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What is private equity?

And how tokenization can expand access to PE

Oct 18, 2022

A new tokenized fund offering exposure to KKR’s Health Care Strategic Growth Fund II (“HCSG II”) recently launched on the Avalanche public blockchain. While investments in private equity (PE) have historically been primarily the domain of institutional investors, sovereign wealth funds, and ultra-high net worth family offices, tokenization is beginning to broaden access to the alternative asset class. Now, new investors want to know, what is private equity and how do PE funds work with tokenization?

Private equity firms invest in the rapidly growing landscape of companies that aren’t publicly traded. Many of the fastest growing companies today are choosing to stay private for longer and are turning to PE for capital and hands-on operational support to achieve their business goals. The best large PE firms provide their portfolio companies with access to decades of experience growing leading businesses and a global network of experts and executives to partner with them to tackle problems, innovate and identify opportunities.

With the number of listed companies on the decline, being able to gain exposure to private companies through investments in PE funds can provide valuable diversification and opportunities for outsized performance.

Private equity is inherently a long-term asset class because operational changes and growth initiatives take time to bear fruit and long lock up periods with limited options for secondary liquidity have been among the historic barriers for individual investors seeking exposure to the asset class. Until recently, the long-term commitment, high minimums, and complex process of investing in private funds meant that the asset class made more sense for institutions. However, tokenization has the potential to rewrite the tradeoffs involved in private equity investment and make it easier for qualified individual investors to add alternatives to their portfolio.

Tokenizing Private Equity

Alternative asset managers like Securitize Capital generally manage investment funds on behalf of private investors. This is where blockchain technology can come into play. Using blockchain technology to automate repeat labor can increase efficiency and create the opportunity for lower minimums, as well as offering greater potential for liquidity via secondary exchanges like Securitize Markets.

What's Next

More asset managers can be expected to explore tokenization strategies as the first tokenized funds prove their effectiveness. The efficiencies created through tokenization make it conceivable that at some point the large pool of eligible high net worth investors in the U.S. will become interested in investing in this type of fund. And tokenization can enable that to happen.

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