Private market investments have long been known for their strong insulation from economic and inflationary pressures, and their robust long-term investment theses that withstand economic downturns. Nonetheless, despite their outperformance, one of the mission-critical challenges associated with private market investments is their lack of liquidity.
According to a report by Preqin and a study by Cambridge Associates, limited liquidity in private markets can lead to reduced returns for investors. Due to the longer holding periods and lack of secondary market options, private market investors are often locked into their investments for extended periods of time. To address these liquidity issues, emerging startups have begun providing early secondary market options through the use of semi-annual auctions. These auctions allow investors to sell their shares earlier in the holding period, providing liquidity to the market and allowing other investors to gain access to these private investment opportunities. However, despite these efforts, liquidity problems in private markets still persist. It’s important to note that liquidity problems in private markets can be mitigated through proper due diligence and valuation of the assets, as well as the use of innovative solutions such as tokenization. These solutions can open up new opportunities for liquidity and increase the efficiency of private market transactions.
Tokenization presents a unique solution for bringing liquidity to private markets in a way that does not exist in the status quo. By converting real-world assets (RWA) into digital tokens on a blockchain, tokenization allows for the fractionalization of assets, enabling more retail investors to participate in private market investments, and enables the creation of secondary markets, providing early exit options for investors and increasing liquidity in traditionally illiquid private markets. Founded in 2022, DwellFi has that as its target. DwellFi brings tokenization to private markets by addressing the issue of illiquidity through the use of blockchain technology. Tokenization allows for the creation of a 24/7 digital marketplace, providing faster and more efficient trades. Compared to the long holding periods typical in private market investment, the creation of tokens can lead to increased liquidity in the market and opens up new investment opportunities for a wider range of investors.
In conclusion, the private market investment landscape presents a long-term performance advantage, but faces significant challenges with regard to liquidity. Efforts have been made to address this issue through the use of semi-annual auctions and the innovation of tokenization. The latter offers a promising solution by converting real-world assets into digital tokens and creating a 24/7 digital marketplace, thus facilitating fractionalization and increasing the liquidity of private markets. The work of companies like DwellFi in the field of tokenization is poised to democratize private market investment and make it more accessible to a wider range of investors. This not only mitigates the liquidity challenges faced by private markets, but also increases the demand for investment opportunities and enhances their overall liquidity.