Private Equity and How Blockchain Can Change it
Several companies are gaining financial benefits from blockchain technology which also includes private equity firms.
One of the long-standing and lucrative modes of investment has been private equity funds. These have been the mainstay of many institutional investors over the years. However, there are certain structural issues that often prevent people from realizing more benefits from such investment funds. Another lucrative, but difficult investment vehicle is real estate funds. These have proven to be inaccessible to several investors. Such funds have difficult terms such as initial buy-ins that are massive and intimate market know-how is also required to ensure that participation is profitable in such investments.
What are Private Equity Funds?
Private equity has acted as a source of income that is steady and reliable for fund managers and investors. Those who invest in private equity cannot buy or sell on the stock market and these funds are usually managed by professional fund managers which have locked in periods and other predefined terms. One of the advantages of private equity funds is that these are usually investments in established businesses that are well established and are growing, restructuring or expanding and hence, these are funds more lucrative than investing in venture capital funds. Many are growth-oriented funds that are invested in companies that are seeking capital for growth or to facilitate their expansion plans, strategies for acquisition and restructuring requirements. The fund investment team not only provides capital, but also provides expertise in assisting the company in achieving the goal of growth that they have.
These funds usually divest interests in different companies and the funds wind down after its holdings are divested and returns are gained for the investors. The cycle is repeated when a follow-on fund is raised by the same team of investors or the fund management company.
Shortcomings in the Traditional Format
The investment model of private equity funds as it exists with different fund managers suffer several inefficiencies. For instance, many funds only allow a small number of investors that minimize the reporting needs of the fund manager. Also, there is a high entry barrier that ensures that only institutional investors can buy into such funds. Many investors are unable to penetrate into the lucrative private equity fund investment products. There are defined deadlines for liquidation that might not always ensure that asset values underlying are maximized. Hence, in certain cases downturn scenario often leads to funds being liquidated that leads to large losses for the investors. Structural deadlines also constrain investment manager from generating the best returns for the investors.
Token Solutions on Blockchain
The immutable ledger system of blockchain helps to tie real-world assets via tokens as well as iTunes gift card. This strategy can provide all the benefits that blockchain offers, that of security, accessibility, and transparency. Real-world investments can be bound by blockchain that provides an additional layer of security to such assets. The immutable ledger and smart contracts mean ownership of the investments remain secure in the blockchain framework. Investments in cryptocurrency funds and assets have been proving lucrative. Many people have gained considerably in such investments over the past few years and even months through the token prices have had dramatic drops.
Solution – Assets Backed by Tokens
While many people are still skeptical about investing in cryptocurrencies, asset-backed blockchain tokens are coming into the picture. Muirfield Investment Partners is one private equity firm that has launched a private equity investment product that is a security asset token. The token has private equity real estate investment product being backed by it and would be managed by portfolio managers. This product has been named by them as MIF. Public exchanges can sell and buy MIF tokens that would be allowed after an initial lock-in period of 90 days which is minimum and maximum is a year.
With assets being backed by cryptocurrency tokens the rigid structure is being broken down. Tokenization allows entry barriers to be lowered so that more investors can participate. With liquidity, the fund structure of private equity can be optimized. There is no deadline for the liquidation of such funds and they can be managed more efficiently and offer greater returns for the investors. Fund managers can also enjoy redemption burdens that are lighter and such funds will not have funds liquidation problems. With better alignment investment managers can improve on the values of the assets and investors can control how long they wish to be part of such portfolios.
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