How To Bring TradFi Onchain

Transcript

You used to before Apollo you were running crypto and blockchain at JP Morgan. Why does this and I think since DeFi summer you started to get pretty excited about moving some of the stuff on chain. Why does this matter? Yeah, I mean I like I would say tokenization of real world assets has been my life my life's work at this point. Uh I've been working at it for a decade. Uh as mentioned been a at Apollo here for three years but previously spent almost a decade at JP Morgan building out their blockchain program. um and like quite proud of the work that I did there. Tokenized treasuries, tokenized dollars. I think to date some of the systems that I've created like intraday repo have tokenized over $2 trillion on permissioned Ethereum blockchain networks. Um and so, you

know, have spent a lot of time, you know, kind of thinking about the intersection of CFI and DeFi, if you will. Um I think the case for tokenization is rooted in like how we fundamentally modernize the creation distri distribution and the management of assets. Um you know I think you know overall like the way that it started in 2016 2017 was that you know tokenization most obviously would bring automation and uh you know the reduction of reconciliation and the reduction of cost to the administration of assets. like that was sort of the starting point for how like a lot of the trady institutions um you know justified like their journey in blockchain if you will but I think over time what we've learned in the past

few years of of doing tokenization is that the unlock is so much more it's so much more than the cost savings I mean the cost savings the automation the reduction of the reconciliation like it's table stakes if you will and by the way it's important table stakes because you know what really what you're talking about is for an institution ution that adopts tokenization. You have the killer cost base in that your cost base is like near z near near zero scale compared to the operations of significant financial institutions that have thousands of people working in operations in finance reconciliating do like doing low value tasks if you will. However, you know, overall like you know tokenization I think brings together like really

important things like multi-asset interoperability. um you know and we started you started mentioning it when we're talking about sort of the beginnings of stable coins and the broad adoption that we have there sort of the drift towards like treasury tokens and money market tokens that you know pioneers like black rockck and securitize and others have driven um now you know kind of adding another layer to the cake with Apollo's private credit fund and you know we'll see what's next but en essentially what we're doing is that we are creating multi-asset interoperability allowing different assets to be programmable program programmable together on the same operating system. And that's really powerful, right? Because especially as

someone who spent like a decade in like sort of the trenches, like the underbelly of of TRDFI operations, what you learn is that different assets live in different siloed systems. They don't interact well, first of all, like on their own. They're on an overnight batch basis like and you know, take multiple days to settle. uh they don't interact with each other and so if you're exchanging one asset for another like that's like an operational nightmare unless you invest in bespoke technology to connect them. Um but in our case like here uh we're we're bringing all these assets. It doesn't matter if you're born on chain or if you were you know tokenized on chain from like a legacy system you're all in the same operating system. Um, and basically, you know,

you're able to program unique experiences like you're able to essentially like, you know, have the Lego blocks, if you will, of you know, t like taking assets, taking waterfalls and programming them at the scale that you can to build like software. And so, yeah, let me ask you one thing on this. So, like, okay, let's say I'm a 70-year-old manager of a private credit fund who's worked on Wall Street for 40 years. And I'm like, Lego blocks? Like, you know, interoperability? Well, the reason I asked this is because last week I was talking to the a 70-year-old manager of a private credit fund. Uh, and I was talking about kind

of using the language I think that Christine is using, and he said, "I have zero clue what you're talking about." He said, "I've he said he said, "You know what I want? I want more people investing in my fund." Yeah. So, I was just kind of talking through like why tokenization or what you get from tokenization, but why uh at Apollo we're tokenizing our funds. We're really focused on expanding access to private markets. As we mentioned like or I as I mentioned like we're in the business of generating excess spread per unit of risk. This is alpha that we generate that for our investors that have historically just been the domain of large sovereign wealth funds and institutions. And now we're focused on expanding this alpha generation for a broader audience that are not

necessarily sovereign wealth funds and pension funds etc. And significantly I'm focused on reaching the next generation of investors that very clearly is cryptonative and wants to have a total diversified portfolio on chain. Um and so you know part of this also is like a discovery on you know like this like anyone that you speak to that is like of this generation they are they are growing quickly growing to become like the future leaders of the world. They will also inherit wealth as well as well as create their own. The way they invest is not the same way as the way our parents invested or our grandparents invested. Their first investment was probably Bitcoin and like you know some

NFT and like some altcoin, right? I'm not going to use any profane language, right? So like they have no pro like preconceived notions of what are the markets and in fact they you know are drawn to the crypto markets. So, you know, like to net it, I would say that like the reason why tokenization is compelling is we're learning about the next generation of investors. We're modifying and um, you know, evolving our products to, you know, kind of accommodate that and then more significantly expanding people's ability to access alpha generation. J one thing I will add to you could say to a 70 year old asset manager that wants to increase their AUM is that one way you could increase your AUM is if you could produce higher returns right

it's pretty obvious so if you have a credit fund and your credit fund is returning 8 to 10% and there is a mechanism that investors can access the credit fund and then leverage it to go to 15 20% they will actually generate more AUM for you because leverage means you're going to borrow money to invest more in your fund So, and and you could actually see it with the with the first strategy we deploy. We have x amount of millions of dollars in in the a fund and that went up by uh x% because by leveraging we have to purchase more of the same asset. That's how you actually increase the yield, right? So, so that increases the AUM. Now, the question is how do you actually do that efficiently and safely, right? And if you were in traditional finance, it would be like a

complete nightmare. Um so you will have to go to this uh 70 year old person. You will have to talk to the investment manager or somebody in the in the back office of their firm. You have to say I want to subscribe to this fund. It will take you like two weeks to get the subscription process and settle the trade done. Then you got to find somebody that wants to lend you money against the asset. Then you once you find that person it's going to take another two weeks for them to send you the loan back with the loan papers and the cash in the bank. Then you have to go back to the same 70 year old asset manager and say I want to resubscribe to your fund for 80% of the previous amount because I got more dollars and it's going to take another two weeks. Then

you have to go back to the lender another two weeks and it's lit and then you have to figure out how to manage all these positions in a way that if you need to liquidate them you can actually do it in an efficient way which might not even be feasible uh because maybe the the liquidity profile of the asset is not there or you cannot unwind the loans quickly because they're all paperbased they're not automated etc. So, so I think I'm going to be Oh, I was going to say one day I'm going to be a 70-y old asset manager. Will you keep me keep me current? I should have said the 70-y old we need to do to to your point about is this for cryptonative or is for everybody? Well, today is for cryptonative because you have to be cryptonative to interact. But

the same way that we're taking, you know, cryptonative stuff like Bitcoin and creating ETFs that anybody can access to, there is a world where you take these structured products that you can create with, you know, uh, people like Gauntlet and Morpho and and etc. And then you repackage it in a way that a traffic person can just click a button and boom, invest and then be invested on that particular strategy that somebody else is managing for them. Yeah. So, and then you don't need to understand crypto because I think if if if what we're building in crypto is only for crypton natives that have know how to use wallets and you know smart contracts and stuff like that is not going to scale right. So, you need to use the technology but then you need to repackage it in a way that you abstract out the complexity of the technology.

Yeah. The only thing I would say is like if I were talking to the 70-year-old I would say two things. One is how hard is it for you to get LP and GP loans? It's like how hard is it for your LPs to borrow against their positions and finance themselves, maybe to commit to your next fund, maybe to invest in another investment? Generally speaking, LP and GP loans are kind of a pain in the ass. And Carlos kind of gave you the reason. A, there's a legal document at every step. B, there's sort of like a waiting time in between. It's not often times you can't subscribe whenever you want. There's not this kind of like continuous thing where it's like, hey, I want to give you another dollar. I want to redeem 50 cents. I want to give you another $10. You can't really do this

kind of like back and forth. Um, and then I think the third thing that's really important is that credit quality and credit standards are very different in traditional finance versus onchain. Um, I think in general lending against uh LP stakes is a a very established business in in traditional finance, but it's kind of one where generally speaking, I think that the risk premium is extremely high because you're forcing the lender to take this kind of very high duration risk and usually it's a single lender. So, usually you can't pull together many lenders. And I think one really important thing about the crypto aspect here is in crypto you

basically you know when you think about uh the the kind of vehicles for doing this and maybe I'm frontr running your questions like vaults they're effectively creating SPVS for uh a particular strategy and and and I think like in some ways that makes it a lot easier than in traditional finance where it's like oh I have to figure out like what legal entity has to own this thing in order for me to borrow against it and oh does that legal entity exist somewhere where I have to think about the tax considerations more efficiently and like I think there's a lot of stuff that these kind of onchain kind of vehicles actually do a lot better that people are probably not thinking about

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