Venture capitalists were quick to fund blockchain technology to disrupt the banking industry, but they have been very cautious about embracing it for their own business. That is slowly changing with some recent efforts to tokenize private funds, including a new venture fund launched by a veteran private equity executive.
Pierre Mauriès founded Nemesis Technologies of Tokyo last year after serving as private equity technology practice director at PwC and as an M&A strategy exec for The Carlyle Group. The firm is targeting $500 million for its debut fund and Mauriès told Venture Capital Journal he expects to hold a first close by the end of Q1 and a final close by July.
After the initial close, the fund will begin to be tokenized and available on Securitize, a digital security issuance and compliance platform. That process will convert the fund stakes into digital tokens, which investors in the US and Japan can then trade on Securitize’s brokerage platform, Securitize Markets.
“The future of all alts is on tokenization,” Mauriès said, noting that it provides a number of advantages for LPs. For example, investors in the Nemesis fund will be able to start trading the tokens after four years, giving them the chance at liquidity much sooner than they would normally. And because the tokens are digital, they can be fractionalized and sold to other investors in a way that is simpler than selling on the traditional secondaries market, he added.
The quarterly reports that SPiCE VC posts on its website show how easily an investor can check on a tokenized fund’s performance. You can look at IRRs and other measures, or you can just keep track of the NAV per token, which is the portfolio value divided by the number of live tokens. For SPiCE Fund I, the NAV per token increased from $1 in Q1 2018 to $3.50 as of Q3 2022, the firm reported.
I am unaware of any big downside to tokenization, other than the complaint that it sounds too much like bitcoin. The Wall Street Journal reported in December: “Blockchain-based private equity funds may face the stigma of high-profile crypto blowups because of the underlying technology, said Hugh MacArthur, chairman of the private-equity practice at Bain & Co, a consulting firm that advises private-equity managers.”
Honestly, I cannot imagine that is a real concern, given the maturity of blockchain technology and the sophistication of investors in PE and VC funds. Does anyone seriously believe buying a digital token in a KKR fund is as risky as buying Dogecoin?
KKR, Apollo, Hamilton Lane and Partners Group are among the big firms leading the tokenization charge in private equity. But I am unaware of any large, brand-name venture capital firm using tokenization. The VC firms using it tend to be newer and focused on investing in blockchain technology, like SPiCE, which is led by the co-founders of Securitize and is raising a second fund with a reported target of $250 million. Others include Blockchain Capital, Illumina Capital, Science-Inc and Sonic Capital.
The early adoption of tokenization in PE is likely due to those firms trying to broaden their investor bases – and tokens are an easy way for retail investors to get into private equity. By offering digital tokens, PE firms can potentially reach 13.6 million accredited investors collectively managing $75 trillion in the US alone, Securitize CEO Carlos Domingo told affiliate Private Equity International in November.
Tokenization doesn’t necessarily give VCs access to a large new pool of potential investors, since high-net-worth individuals have long had access to VC funds. For now, the appeal of tokenization for VC funds is ease of use for LPs, and VCs haven’t really had to think much about that during the bull market of the last decade. Maybe we’ll see that change now that we’re in a more challenging fundraising environment. A friendly gesture may be enough to prompt an LP to choose one VC fund over another, all other things being equal.