Tokenizing Private Funds 3/3
In the final installment of our series, DwellFi endeavors to address the prevalent misconceptions and myths surrounding tokenization to advance its widespread adoption in private market investments. As Jeff Bussgang illustrates in his post “For VC Investors, Illiquidity is a Feature Not a Bug,” the illiquid nature of private market investment is a deliberate strategy aimed at prolonging investment holding periods and identifying a few high-yielding firms, as opposed to minimizing losses with average returns. Taking a closer look at some myths, reveals that this doesn’t have to be the case. We at DwellFi present our point-of-view on these myths.
Myth #1: Private funds must be undemocratic to preserve operational freedom and risk-taking.
DwellFi challenges this notion. Tokenization does not inherently affect the private nature of a fund, as ownership remains limited to investing partners in the form of security tokens. Rather, tokenization enables private funds to adhere more closely to their investment theses, free from pressure from limited partners concerned with capital preservation. Tokenization transforms ownership into a digitally tradable asset in secondary markets, offering increased democratization through ease of secondary market trading, rather than through buy-in from retail or small-ball investors.
Myth #2: Crowdfunding or secondary markets already democratize funds.
Tokenization still offers novel benefits. Investment crowdfunding platforms, such as StartEngine, SeedInvest, and AngelList, allow for investment in early-stage companies, but these are not portfolio investments and lack due diligence opportunities for investors seeking later-stage investment targets. Tokenization enables investors to trade ownership in functional secondary markets, which is currently not feasible. This functionality reduces the liquidity discount faced by private market investors during asset sales, as ownership can be easily traded on these markets.
Myth #3: Private funds’ success is rooted in their illiquidity.
We reject this perspective. While illiquidity has been a legacy trend in the private fund industry, it does not necessarily equate to higher returns. Tokenization enables fund managers to operate more efficiently, which is why we are observing increasing adoption among private fund players. While the illiquidity of private funds has been a market standard, it not a necessity for success.
To conclude, tokenization is the future of private market investment, and the traditional concerns surrounding tokenization are often due to misunderstandings or outdated views on private fund management. Fortunately, private market investment is moving in the direct of tokenization and DwellFi supports it.