A new investment scheme is doing the rounds

The question is, do you want to invest in it?

Sasha Planting

Benchmark International is a Malta-registered company, managed out of South Africa, with ambitious plans to sell crypto tokens, list a crypto exchange and start a crypto hedge fund. These ventures will create the financial ecosystem necessary to fund several start-up projects in the ‘traditional economy’, including a waste-recycling plant, property fund and photovoltaic water purifying plant.

In the white paper published by the company here, it explains its aim of raising $30 million via the (initial) public sale of 30 million crypto tokens called Benchmarks. In total 300 million tokens will be created.

The idea is not completely implausible.

Initial coin offerings (ICOs) are revamping the concepts of crowd funding and seed funding. Last year hundreds of start-ups raised more than $3 billion via ICOs and many economists and academics believe that they will transform the global investment environment in the next few years.

Through this fundraising model startups can raise capital by issuing crypto tokens on a blockchain. In the case of Benchmark, its tokens are built by what.digital of Switzerland using Ethereum’s globally-recognised standard ERC20. These tokens went on sale publically at the price of $1, or R12, at the end of May 2018. The sale ends on November 30 2018.

The tokens are similar to cryptocurrencies in that they can be transferred across networks and traded on cryptocurrency exchanges.

ICOs are revamping the concepts of crowd funding and seed funding.

Source: Shutterstock

However they are unique in that their value is derived from something they represent, such as company equity or access to a service — not their use as a currency or store of value.

Denis Quayle, co-founder of Benchmark.

Source: Moneyweb

There are two main types of crypto tokens, explains Denis Quayle, co-founder and business development manager at Benchmark. These are utility tokens and security tokens.

Utility tokens represent future access to a company’s product or service. The defining characteristic of utility tokens is that they are not designed as investments. By creating utility tokens, a start-up can sell “digital coupons” for the services it is developing.

Security tokens on the other hand are more like shares as they are considered to be akin to an investment contract. These should be issued in compliance with legislation regulating conventional securities.

In the case of Benchmark once investors are holders of its Benchmark utility tokens, they can choose to participate in its hedge fund, become a client of the trading exchange or invest in some or all of the planned projects.

These include a materials recycling facility (MRF) in Johannesburg; a start-up real estate investment trust (Reit), which will acquire the land and buildings necessary for the MRF; a peer-to-peer lending operation called Benchmark Finance and a production facility for power generation and clean water in Portugal called Tenkiv.

“We opted to fundraise using crypto tokens because this is the new economy and we expect it to fundamentally change the structure of the finance environment,” says Pieter Coetzer, co-founder and MD. “It is easier and more efficient to fundraise across borders using crypto tokens than in any other way.”

The idea of using crypto tokens to raise capital to fund their ventures is the most sensible idea around, adds Quayle. The utility token creates the opportunity for participation in a number of projects that are supported by underlying value in the form of assets, he says. This is different to straight cryptocurrencies like bitcoin, which have no underlying assets to support its value.

The company has already raised R3 million to R4 million through the sale of tokens to friends, family and other investors. In total 37 people have contributed capital and intellectual expertise to the venture. This has been invested in corporate infrastructure (attorneys, the registration of the company, the development of the tokens, complying with regulations in Malta and pre-feasibility studies into the initial projects).

“There are so many fly-by-nights and one-trick ponies in this world,” says Quayle. “We are a real business managed by real people who intend to provide our investors with real opportunities using the security of the blockchain and our utility token. We expect the projects to be highly profitable.”

Source: Moneyweb and Benchmark information

With the sale of tokens underway, the next step is the establishment of the Benchmark crypto exchange. The first exchange will be launched in South Africa during July 2018. The exchange will form part of a network of white label crypto exchanges that aim to create a ‘unified liquidity pool’. In this regard Benchmark has joined hands with Expread, which is based in the Isle of Man, to establish several exchanges around the world.

Almost simultaneously with the launch of the first Benchmark crypto exchanges in South Africa, Benchmark will launch the Benchmark CryptoHedge Fund.

The structure of the Benchmark eco-system

Source: Benchmark white Paper

Plans are also in place for the implementation of the various projects. For instance the third quarter of 2018 will see the groundwork laid for the Benchmark Finance Company and the acquisition of ground for the recycling plant. The plant is expected to be operational in 2019.

Income, says Quayle, will be generated in two ways. The first is through the incremental increase in the value of the cryptocurrency itself. Liquidity will be created via the trading platform and the hedge fund, which is expected to generate a 42% return within the first year.

Returns will also be generated through ownership in a variety of income-producing projects. However Quayle warns that this is not a short-term game and investors in these projects need to have patience.

However an astonishing 42% return promised from the hedge fund over the first year warrants a closer look.

According to the white paper, the hedge fund will be a low-risk fund that will place 60% of available funds in the top ten best-performing crypto hedge funds employing strategies approved by Benchmark. Another 15% of funds will be used to exploit arbitrage opportunities in the crypto universe using Benchmark's own algorithmic trading concept, which it is currently developing. Finally 10% will be retained to invest in the top ten crypto tokens.

Benchmark’s projected returns of a USD $10 000 contribution to the Benchmark CryptoHedge is illustrated below:

Source: Benchmark white paper

In arriving at this figure we have made certain assumptions, says Quayle. “According to Bloomberg and other sources the performance of all hedge funds in 2017 was a return of 1 167% for that year. Thus someone who was able to invest $10 000 proportionately on January 1 2017 would theoretically have had $116 700 on December 31 2017. That of course is not going to continue.

It further appears that investments in initial coin offerings for the same 12 months would have provided a return of 1 320%. If someone invested $10 000 proportionately on January 1 2017, they would theoretically have had $132 100 on 31 December 2017. “This also is unlikely to continue,” he says.

“Quant models have varying returns. We are satisfied that we can do a substantial performance with the model that we have designed. After looking at these results we decided that an assumption of an overall return of 60% per annum would be sufficiently conservative as an assumption and from experience we know that we can achieve this result. This means that we will perform at no more than about 5% of what had actually been achieved in the market.

According to Bloomberg and other sources hedge funds returned an above-market performance in 2017.

Source: Shutterstock

"We have assumed costs to be on the basis of the 2:20 model generally used by most hedge fund managers. In our model we have assumed a 2% management fee charged annually in arrears and a success fee equal to 20% of profit subject to a high watermark.

This means that profits that recover losses do not qualify for success fees and if there are no profits then there are no fees. We work on the basis of quarterly withdrawals and quarterly investments. A net inflow of 2.5% quarterly from new funds was assumed. Dividends will be distributed annually. Fifty percent of the accumulated will be distributed as dividends and the remaining 50% will be re-invested in the Benchmark CryptoHedge Fund."

It sounds impressive. But would you invest your savings into this scheme? Moneyweb asked a financial planner for his views.

Craig Gradidge is a certified financial planner and is a member of the Financial Planning Institute of Southern Africa. He had this to say:

I would not advise my clients to invest here for a number of reasons:

• If the investment went belly up, I’d quite likely find myself standing in front of the FAIS Ombudsman who would want to determine the extent to which I understand the investment. This is an immensely complex investment opportunity and I really cannot say I understand exactly how my clients will earn a return.

• The projected returns quoted are excessive. This is usually a warning to potential investors. I know someone will likely point to the returns achieved by Amazon or Naspers, but those returns were not offered to investors at the outset.

Craig Gradidge, Financial planner

• You can arrive at some parties late and still have a very good time. I think this could be one opportunity where interested investors can bide their time and monitor the progress of the opportunity over a period of two to three years. If the investment is doing well and the integrity of the opportunity is clearer, then perhaps a 2% to 3% portfolio allocation may be worth the risk. We would classify this as an alternative asset class and therefore cap exposure at 5%.

• There are a number of unresolved matters around the issue of cryptocurrencies such as estate and tax planning implications.

• The fees quoted are too rich for our blood. Two and 20 [percent] works out wonderfully for the manager, not too well for investors over time. That 2% fee compounds annually irrespective of performance.

• The performance of ‘all hedge funds in 2017’ just looks wrong. Was that an average return? No. How was that number arrived at? Quoting Bloomberg seems to legitimise it, but it just looks wrong. My Uber driver would have been recommending hedge funds if that really was their return in 2017.

All in all this looks like an innovative concept, especially the idea of utility tokens. However, there risk profile is just too scary for us as advisors who worry as much about loss of capital as we do about return on capital.■