Are Family Offices Ready For The STO Revolution?

As an industry, we are not at a stage yet where we can pitch individual STO projects to institutional investors (family offices).

 

We have to pitch security tokens as a whole, clearly communicating what pain points they solve for investors and companies alike.

 

There is evidence that single family offices (SFO) have taken a keen interest in Bitcoin. As an asset class, Bitcoin can provide diversification gains for SFO that are heavily invested in the so-called “real economy.” It is feasible that this interest in Bitcoin extends to other assets in the digital economy, namely security tokens.


The issue is that unlike Bitcoin, security tokens do not enjoy mass adoption yet by any means. They are not part of the the general vernacular, either for investors or for the general public.


For the moment, let’s take SFO interest in Bitcoin as a proxy for their potential interest in other crypto products.
Given this assumption, how do we as an industry present a compelling case for exposure to these novel asset classes?

Demonstrate to SFOs that we understand the unique needs of family offices.

The UBS Global Family Office Report provides valuable insights into the investment strategies of over 300 SFOs.


A rough breakdown of investment strategies can be so summarized:

 

  • 45% of SFO prioritize balanced growth
  • 32% prioritize on pure preservation
  • 25% prioritize growth


Interestingly, the investment strategy of any SFO is largely a function of family origin and fund size.


That is, Asian and US large family offices are far more growth oriented than their smaller European equivalents.

Go East, Young Man

It may be more relevant, therefore, to focus our attention on large family offices in Asia and the US who view digital assets as a novel growth avenue.

 

To engage these SFOs, it will be important to stress that investments in Bitcoin do not constitute a well-balanced approach to digital assets exposure.

 

At the same time, we have witnessed that neither does investment in utility coins make a digital asset portfolio more mature: in fact, the vast majority of alt-coins mirror each other’s movements.


What other digital assets could provide the risk mitigation requirements of SFO in the digital asset space?

Security Tokens provide much needed risk diversification to SFO digital asset portfolios

It is thoroughly argued that Bitcoin’s value is backed by sarcity, utility as a means of cross-border payment, and a fundamental belief in decentralization of currency.

 

Security tokens, however, derive their value from their link to real-world assets.


This difference in value proposition is a fundamental reason security tokens diversify risk in a crypto portfolio: forces that influence Bitcoin will not necessarily influence the value of security tokens, and vice versa.

Furthermore, security tokens allow SFO to kill two birds with one stone: VC and crypto

It is well known that family offices have begun taking a serious interest in venture capital investments as a long-tail growth strategy.


In the
UBS report previously mentioned, one CEO of a North American family office remarked the following of SFO perception on VC investments:

“Venture capital is obviously quite risky and that might be 5% or 6% of a family’s portfolio – maybe 10% at the top. That provides that inflation adjusted growth, but it also has very long block ups and the returns are sporadic.”

Very Long Block Ups

Sporadic Returns

For SFO investment managers, security tokens can solve these issues, and provide crypto exposure at the same time. They are efficient.

Certain properties of STO alleviate long block ups and sporadic returns. In particular, early and efficient liquidity can help SFO lock in gains at 2-3x their initial investment in one year rather than wait 10 years for a potential 30-40x gain.


This behaviour of seeking early liquidity may not result in the wild-west price fluctuations of the utility token world either. One glaring characteristic of many ICO investors was the get-rich-quick impetus.

 

The thing is, SFO is already rich. They seek growth, not outlandish and unsustainable gains. Their overarching mandate after all is to preserve wealth for a family through the generations. That mandate is not consistent with short term pumping and dumping.


Funds that need to offload risk will be free to sell their stake in STO companies to funds that need to onboard more risk. While early (Q4 2018/Q1 2019) liquidity may be scarce, the arrival of high frequency market makers can quickly change the liquidity dynamic.

Thus, STO's obtain:

  • Exposure to VC risk profile with early exit opportunities
  • Exposure to crypto market
  • Hedge against more volatile cryptocurrencies
  • Early entrance to long-tail growth industry
 
Assuming that we are able to fulfil the conditions for STO mass adoption, what’s not to like?

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