Private Equity Funds On Blockchain

Private Equity Funds On Blockchain

Private equity represents equity securities in companies that are not publicly traded on stock exchanges. Unlike regular equity securities, which are offered to the public, private equity securities are privately offered to institutional investors like venture capital firms, who often take on an active role in managing and structuring the companies into which they invest. This process is also known as private placement. Companies issue and distribute equity in order to raise the funds they require for expanding their operations.?

Private equity investments are often considered to be portfolio return enhancers because they can offer sources of returns that are not available through traditional investments. In addition to providing unique sources of returns, private equity investments can also offer investors diversified portfolios spanning across a range of industries and geographies.?

Types of Private Equity Investments

Private equity encompasses various types of investments. The main types include:

1. Venture capital investments and buyouts: Venture capital focuses on early-stage companies with high growth potential. Such firms provide capital to startups and emerging companies in exchange for equity. Buyouts involve acquiring a controlling interest in a company.
2. Growth Capital: Growth capital, also known as expansion capital, is a form of investment which targets profitable companies with the explicit purpose of helping them to grow.
3. Mezzanine Financing: Mezzanine financing is a hybrid of debt and equity financing. It involves providing capital in the form of subordinated debt or preferred equity, often with warrants or options to convert to equity.
4. Distressed Investments: Distressed investments involve investing in companies that are in financial distress or bankruptcy. The goal is to restructure the company and turn it around for a profit.

Private equity funds are pooled investment vehicles used to invest in private companies. These funds are managed by private equity firms and are used to deploy capital into various investment opportunities. The table below compares the performances of private equity securities and publicly traded securities over the last ten years.

While private equity investments offer higher returns than publicly traded securities, they are illiquid, often locking investors into a commitment for several years. This illiquidity can limit investors' flexibility, making it challenging to respond to changing market conditions or personal financial needs. This is because they are not offered to the public and secondary markets for the trade of private equities are scarce. Private equity firms have predefined exit strategies to realise returns on their investments. Common exit strategies include initial public offerings (IPOs), sales to strategic buyers, secondary buyouts and recapitalisations.

Many investors are unable to invest in this asset class because most private equities are traded in block deals. Valuations entail lengthy verification processes, often making it difficult to raise funds by issuing equities. While VC funds have partially facilitated investor exposure to private equities, it is yet to become a mainstream practice.?

Private Equity Funds On Blockchain

Rooba.Finance has made it possible to tokenize private equity funds via blockchain. This tokenization use case is currently undergoing IFSCA’s Limited Use Authorisation Sandbox trials. So how does this event put Rooba at the cutting edge of financial technology??

Lower Investment Barriers

Private equity has traditionally been an exclusive investment domain, primarily accessible to institutional investors or affluent individuals. This exclusivity stems from the substantial minimum investment requirements and the extended investment horizons that characterise private equity investments. Tokenization of private equity funds on blockchain allows many more investors to participate by fractionalising equities, allowing for lower ticket sizes and efficient price discovery.

Enhanced Liquidity?

By virtue of a secondary market for tokenized securities (Rooba Tradecenter), tokenization significantly improves the liquidity of private equity investments. Because of the secondary market, investors can benefit from the flexibility of being able to trade their tokens when required. This increased liquidity can make private equity investments more attractive for a broader range of investors.

Transparency and decentralised access to information

Private equity investments are often opaque and lack transparency, making it difficult for investors to assess the risks and returns associated with their investments. Blockchain technology, which underlies tokenization, provides a tamper-proof and transparent ledger of all transactions, enhancing transparency and enabling investors to assess the risks and returns of their investments with greater clarity. The decentralised nature of blockchain technology means that all participants have equal access to information about tokenized assets.?

Further, since the valuation of private companies happens sporadically - in intervals of upwards of 6 months - investors cannot gain valuable insights regarding their investments in real time. Rooba.Finance prevents investors from losing money due to gaps in information or being unable to exit in time. Investors can now find out investment values on demand (and exit quickly courtesy of increased liquidity). This also enables a broader range of investors to access investment opportunities and make informed investment decisions.

Governance and control over investments

Holders of tokens are granted voting rights which allow them to participate in companies’ decision-making processes. This enables investors to assume complete control over their investments and to actively participate in the management and structuring of enterprises.?

Conclusion

Fund tokenization on blockchain eliminates various pesky characteristics of conventional private equity investments. It also adds multiple valuable features such as enhanced liquidity, lower investment barriers, absolute transparency and direct control over investments. These features make fund tokenization a monumental breakthrough in the world of financial technology.???