Fund tokenisation – Part III: Solving liquidity and access challenges in private equity
Underlying blockchain technology is a potential game changer for general partners, who are now able provide evergreen fund solutions for illiquid private market assets.
Venture capital is sometimes referred to as an “access class” rather than asset class, due to the investor’s difficulty in allocating to well-known firms like Sequoia Capital or a16z.
To remedy this, tokenisation could help to democratise alternative investments. It gives managers the option to provide fractional ownership of their funds in an evergreen structure and offers accredited investors the chance to invest more easily in the best-known managers.
Evergreen funds have no termination date. They allow managers to re-invest capital in companies with the most attractive growth prospects, while avoiding missing the additional upside when they IPO. Notably, Sequoia Capital addressed this issue last year when it launched its evergreen fund – the Sequoia Capital Fund.
Simplifying the redemption process
An additional benefit is that the underlying smart contracts controlling economic ownership ensure that exit liquidity on the secondary market is more orderly, transparent and streamlined.
Texture Capital, a FINRA and SEC-registered broker/dealer, onboarded several primary fund offerings onto its platform. One of these is a VC manager, Cosimo Ventures, that provides an evergreen solution with their Cosimo-X fund.
Richard Johnson, Texture’s Founder and CEO says, “the problem with traditional VC funds is that the redemption process can be quite complex.” He adds that “tokenisation enables illiquid funds to be traded on an alternative trading system. Instead of waiting for the redemption process, an investor can potentially trade on the secondary market. That is an advantage for a VC whose typical lifecycle can be ten years or more. And notably, the average age of companies who IPO’d in the US last year was 14 years!”
He confirms that Texture Capital has several real estate funds in the pipeline, “and we’re in early discussion with a PE secondary fund, which could be interesting. We are also starting to see litigation funds starting to tokenise.”
Johnson provides a brief insight on the onboarding process:
”The standard Limited Partnership Agreement needs to be updated, so managers should work with law firms who understand the nuances of this space. This first step needs to be completed before they come to a platform like Texture Capital. Then, they need to select their custodian, transfer agent and token provider.”
Generating long-term returns using illiquid funds
Some investors will want assurances over how illiquid funds like private equity, designed to generate returns over eight years or more, can provide a similar return profile.
Kevin Yunai is the founder of Backed, an alternative investment fund founded on the blockchain that offers investors a decentralised private equity fund.
He stresses that liquidity depends on the tokenomics used by the fund manager, and how specifically, the investment is diversified.
”At Backed, we ensure investors get a stake in the daily trading volumes as well as on the valuation increase of the total assets. We’ve combined private equity with digital assets; then we’ve ensured its liquidity by tokenising it and listing it on centralised and decentralised exchanges.
”As digital assets become more valuable over time due to macroeconomic factors and scarcity, the combination of private equity and digital assets may even outperform listed stocks.”
This is the third in a series of articles on fund tokenisation.
Part IV will follow in the weeks ahead.