⛓ Investment funds but on-chain
Private tokenized funds are completely changing the landscape
Gooood morning, Rainmakers! ☀️
Today, I am elated to welcome once again Peter Gaffney as a guest writer.
Peter is the Head of Research at our sister company, Security Token Advisors.
For the last 18 months, he has embarked on a journey to tokenize every single industry in the world (figuratively) and break down the value adds for those that would be interested in doing so.
The series is called 'Tokenize This' where you can find about 75 examples of different products or industries being tokenized and I thought I'd share one of my favorites this week.
Without further ado, it's time to…
Get liquid & learn about the benefits of 'Tokenizing Private Investment Funds' 💧
⛓ Tokenized Private Investment Funds
The outsized return potential of Angel Investing, Venture Capital, and Private Equity are well-known in the finance industry.
Traditionally, direct access to early-stage investing at significant magnitudes has been reserved for ultra-high-net-worth individuals, family offices, dedicated funds, etc. — pretty much entities that can foot the bill.
With recent legislative changes, however, access to the early-stage startup market is becoming more widely accessible.
Before we jump into the capabilities of security tokens to usher in widespread access to private investment vehicles, check out one of the most recent success stories regarding this exact concept: Blockchain Capital and its associated security token, BCAP.
Blockchain Capital is a tokenized Venture Capital fund that’s been around since 2013. Much like any VC fund, the firm has access to direct investments in early-stage startups.
The initial fundraising was conducted via a Security Token Offering (STO), so token holders gain a right to fund distributions over the years and have the ability to trade their ownerships on secondary markets.
One of Blockchain Capital’s venture investments is Coinbase, which has since IPO'd so that investment has done pretty well thus far.
How many other investment vehicles provide the opportunity for ordinary retail investors to have early ownership in an 11-figure valuation?
Probably none to be honest.
Blockchain Capital’s investment in Coinbase is simply an example of the potential of tokenized investment funds for non-traditional VCs and early-stage investors and does not imply that all tokenized investment funds will capture investments of equivalent returns and results.
As always, past performance is not indicative of future results.
BCAP just so happens to be one of the most recent examples of a tokenized VC fund that had a portfolio company IPO.
The rise in the popularity of SPACs is remarkable. And the overall space has room to evolve further. (source)
Value Adds -
Fund Managers (Token Issuers):
- Ability to close funds more quickly than the traditional fund formation structure
- Access to a larger pool of smaller Limited Partners (LPs), which may offer more flexibility and authority over investment decisions than a structure with only a few high-ticket LPs
- Can raise add-on rounds just as seamlessly as the initial raise via security token offerings, all while having a more concrete “feel” of the market through secondary trading prices of the VC’s token
- Gain access to investment opportunities in one of the most historically lucrative asset classes
- Can get exposure with a small sum of capital (i.e. whatever the price of a fund’s security token is) which makes the process less daunting and more feasible
- Can add to or decrease their investments in real-time, as the token trades in secondary markets
- Further opportunities for arbitrage as the token’s trading price can be compared to the book value of the fund, and decisions can be made accordingly
These amendments are pretty clear indicators of the shifting investment landscape, especially in the private sector.
Crowdfunding platforms like SeedInvest and Wefunder are strong current beneficiaries of this progress, but there exists a deeper root that stands to benefit even more heavily — Private Investment Funds and Special Purpose Vehicles through security token capabilities.
One of the pinnacles of blockchain technology is its ability to transact, verify, and store data of all sorts. This extends to handling capital investments, monitoring cap tables and ownership verifications, managing distributions and dividends, and end-to-end compliance requisites.
Smaller-level investors who have the experience and abilities to raise their own investment funds are typically deterred by the sheer time and monetary expenses associated with everything non-investment-related.
Where these investment managers could be spending nearly all their time performing research and diligence on prospective investments and working with portfolio companies (current investments), their attention is unfortunately dragged over to the facets listed in the previous paragraph.
This leads to the necessity of either hiring more team members to cover those roles, or spreading oneself too thin trying to manage the entire operation.
Either way, the current “process” certainly has its fair share of misallocation of resources and could be improved.
Make no mistake, these updated fundraising guidelines are not excuses for everybody to pop up with their own investment funds, collect capital through a digital raise, and start throwing darts at every SaaS company they see.
There will still be a diligence process both on the aspiring investment manager’s side and from the prospective investors’ side.
Integrating blockchain technology and security tokens can simply ease the pain points associated with raising and managing funds, with the overall goal of improving the operations of every party involved.
Integration Potential with Allocations -
One firm that is already blazing the trails in the Private Fund and Special Purpose Vehicle (SPV) realm is Allocations.
Pretty much already covering the bases that we discussed earlier, Allocations has a range of offerings for different fund types and managers. From traditional funds to SPVs and Multi-Asset SPVs, the platform handles onboarding, fundraising, cap table management, liquidity tests, accounting, tax filings, and distributions.
The pricing of these services is pretty enticing — especially to those who can already count how many employees it would take to manage all the above, and how much they would cost in salary + bonus.
The team at Allocations is positioned nicely to take advantage of the changing tides in a world where the private markets are becoming more desirable and SPACs are taking big bites out of them.
For a truly end-to-end service at near-peak efficiency, the integration of security tokens and underlying blockchain tech in the operations could very well be in Allocations’ game plan, which would set a new standard for private funds going forward.
If you enjoyed this be sure to follow Peter on Twitter, as he will be publishing an eye-opening report that breaks down every institution's involvement in tokenization very soon!
Everything in this report is for informational and entertainment purposes only. Nothing in this report should be taken as financial advice or as an inducement to purchase or sell any security. Nothing in this market report should be used as legal advice. Always do your own research before making any decisions regarding financial transactions of securities.
• No money or other consideration is being solicited, and if sent in response, will not be accepted;
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