Beyond RWA tokenization: Redefining Private Asset Investment in the Digital Age
At a glance:
- The private asset market, totaling $12 trillion of assets under management, remains largely inaccessible to many due to its fundamental architecture. By establishing a more open and inclusive infrastructure, the industry can tap into latent private demand, potentially doubling the market size.
- Merely overlaying new technology like Real-World Asset (RWA) tokenization isn’t the panacea. For genuine democratization, the entire system needs a ground-up redesign that ensures scalability and inclusivity, all while upholding the industry’s foundational alpha pillars.
- Linemint has the ambition to pioneer the Digital Asset Age by crafting a holistic framework for open investment. Leveraging on-chain incentives and zero-knowledge-proof technology, we are building a transparent and trustworthy ecosystem where all investors can thrive.
The Current Landscape 🌐
While private markets consistently outperform their public counterparts, most of us remain barred from tapping into its superior alpha. The prevailing market structure either sidelines numerous potential investors, confines them to bottom quartile deal flow, or burdens them with a cascade of fees that, over time, erode the very alpha they seek.
Totaling USD 12 Tn in assets under management (McKinsey, 2023), the sector is dominated by regulated fund managers investing on behalf of financial institutions. Fund managers operate within an intricate ecosystem of custodians, intermediaries, and legal advisors, all navigating under a stringent legal and regulatory framework. This setup inherently amplifies administrative and regulatory burdens, exacerbating asset holding illiquidity, complicating collateral lending, and elevating the entry barriers with substantial minimum investments.
Consequently, the global investment capacity faces constraints:
- At the GP (fund manager) level: The deterrent barriers for first-time funds persist. Additionally, as fund managers zero in on niche investment strategies, they grapple with deployment challenges as their funds grow. Strategies viable at one scale can become untenable as fund sizes swell, given the limited absorptive capacity of the same investment opportunities.
- At the LP (fund investor) level: Participation remains exclusive to sizable, “qualified” investors.
These structural challenges render the current model both unscalable and exclusive.
“Private Asset Investing Desperately Needs New Market Infrastructure.” Bain & Company, June 2023.
The call for a reimagined system grows louder, especially considering the burgeoning demand from individual investors, representing a potential influx of $8 to $12 trillion in household funds (Bain & Co, June 2023).
In this context, many have looked to technological solutions, particularly blockchain, to remedy the flaws of the prevailing architecture.
RWA Tokenization will not trigger a paradigm shift 🧩
The merits of blockchain as the foundational layer for real-world private asset transactions — on liquidity, transparency, accessibility, and composability — are undeniably transformative. However, merely superimposing this technological advancement onto the existing infrastructure is not enough. Given the intrinsic structural challenges previously discussed, a simple enhancement won’t truly democratize access. To prevent dominant entities from perpetuating their control on the financial system, we must fundamentally rethink the paradigm, ensuring it’s both scalable and inclusive from the outset.
Crafting the Open Investment Paradigm While Preserving Alpha 🚀
The impending paradigm shift in private asset investments must be anchored in its historically successful factors, with blockchain technology safeguarding these foundational pillars. While numerous studies highlight the superior performance of private investments over public ones, our extensive experience in private equity distills the reasons to four core principles (the « Core Principles »):
- GP expertise: Successful deal sourcing and execution demand specialized investors, epitomized by the unique skills and networks of lead investors or fund managers.
- Trust signaling: Given the pronounced information asymmetry in private investments, trust signaling is indispensable. This trust is not only between the GP and LP but also among LPs. The prevalent ‘herd mentality’ in private investments often sees investors awaiting a green light from a key player before committing.
- Long-term horizon: GPs prioritize sustained value creation, free from the quarterly performance pressures that public companies face.
- Alignment of interests: The extended nature of private asset investments calls for a strong alignment between GPs and LPs. Existing frameworks, typically governed by Limited Partnership Agreements, ensure this alignment by promoting equitable treatment, providing conflict resolution mechanisms, and managing early liquidity scenarios without prejudicing co-LPs.
We reckon that the Core Principles relevantly address the agency problem. Introducing greater liquidity, accessibility, composability, and transparency to private assets, if not done within the right framework, could destabilize these pillars, potentially diminishing the sector’s long-term performance. Such disruption would probably deter established players from fully harnessing the technology’s capabilities.
The Linemint Vision
In an era where technology continually reshapes industries, Linemint is poised to redefine how private asset investments and fundraising are made. But our vision goes beyond mere technological integration; it’s about crafting a holistic framework that addresses the inherent challenges of the sector while preserving its core strengths in order to build the Open Investment Paradigm.
At Linemint, we are building a permissionless protocol for open investment, harnessing the synergy of trust signaling, network effects, long term incentives and privacy, realizing the full potential of Real World Asset Tokenization. We’re building a platform where all investors can capitalize on their investment acumen within a transparent and trustworthy ecosystem. With Linemint, we’re not just entering the Digital Asset Age: we’re defining it. Stay with us on this journey.
