More than just a token development for private markets

A trio of private equity giants with enormous existing LP bases are using digital securities platforms to unlock new sources of capital.

Private equity managers are always seeking new ways to access capital from individual investors at scale. Tokenisation could help them to do exactly that.

Tokenisation is the process of converting assets – such as a stake in a private equity fund – into tradable digital security. A $5 million fund commitment or direct equity stake, for example, could be subdivided into 100 tokens worth $50,000 each and then fractionalised into even smaller units, similar to buying 0.1 of a bitcoin. (Further reading: Private Equity International’s brief introduction last year).

The concept is already starting to make waves within private markets. This week, KKR and digital asset securities firm Securitize launched a fund that would tokenise an undisclosed interest in KKR’s $4 billion Health Care Strategic Growth Fund II, which closed in January. Investors can purchase a set number of tokens in the fund managed by Securitize Capital and the primary underlying interest of this fund will be the exposure to HCSG II.

KKR isn’t the only big hitter to recognise the potential in tokens. Last year, Singaporean digital assets platform ADDX secured an undisclosed allocation to Partners Group’s €5.5 billion Global Value SICAV Fund. The partnership enables accredited investors to access a diversified portfolio of more than 500 underlying companies and assets with a minimum ticket size of $10,000.

Hamilton Lane did similar this year with its Global Private Assets Fund. ADDX also offers exposure to a private equity fund of funds managed by Fullerton Fund Management; an Astrea collateralised fund obligation from Azalea Asset Management; and, reportedly, a direct stake in Chinese auto chip maker Black Sesame Technologies.

Tokenisation seeks to resolve many of the problems that have traditionally prevented individual investors from participating in alternatives en masse, namely, a comparative lack of liquidity, transparency and accessibility. It’s for this reason that, in a March survey of European fund managers from tokenisation platform Token City, 73 percent said they expect private equity assets to be first to see significant levels of tokenisation.

How returns are generated depends on the deal structure. For a closed-ended fund or direct equity stake, returns are folded into the net asset value and the tokens are worth the principal plus any gains. Semi-liquid funds, on the other hand, may be structured to pay out regular dividends, in which case the fiat amount would be credited to a token-holder’s wallet and the tokens would be worth whatever remains of the NAV after that payment.

GPs are usually charged a one-time distribution fee for the capital raised and the investor is charged a one-time access fee. Buyers and sellers might also face a one-time transaction fee when trading tokens on a platform’s internal secondaries market. When trading, the most recent NAV value is known to both parties and a discount is agreed among them; if the trade falls between two NAV announcements there may be some ambiguity around pricing.

How big could tokenisation become? ADDX and Boston Consulting Group this week published a report forecasting that tokenised assets as a business opportunity would reach $16 trillion by 2030 – around 10 percent of global GDP.

While that might seem a tad optimistic, that at least three private equity giants with enormous existing LP bases already see merit in tokenising their products suggests the opportunity could be significant. As a congested fundraising environment reinforces the importance of identifying new sources of investor capital, so expect more GPs to follow suit.

Expert analysis by Alex Lynn, PEI