Blockchain and cryptocurrencies are considered game-changers in the finance world despite Wall Street's caution. And when it comes to private equity (PE), an early innovator could enjoy first-mover advantage.
Global private equity deals are valued at $150 trillion USD. But barriers and inefficiencies have prevented more people from participating in PE deal flow. These hurdles include minimum investment size, regionalism, a culture of exclusivity, non-liquidity of funds as well as long and uncertain exits. All of which keep out non-institutional, retail investors.
Blockchain's Ability to Bring Investing Efficiencies
Singapore-based Aranium anticipates that blockchain adoption as well as tokenization of private equity industry will lead to large online exchanges, frictionless trading and higher asset values derived from more liquidity. The venture wants to reshape how private equity firms do business by being one of the first to implement game-changing technology to a timeless but traditionally-leaning industry.
Blockchain, a distributed peer-to-peer database, can provide several benefits to PE organizations that Aranium's team believes will lead to significant operational and financial efficiencies. These include transparent and accessible financial reports; custodian-related documentation, ownership verification and transfers; and potential to reduce the need for expensive middlemen such as brokers and service professionals. The firm intends to use smart contracts on the Ethereum blockchain.
Investing Demand in Asia
Private equity value in Southeast Asia was recently estimated at $1.23 billion USD. The region is creating wealth faster than U.S. and Europe, according to World Ultra Wealth Report 2018. Singapore, China and Japan have also become hotbeds for blockchain innovation. These trends are creating a need to cater to retail investment demands of new money.
Aranium CEO Gen Chia says his company's vision is to give everyone access to large-scale private equity investment ideas in Asia and to present opportunities that have traditionally been accessible only to well-funded and well-connected PE firms. Doing so would let investors (of all shapes and sizes) across the Asia region to, in essence, pool their capital through a private equity tokenized market that makes unnecessary minimum capital requirements. Chia says his firm will develop a PE-focused exchange, wallet with credit scores, and marketplace.
Blockchain and Tokens Can Improve PE Practices
Tokenization can unleash PE and micro investing in Asia where tens of millions are unbanked due to lack of banking infrastructure. And it represents a natural progression of financial innovation. Throughout history, money has always "greased" local economies to make possible increased economic activity while reducing the need to barter physical goods.
Cryptocurrencies are ushering a new age in which digital coins are supplementing paper cash by leveraging platforms that people increasingly use: smartphones. Investors are transacting through mobile and often more so than via a physical wallet or checkbook.
To illustrate, here's a use-case for a tokenized PE ecosystem. Tokens can facilitate cross-border transactions in minutes and enable investors to buy or sell PE shares on an open, secondary market.
It's crucial to have reliable protocols that link tokens to real-world assets. And blockchain firms like Aranium are working to make that a reality. Because once the link is established, tokens can give private equity participants much shorter (perhaps near-instant) investment horizons — instead of waiting for an uncertain exit that may take months or years to materialize.
Tokenization simplifies investment transactions in a PE industry where deals are often knownto have complex structures. Tokens can also facilitate portfolio diversification by presenting more investment ideas on liquid, secondary markets.
The private equity industry is about to get a major facelift, at least in Asia.