on a standalone basis or through a network of shared bookings could remotely scale to the level that institutional investing required.
For example, the SW pipeline is $500 million to $1.5 billion a year…and as high as $2.5 billion. The average deal size is $100 to $150 million.
The exchange customers are primarily hyper-nichey individual players who are all ‘crypto natives’ – basically, retail investors who are very well versed in the 3.0 space, but not institutional at all.
Make no mistake – The odds of raising $100 million around an institutional real estate deal in this ecosystem are zero and will remain zero until institutional investors buy into the promise and drive the ecosystem forward.
But the retail sector can’t drive the maturation of this industry. The driver has to be the institutional sector. Yet, for that to happen, a host of significant hurdles must be overcome.
The needle is clearly moving in the right direction – But first, the regulatory framework has to be defined by the regulatory agencies; this will require a broad agreement among the various regulatory agencies as to what that framework needs to look like.
This isn’t just the bailiwick of the U.S. Securities and Exchange Commission (SEC). This is a global phenomenon and requires the various regulatory agencies, on a global basis, certainly across the major financial centers in the West, Middle East, and Asia, to be on the same page.
To date, the SEC has been a sideline player at best and has not sought to take a leading role.
Partial buy-ins only promote uncertainty and opaqueness.
The regulatory framework also has to be fully transparent so that all of the participants understand the rules…what they MUST do, what they CAN do, and what they CANNOT do.
Fourth, once the regulatory playbook has been crystalized, then all the compliance elements need to be baked into the cake: licensing, registration, statutory reporting, and so forth.
Last, but not least, there is the CUSTODY question. Who are going to be the repositories of these digital securities? What are the security protocols in place to make sure that the digital securities are safe and in the custody of who they are supposed to be, and haven’t disappeared into thin air.
It’s all the stuff that institutions, as well as the general public, take for granted in the context of the traditional financial ecosystem.
If institutions don’t have the same level of trust and understanding that the ecosystem is properly wired and safe, they won’t invest in it and they certainly won’t adopt it.
If they don’t adopt it and drive growth in the ecosystem, or if enough institutional players take a pass in order to drive to some sort of critical mass, then the whole promise of frictionless asset ownership, asset transfer, primary and secondary asset liquidity and limitless fractional functionality, all falls apart.
All of that is a backdrop for the fund that we are currently raising.
We at SteelWave believe that bringing institutional investors into the ecosystem with institutional product offerings requires a step by step approach. The best way to do that is to provide a traditional vehicle to invest in a risk-off real estate strategy that provides outsized returns because of the current RE market dislocation.
The final step is to provide all your limited partnership investors a zero-cost option (not an obligation) to convert their traditional LP interests in the fund, to digital securities in the fund — when and if the ecosystem has navigated the above hurdles and has matured into a vibrant marketplace that can provide seamless secondary liquidity.
Simply put, provide them this zero-cost optionality to participate in the promise of tomorrow’s financial ecosystem.
That’s exactly what we are doing. We are raising a traditional $500 million institutional fund that will acquire existing office and life science assets that are fully leased on a long-term basis (7-15 years) to tech tenants in all of the major tech hubs in the Western U.S. – in San Diego, Orange County, Los Angeles, the Bay Area, Seattle, Denver, and Austin. What was trading in this strategy at a low 5 cap is now trading in a mid-range 7 to 9 cap. It’s a simple asset aggregation strategy involving institutional buildings with long-dated leases in place.
The digital twist is that each of the LP investors will have the option to convert their LP interests into digital securities (tokens) when and if doing so can provide seamless secondary liquidity.
Unfortunately, the current U.S. regulatory void means that we cannot now provide that optionality in the U.S. Instead, we were forced to domicile the fund elsewhere – regions which have proven to be much more digital-security friendly.
The upside is that we anticipate fund level returns in the high teens to low twenties.
We are privileged to be at the vanguard of this novel breakthrough at the intersection of commercial real estate (CRE) and decentralized finance, taking bold steps with a tokenized model replicable industry on industry. We believe it’s in our hands to create lasting change.