Private equity tokens aim to bring greater liquidity, transparency, and accessibility
As the burgeoning blockchain technology paradigm has continued to evolve, a whole host of unique asset classes have started to make their way into the mainstream. Private equity tokens are one such offering, serving as digital representations of ownership in private equity investments powered by a decentralized ledger.
These tokens enable fractional ownership, improved liquidity and simplified management of private equity assets. They are created through a process called tokenization, which involves converting real-world assets into digital tokens that can be bought, sold or traded on various platforms.
Recent research indicates that private equity and hedge fund assets are the most likely to see tokenization in the near future. The study surveyed fund managers in France, Spain, Germany, Switzerland and the United Kingdom, collectively responsible for around $546.5 billion in assets under management, and found that 73% of the participants identified private equity assets as the most likely first to see significant tokenization.
Moreover, the World Economic Forum has estimated that up to 10% of global GDP could be stored and transacted via distributed ledger technology by 2027, with crypto-asset custodian Finoa reporting that tokenized markets may be worth as much as $24 trillion by the same year.
As a result, most fund managers (93%) overwhelmingly believe that alternative asset classes — such as private equity — are highly likely to be targeted for tokenization due to their inherent lack of liquidity, transparency and accessibility compared with traditional asset classes.
The financial proposition of private equity tokens
One of the most enticing aspects of private equity tokens is the potential for enhanced liquidity.
Traditionally, private equity investments have been plagued by long lock-up periods and limited exit opportunities, making them unappealing for some investors. However, by tokenizing these assets and enabling them to trade on secondary markets, private equity tokens can offer a much more liquid alternative.
This new level of liquidity not only allows investors to enter and exit positions more easily but also helps unlock the value of illiquid assets, making them more attractive to a broader range of investors.
In addition to improved liquidity, private equity tokens also offer increased transparency in an industry that has historically been opaque. The use of blockchain technology, which underpins these tokens, allows for the public tracking of ownership and transactions, providing investors with a real-time, transparent view of the underlying assets. This level of transparency can help build trust and confidence in the private equity space and reduce the risks associated with fraud and mismanagement.
Furthermore, these tokens democratize access to the private equity market, breaking down barriers to entry for retail investors. By allowing investors to purchase fractional ownership in private companies or funds, they create opportunities for smaller investments, thus enabling a wider range of individuals to participate in the growth of private companies. This democratization of access not only diversifies investment portfolios but also fosters innovation and economic growth as more capital is funneled into the private sector.
Speaking to Cointelegraph, Nikolay Denisenko, co-founder of Swiss neo-digital bank Brighty and former lead backend engineer for Revolut, noted the aforementioned benefits of tokenization for private equity. However, he said that “there are factors that could potentially limit the growth and adoption of private equity tokens. One key factor is the regulatory environment, which is still evolving in many jurisdictions. Ensuring compliance with securities laws and Anti-Money Laundering regulations can be a challenge.”
Recent developments surrounding the space
While venture capitalists have eagerly financed blockchain technology to revolutionize the banking sector, they have been more hesitant to adopt it for their own operations. However, recent initiatives to tokenize private funds seem to signal a significant shift in this mindset.
For example, Pierre Mauriès — who previously served as the private equity technology practice director at PwC and a mergers and acquisitions strategy executive for The Carlyle Group — recently founded Nemesis Technologies. The company is tokenizing a $500 million fund that will become available on Securitize, a digital security issuance and compliance platform. The process will transform the fund stakes into digital tokens, allowing investors in the United States and Japan to trade them on Securitize’s brokerage platform, Securitize Markets.
In a recent interview, Mauriès emphasized the importance of tokenization for the future of alternative investments, highlighting several benefits for limited partnerships. For instance, Nemesis fund investors can trade tokens after four years, offering earlier liquidity than traditional models. Additionally, the digital nature of the tokens simplifies fractionalization and sale to other investors compared with the conventional secondary market.
Other prominent firms like KKR, Apollo, Hamilton Lane, Backed and Partners Group are also spearheading jumping into the private equity tokenization movement. Backed, in particular, recently introduced its ERC-1400 security standard-based private equity token, BACD.
The firm claims that the token’s features include faster settlement speeds, automated compliance through smart contracts, 24/7 trading and better transparency. BACD tokens represent private equity ownership and function as utility tokens for exchange and payments.
While the core concept pervading tokenization may not necessarily provide investors with a significantly expanded pool of potential market participants, the primary attraction surrounding tokenized private equity lies in the simplified experience it offers smaller investors with limited means.
Moreover, as tokenization gains traction in the private equity domain, more established financial entities will likely adopt this innovative approach. With the support of industry leaders such as KKR, Apollo, Hamilton Lane and Partners Group, the tokenization movement is well-positioned to reshape how private equity investments are managed and traded. Thus, it will be interesting to see how this relatively nascent market niche continues to mature moving forward.