Tokenisation of private credit is “new frontier” that will grow sector
The tokenisation of private credit is a “new frontier” for the industry that could boost liquidity, grow the market and expand the capital base for borrowers, S&P Global research has suggested.
A report by the ratings agency said that the fast-growing private credit sector could benefit from a digital revolution to open access to the asset class for both investors and borrowers in a whole new way.
Tokenisation could make it easier to buy into private credit funds and trade shares, thus broadening access to the asset class, the report said.
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It could also save on back-office costs thorugh smart contract templates, which could lead to lower transaction costs and management fees.
Additionally, S&P Global said that tokenisation could enhance the transparency of private credit – a sector which has historically been known for its opacity.
The transaction flow of private credit assets would be much more visible due to real-time settlement and the use of a shared ledger, which provides data on underlying assets at all times.
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However, the report also noted that the benefits of tokenisation could be limited as it would still require intermediaries, such as broker-dealers and transfer agents, to perform specific duties and meet legal requirements.
It added that transparency benefits would need to be weighed against privacy considerations, as portfolio managers want to keep positions private.
The private credit market is valued at $1.7tn (£1.3tn), according to Preqin data.
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By contract there is only around $500m of tokenised private credit, according to S&P Global’s estimates from data on rwa.xyz.
“The growth of both private credit and tokenisation demonstrates market participants’ increasing appetite for alternative investments and technologies,” the report said. “Early steps in tokenisation also signal a possible avenue for private debt to continue increasing in size and scope.”
