(Blog) Tokenization for Private Market Secondaries

(Blog) Tokenization for Private Market Secondaries

InvestaX is a Singapore-headquartered, MAS-licensed* investment and trading platform for Digital Securities Offerings (DSOs) of global private markets deals, including private equity and real estate.

What is tokenization?

Tokenization is the process of converting traditional securities into digital securities using distributed ledger technology (i.e., blockchain), to bring benefits of efficiency, accessibility and liquidity to private markets investors.

Asset owners such as yourselves can tokenize either new or existing funds and issue digital securities to:

  1. Raise capital from a broader base of investors
  2. Sell-down existing portions of their ownership interests

What are digital securities?

Digital securities are digitized investment contracts that provide investors with a contractual claim on an underlying asset. This could be in the form of economic interest tokens, equity tokens, debt tokens or convertible tokens.

  • DSOs are NOT cryptocurrencies
  • DSOs are regulated by governing bodies and must be issued and traded on licensed platforms, such as InvestaX
  • DSOs are able to embed smart features into their contracts, such as receiving voting rights and dividends

Why issue digital securities for Primary vs. Secondary Funds?

There is tremendous potential to tokenize private markets, sheerly by their size in comparison to public markets:

  • There are more than 98,000 firms in private equity markets , 4.5x of public markets
  • Private debt markets are a $258trillion opportunity, 2.5x of public markets
  • Real estate markets are a $317trillion opportunity, 32x of public markets

Case for Tokenization of Private Equity Secondaries

As you know, private market funds have long lock-in periods for investors, and do not provide sufficient liquidity. This often means that investors take a large haircut to exit. That is why, there is an increasing demand for tokenization in the private market secondaries world.

Broadly speaking, given the opaque nature of such transactions, secondaries placements are restricted to institutional investors alone. However blockchain-based tokenization, such placements can involve smaller investors, too, such as single-family offices and accredited investors. These investors often prefer to invest in a fund further into the portfolio’s investment cycle, so tokenization or fractionalization of fund interests will increase their participation in secondary market transactions.

Furthermore, from fund managers' perspective, tokenization of existing funds allows them to sell-down LP ownership at the end of the fund lifecycle to repay investors, while retaining their GP ownership and potentially becoming a majority shareholder of the asset.

Conversely, it also allows GP investors to sell down their equity to smaller investors or single LPs, and become more hands off during secondary trades vs. the compliance requirements embedded during the initial fundraising process.

If this makes sense for your existing fund, we would like to explore tokenization further with you. Do reach out to us at support@investax.io to learn more.