How Blockchain Technology Is Helping Remodel the Private Equ…

May 25, 2018

5 min read

This story originally appeared on Due

Private equity investment funds have made many people and institutional investors billions. However, structural issues prevent all parties from experiencing the full benefits of this powerful investment vehicle.

Real estate investment has proven inaccessible to many investors across the marketplace. It has required massive initial buy-ins and/or intimate market knowledge for profitable participation.

Private equity today

Historically, private equity funds have been a reliable and steady source of income for investors and fund managers. Unlike public companies, a limited number of in-the-know partners hold private equity. Shares can’t be bought and sold on the stock market. Now, this is where shareholder governance and reporting are significantly easier. Unlike venture capital, private equity is traditionally used to invest in established businesses seeking to expand or restructure.

Therefore, a growth-oriented private equity fund invests the capital it raises in companies seeking growth capital to facilitate expansion, an acquisition strategy, and/or restructuring.  In addition to providing capital, the fund’s investment team will use its expertise to assist a portfolio company in achieving its growth goal.

After a prescribed amount of time, the fund divests its interests in the portfolio companies. Hence, this provides a return to the fund’s investors.  After divesting its holdings, the fund will be wound down. Then, the private equity firm will start a follow-on fund and repeat the cycle.

Stiff structure

In the past, this investment model has been successful. However, it also has struggled with several inefficiencies.

Private equity fund managers have sought to work with a relatively limited number of investors to minimize shareholder reporting needs. Hence, the amount of cash typically required for participation means only large institutional investors like pensions or wealthy individual investors can buy in. A huge portion of the investing world simply isn’t able to participate in this profitable investment structure.

Furthermore, private equity fund structures have defined liquidation deadlines. These deadlines drive certain behavior that isn’t always in the best interest of maximizing underlying asset value.  After the downturn, many funds liquidated their holdings. And, as a result, suffered tremendous losses. These structural deadline elements oftentimes constrain the investment manager from generating the best returns for their investors.

Blockchain token solutions

Blockchain’s immutable ledger can be used to tie real-world assets to tokens. This strategy combines the benefits of blockchain — its transparency, accessibility and security — with the reliability of real-world investments. Smart contracts and an immutable ledger means ownership of those real investments can be secured within the blockchain itself.

Cryptocurrency has made a few people very rich over the past six months. Yet, many tokens have experienced price drops almost as dramatic as their price increases.

People who need lower-risk investment opportunities have been shut out of the cryptocurrency boom. No one wants to sink a large portion of their kids’ college fund into a cryptocurrency that might be worthless tomorrow. This is where asset-backed blockchain tokens come into the picture.

A secure option for investment: Asset-backed tokens

Founded in 2012, Muirfield Investment Partners is a private equity firm. It will launch a TAO for a new generation of private equity investment. Murfield built MIF, a security asset token. And, a private equity real estate investment portfolio managed by the private equity real estate firm will back the token.

Initially, a limited number of U.S. accredited investors and non-U.S. approved parties will receive tokens. Then, public exchanges buy and sell MIF tokens. This can happen after a lock-out period of 90 days to a year. This groundbreaking model presents several opportunities.

Breaking the rigid structure of private equity investment

Tokenization allows a lower barrier of entry to participation. Anyone who owns just one token is participating in the fund.

Furthermore, tokenization allows liquidity that was previously impossible in private equity fund structuring. As a result, this helps optimize the private equity fund structure. Investors in need of redemptions can sell their tokens in exchanges. Someone else acquires the token.  

Fund managers face far lighter redemption burdens under the tokenization model. Plus, the fund doesn’t have a liquidation deadline. Therefore, they can manage the fund far more efficiently and drive greater economic returns for their investors.

In fact, tokenization means no fund liquidation. Instead, managers can focus on maximizing the fund’s long-term net asset value rather than reaching a target exit date.

Now, Muirfield wants to improve the traditional private equity fund world. Tokenization opens this world up to a larger participant pool. As Thomas Zaccagnino, Founder of Muirfield Investment Partners, explained, “We are very excited to bring a new and much improved private equity investment structure to the market. A structure offering better alignment between the investors and investment manager, improved ability to maximize assets values, and enhanced liquidity allowing investors the ability to control how long they participate in the growth of the underlying real estate portfolio.”

(By Peter Daisyme)