Private equity has long been associated with high returns but has remained inaccessible to the broader investor due to factors like exclusivity, illiquidity, and opacity. However, tokenization—the process of converting real-world assets (RWAs) into digital tokens—has emerged as a game-changer, opening the door to more investors and providing private equity firms with innovative pathways for fundraising.

In this blog, we’ll explore the transformation of private equity through tokenization, focusing on:

• Current trends in private equity
• The role of tokenized assets in reshaping private equity
• Regulatory considerations
• The tokenization process step-by-step
• Key benefits for issuers and investors

Private Equity: An Investment Opportunity for All

The private equity market, known for funding private companies with high growth potential, has consistently outpaced public market returns. CAIA reports that private equity achieved an annualized return of 11.0% from 2000 to 2021, outperforming public stocks, which saw a 6.9% return in the same period.

However, traditional private equity investments have drawbacks:

• Illiquidity: Investments are usually locked up for years, limiting immediate access to capital. However, this can lead to higher returns for patient investors.
• High Minimums: Entry often requires $100,000 or more.
• Restricted Access: Closed-door deals limit participation for average investors. Additionally, only accredited investors and higher can invest, further narrowing access to these opportunities.

But now, “Private equity is targeting individual investors," said Band & Company’s Global Private Equity Report.  

As individual investors grow wealthier, private equity is looking to tap into this market. Bain & Company’s 2022 report reveals that 53% of high-net-worth individuals with over $5 million are planning to increase allocations to private equity and other alternative assets.

Global wealth allocations by investor type, $ trillion, 2022. Source: Bain & Company

Meanwhile, according to Bain & Company’s Private Equity Midyear Report 2024, private equity deals, exits, and funds closed slowed in the first half of 2024. Most funds are still struggling to raise fresh capital.

As a result, we can expect a gradual shift in the private equity landscape, with more funds seeking strategies to attract individual investors and diversify their sources of capital.

How Private Equity Tokenization Bridges Investors and Firms

Tokenization enhances accessibility and democratizes private equity by converting asset ownership into digital tokens. For instance, shares in a private equity fund can be represented as tokens on a blockchain, enabling fractional ownership and tradability.

Consider a private equity fund with a minimum investment requirement of $1 million. With tokenization, shares can be divided into tokens valued at $10,000 each, allowing more investors to participate in this lucrative market.

Tokenized assets also bridge the gap to Web 3.0, allowing token holders to leverage DeFi opportunities like staking, lending, and borrowing.

In fact, Citi estimates that private equity tokenization could account for $0.7 trillion—10% of the private equity market—by 2030.

The Private Equity Tokenization Process: Step-by-Step

Here’s a high-level look at how tokenizing private equity works:

1. Asset Selection and Valuation
   Suitable assets, such as private companies or real estate holdings, are identified and evaluated according to financial standards.
2. Legal Structuring
   The legal foundation ensures that tokens represent legitimate ownership. Common structures include Tokenized SPVs (special-purpose vehicles) and Direct Asset Tokenization.
3. Tokenization
   Assets are converted into digital tokens—often known as Real World Asset (RWA) tokens—on a blockchain platform like IX Swap.
4. Primary Offering
   Tokens are initially offered to investors on primary marketplaces, where KYC/AML checks are mandatory for regulatory compliance.
5. Secondary Trading
   After the initial offering, tokens can be traded on secondary markets, such as IX Swap's Automated Market Maker-Decentralized Exchange (IXS DEX)
6. Ongoing Management
   Essential services, including regulatory compliance, asset valuation, and corporate actions, are managed throughout the token’s life cycle.
7. Regulatory Compliance
   Issuers need to remain compliant with securities laws, conduct audits, and manage investor relations to ensure ongoing transparency.

Benefits of Private Equity Tokenization for Issuers and Investors

For Issuers:

• Global Reach: Tokenization expands the investor base globally, opening up new sources of capital.
• Enhanced Fundraising: By tapping into tokenization, issuers can streamline fundraising processes, potentially reducing costs and increasing efficiency.
• Improved Liquidity: Tokenized assets offer enhanced liquidity, giving issuers quicker access to funds.
• Enhanced Transparency: Blockchain technology ensures transparent and secure transaction records.

For Investors:

• Portfolio Diversification: Tokenized assets allow investors to diversify their portfolios by gaining access to high-yield private equity.
• Greater Transparency: Investors gain real-time access to detailed asset information and performance metrics.

For Service Providers (Banks, Auditors, Custodians):

• Reduced Reconciliation: Blockchain acts as a single source of truth, reducing reconciliation efforts.
• Faster Settlement: Tokenized trades can settle almost instantly, unlike traditional processes.
• New Revenue Streams: Service providers can offer specialized digital services within the tokenized equity landscape.

Real-World Examples of Private Equity Tokenization

Several examples showcase the potential of private equity tokenization:

• Quadrant Biosciences Quadrant Biosciences took the lead in private equity tokenization by raising $13 million through the issuance of Quadrant Tokens, representing 17% of the company's diluted equity, in 2018.
• BFToken, is a private equity fund targeting early-stage blockchain companies; it raised over $100 million through an Initial Token Offering (ITO) in 2018.

Challenges in Private Equity Tokenization

Despite its promise, private equity tokenization faces significant challenges, particularly around regulatory uncertainty. Tokenization must comply with securities regulations to protect investors and maintain market integrity. However, the regulatory landscape remains fragmented, with some regions adopting existing securities laws and others developing entirely new frameworks for digital assets.

KPMG’s 2023 report highlights Singapore, Hong Kong, and Switzerland as key jurisdictions for asset tokenization. Singapore’s Project Guardian, which tests blockchain’s potential for asset tokenization and DeFi, showcases the region’s leadership in this space.

A New Era for Private Equity Investments

The tokenization of private equity is revolutionizing the market, offering wider access and enhanced liquidity for this traditionally exclusive asset class. Platforms like IX Swap are paving the way for tokenized equity, creating new opportunities for investors and issuers alike. By lowering entry barriers and fostering greater transparency, tokenized assets are driving a shift toward a more inclusive and dynamic financial ecosystem.

At IX Swap, we simplify the process of investing in private equity and real-world assets through our licensed platform and comprehensive services. Holding the prestigious DARE License from the Securities Commission of The Bahamas, we ensure a secure and regulated environment for the issuance, offering, and trading of tokenized private equity and RWA tokens. Through our IXS Launchpad, IX Swap facilitates the launch of global RWA token offerings, connecting issuers with investors worldwide via our trusted and compliant platform.

Discover how IX Swap can help you tap into this transformative opportunity. Contact us today.

Want to Learn More?

Curious about how RWA tokenization could change the way you invest? Watch Julian Kwan's RWA Masterclass to dive even deeper into the Real-World Asset (RWA) space.

Julian brings 6 years of his team's expertise, including multiple world-first RWA token launches, thousands of conversations with industry leaders, and hundreds of conferences, speaking engagements, webinars, AMAs, and podcasts. All of this valuable knowledge is distilled into just 2 hours.

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