Blockchain technology is growing in popularity across various sectors, with new use cases emerging. The private equity industry will also not remain immune to blockchain disruption, much to the benefit of all key stakeholders involved in this industry.
Private equity funds have been one of the long-standing and lucrative forms of investment. They have been the backbone for most institutional investors for many years.
But, some structural challenges often limit investors from getting more benefits from these investment vehicles. Another profitable but stressful investment carrier is real estate funds. They have proven to be inaccessible to many investors, because of complicated terms, like huge initial buy-ins and intimate market knowledge needed to ensure that participation is profitable in such investments.
What is private equity?
Private equity (PE) refers to an investment in the shares of a non-listed firm. Precisely speaking, private equity companies venture into businesses that are either underperforming but can be turned around, or in companies with high growth potential. Firms can be either private or publicly-traded firms, which are then “taken private” via a buyout and a subsequent delisting.
Unlike hedge funds, private equity funds invest for the long-term. The investment period for PE funds differs based on the company’s strategy and investment philosophy but has historically ranged from four to six years.
Shortcomings of PE in the traditional format
The investment structure of PE funds, as it exists with several fund managers, experiences numerous challenges. For example, PE funds only allow a small number of investors that reduce the reporting needs of the fund manager.
Besides, there is a high entry barrier that ensures that only institutional investors venture into such funds. Most investors are barred from venturing into the lucrative private equity industry. There are definite deadlines for liquidation that might not always ensure that the underlying asset values are utilized well.
Therefore, in some instances, downturn situations often lead to funding liquidation that further causes significant losses for investors. Structural deadlines also limit investment managers from generating high returns for investors.
How can blockchain disrupt private equity?
Because of the ability of blockchain to securely keep and transfer records in an immutable and transparent way, it can help minimize inefficiencies in recordkeeping, deal execution, and customer onboarding while reducing operational costs.
Additionally, and perhaps more importantly, blockchain can democratize the PE sector for investors as new funding models are now possible.
Access to new clients
The investor base in the PE industry mainly comprises of institutional investors. However, with blockchain technology, that will likely change as it will become easier to onboard new clients, like ultra-high-net-worth individuals (UHNWI).
Using a blockchain-based KYC.AML platform, the onboarding and management of new investors, can be carried out in a much more efficient manner than before since the signing of contracts, data sharing, and transaction management could be cost-effective and faster than it is now.
A new form of fundraising
Although many people are still skeptical about venturing into cryptocurrencies, asset-backed tokens are taking the show. Muirfield Investment Partners is an example of a PE company that has launched a private equity investment product, which is a security asset token.
The token is backed by a private equity real estate investment asset and is managed by portfolio managers. The tokens can be traded on crypto exchanges at any time and from anywhere.
With assets being backed by crypto tokens, the rigid structure of PE funds is being broken down. Tokenization lowers entry barriers, enabling more investors to participate. It is now possible to optimize the fund structure of PE with liquidity.
There is no deadline for the liquidation of such funds, and they can be managed more efficiently and offer better returns for investors. Additionally, fund managers can also enjoy lighter redemption burdens.
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