Private Equity Tokenization with RDX on Hashgraph.

Private Equity (PE) is risk capital provided to businesses outside of the public markets. PE is about driving improvements in businesses over the long term. PE investments are illiquid and are generally traded only on acquisition and exit. There are two approaches to investing in private equity. First, an investor can make direct investments in one or many private companies. This is the typical approach chosen by the largest and most experienced investors. Second, an investor may make indirect investments through a private equity fund, or via a private equity fund of funds. This is the most common approach.

PE funds are generally considered to be portfolio return enhancers because they can provide sources of returns that are not available from traditional asset classes. First, PE funds have long holding period of seven to 10 years, so their underlying portfolio companies can undertake multi-year business transformations. Second, PE funds can provide funding where traditional lenders are unwilling or unable to do. This allows PE funds to invest in new but growing companies, or in poorly performing companies with potential for turnaround.

CHALLENGES OF THE ASSET CLASS

Lack of access:

PE is typically only accessible to institutions and high net worth individuals due to the high minimum investment requirement and long holding period of several years.

Illiquidity:

Investors may not be able to sell their interest in PE efficiently on the secondary market in terms of time and/or cost. Due to this structural illiquidity, investors require sufficient resources or exposure to other liquid assets to be able to hold their PE interest until maturity.

Returns dispersion:

Unlike traditional stock and bond funds, there is substantial performance dispersion between the top quartile and bottom quartile PE funds. For example, top quartile PE funds could achieve high teens return, while the bottom quartile could achieve less than 5% returns

Need for diversification:

While individual PE funds may attempt to achieve a certain level of portfolio diversification, research has shown that the most effective way to minimise capital risk is by diversifying across different fund managers and fund vintages. This would be difficult to achieve for the average retail investor.

HOW TOKENISATION ADDRESSES THE CHALLENGES

Increase access to a wider group of investors:

Tokenisation could allow PE to be accessed by a wider group of investors by lowering the minimum investment quantum. Currently, typical investments start from USD 10 million if investing directly into a PE fund. An investor could lower the quantum by investing through a commingled fund which acts as a single Limited Partner (LP). This would reduce the quantum to around USD 200 000. In addition, investors may also invest in the private company before it goes public. It is generally difficult to buy shares in a private company because they are only available when the company sells shares to raise funding, or when existing shareholders sell. Furthermore, these stakes often cost USD 250 000 or more. Tokenisation would allow investors to buy tokens from certified exchanges at a smaller minimum

Better liquidity:

Another benefit is the potential for cheaper secondary transactions. Currently, stakes in PE funds are sold to secondary funds or other LPs. The sale process can take a long time, with the involvement of many intermediaries.

Source: RDX India