Tokenization in Private Equity is Creating New Markets

The world of private equity, where groups invest in non-public companies, is undergoing a transformation thanks to the growing popularity of asset tokenization. Tokenization has shown potential to fundamentally alter how private companies raise funds, as it gives new investors avenues to enter markets that were previously inaccessible.

On the one hand, by breaking down complex investments into more manageable, digital tokens, akin to dividing a building into smaller, LEGO-like pieces, each representing a part of the investment, startups are able to use tokenization to crowdsource investments. Private equity firms could use the technology as well and sell shares of their investments more broadly, finding new outlets for fundraising, and create liquidity from illiquid investments.

Built on the blockchain technology, tokenized funds might change the way private equity raises money, invests capital, and connects with prospective startups.

In this article, we'll explore the benefits of tokenizing a fund and help you get started if you're interested in trying it out.

Benefits of Tokenization for Fundraising

Tokenization may breathe new life into private equity fundraising and allow firms to source money from new avenues. By democratizing investment opportunities, allowing broader participation in funding companies or investments, tokenization enables investors to buy into a fund’s offering through tokens. This approach means owning a share in a fund without the need for a substantial upfront investment.

Do private equity firms want a lot of small investors? It’s a good question. But the idea is that firms can offset risk by pitching shares of an investment to the public. The process involves careful legal compliance, selecting suitable investments for tokenization, and leveraging blockchain platforms to create and trade these shares with a larger population of people. The shares owned by those people could then be traded or sold on the open market or connected to automated distributions, royalty payments, or dividends, removing some of the headache of managing a large investor pool.

For firms, the other allure of tokenization lies in its ability to make private equity investments more liquid and accessible. Imagine we are a firm and an investment has stagnated or we need public interest in the company to build momentum. We can sell shares of that investment to create interest or buzz, and create liquidity from an illiquid asset.

How Is a Fund Tokenized?

Tokenizing a fund involves converting the ownership or shares of the fund into digital tokens on a blockchain. This process begins with selecting a suitable blockchain platform, like Kaleido, that supports smart contracts, as these contracts govern the token's behavior and ensure compliance with financial regulations. If you're just starting out in blockchain, our article on smart contract examples is a good place to get up to speed.

The next step is defining the tokenomics, which includes the total supply of tokens, their price, distribution methods, and any rights or dividends they confer to holders.

Once the framework is established, the fund's assets are audited and valued, ensuring transparency and helping to build trust with potential investors.

Tokens are then created through a smart contract, which codifies the terms of ownership, transferability, and any specific rights associated with the tokens. These tokens can be sold to investors through various mechanisms, such as private sales, public offerings, or on decentralized exchanges, allowing for easier liquidity and transferability of fund shares compared to traditional investment models.

Tokenizing a fund can significantly reduce administrative costs, enhance liquidity, and open up investment opportunities to a broader range of investors by leveraging blockchain technology, but the process can be cumbersome. This guide we wrote about how to tokenize an asset provides a nice look at how easy we make it to represent an item in the real world on the blockchain.

What the Future Holds

The prospects for tokenized private equity are promising. Industry forecasts suggest that the tokenized asset market could surge to $24 trillion by 2027, signaling not just a diversification of investment opportunities but a complete overhaul in the operational mechanics of investments.

The spread of tokenization is sure to encompass not only physical assets and portfolios, but also shares of companies, fundraising efforts, and public interest in micro-ownership via token purchases. Bain & Company suggested that tokenization could "fuel a $400 billion opportunity in distributing alternative investments to individuals."

This transition to tokenization offers flexibility and engagement with the public and new avenues for fundraising previously unattainable in traditional investment models. The thing to guard against is that such innovation doesn't come without risks, particularly concerning market volatility and security.

Private equity firms need stringent security protocols and comprehensive investor education to effectively manage these challenges and ensure a secure and trustworthy environment for growth.

It is also vital to select a partner that offers robust security, high scalability, and compatibility with existing financial systems. The Kaleido Asset Platform is built for enterprise security, compliance, and scale, and ensures that you spend less time developing technology solutions and more time building your business. With ISO & SOC 2 Type 2 certifications, SLAs, 24/7 support, HA/DR, and business continuity, Kaleido is the platform financial institutions around the world trust for tokenization projects.

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It’s Time to Get Started

Tokenization in private equity represents more than a passing trend. It's laying the groundwork for a more inclusive, dynamic, and transparent investment landscape. It simplifies the process of owning a share in a fund, akin to a share in a company, and breaks down some of the barriers that once rendered these markets exclusive. As the technology matures, private equity investments might become more accessible to a broader audience with the help of tokenization.

If you’re a private equity firm or investor who wants to learn more about how to tokenize a fund, schedule a talk with one of our solution architects to get started.