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Unlocking Private Equity Through Tokenization

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:

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:

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

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:

For Investors:

For Service Providers (Banks, Auditors, Custodians):

Real-World Examples of Private Equity Tokenization

Several examples showcase the potential of private equity tokenization:

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 to learn more.