DTCC invests in iCapital and will integrate alternative investment product

The Depository Trust & Clearing Corporation has invested in iCapital and announced a strategic collaboration with the alternative investment platform, both disclosed together, according to WealthManagement.com. As an initial part of the collaboration, the two firms will integrate DTCC's Alternative Investment Product with iCapital's platform, which the report says will connect their capabilities across transaction processing, data exchange, access, administration and reporting. Talia Klein, DTCC's head of wealth and investment solutions, will become an observer on iCapital's board of directors. The coverage gives no figure for the investment and no size for the stake.

DTCC is an industry-owned utility that clears and settles securities transactions, and its long suit is standardization: over the years it has worked with the financial services industry to build common data and processing for operations running from account opening and closing to funds transfers, billing and reconciliation. It already operates an alternative investment product. What the stake appears to buy is a position inside the layer where fund managers' offerings reach the wealth managers who allocate client money into them, which places a settlement utility in the distribution plumbing of a market the industry has spent several years trying to widen.

Frank La Salla, DTCC's president, chief executive and director, called private markets one of the most significant growth areas in financial services and said broader adoption will depend on making the ecosystem easier to navigate, more efficient to operate and highly resilient. That is an argument about operations rather than about the supply of product: the constraint, in his framing, sits in what happens to an allocation after it exists. WealthManagement.com describes iCapital as one of the biggest and most widely used alternative investment platforms in the wealth management industry. If that description holds, the operations the two firms intend to connect touch a wide slice of the allocations being made.

The corporate structure is a familiar one. A strategic investor takes equity, signs a commercial agreement and asks for board visibility without a vote; the platform collects capital, a marquee name and an integration that should make its own back office cheaper to run. iCapital has repeatedly raised from firms that sit on the distribution side of the business. Last year it raised over $820 million from T. Rowe Price Associates, T. Rowe Price Investment Management, SurgoCap Partners, State Street Investment Management, Temasek, UBS and BNY, and its earlier investors include Goldman Sachs, Wells Fargo, BlackRock and Blackstone, among others. Asset managers buy into a platform like this to hold shelf space. DTCC's standing rests on being the format that everyone uses, and a format it helps write for alternative transactions, data and reporting is worth more to it than a cut of the fees those transactions generate. Front-end distribution and back-end settlement now sit on the same shareholder register.

If the industry's answer to advisors and family offices has been more product, the gate has always been the paperwork. Subscriptions, capital calls, position data, tax reporting and reconciliation across a dozen managers are the functions named in the integration, and they are what makes a modest allocation expensive to hold and awkward to explain to a client. Push that cost down far enough and the account size at which an alternative sleeve pays for itself falls with it, which is the mechanism by which smaller households and single-family offices get a menu closer to the one the largest allocators already work from. The announcement promises connected systems, not changed economics, and the distance between those two is the thing to watch.

Lawrence Calcano, iCapital's chairman and chief executive, said the firms may explore emerging technologies including blockchain-enabled distributed ledger technology and tokenization, and the report presents that language as exploratory. A distributed-ledger pilot running on a clearing utility's rails would be a larger story than a data integration, though it would be a story about the same subject: which institution holds the authoritative record of who owns what.

What the announcement does not settle is scope. It describes one integration and says nothing about whether DTCC's alternative investment product will also be wired into platforms that compete with iCapital, or whether the format stays where the equity went. A second integration announcement would answer that question. Until then, the transaction has produced one integration, one board seat without a vote, and no stated price.