The aim of the master thesis is to examine whether private equity is suitable for tokenization. After analyzing different characteristics of private equity, such as the illiquidity or mechanisms like capital calls, the master thesis concluded that the asset class is suitable. Private equity shares in the form of security tokens can help to reduce illiquidity and cashflows like the capital calls can be automated by the use of smart contracts.
For the tokenization, the master thesis recommends to use existing standards, such as the Ethereum blockchain or the ERC-1400 token. Furthermore, different structures for issuing private equity tokens were elaborated. These include a structure for an indirect participation via a special purpose vehicle which issues tokens and simultaneously invests into a fund, but also a direct participation where the fund itself can issue tokens. During the description of possible structures, all relevant laws were included. These include the German Electronic Securities Act (eWpG), German Banking Act (KWG), Security Prospectus Act (WpPG), Capital Investment Act (VermAnlG), Securities Trading Act (WpHG) and the German Investment Code (KAGB).
All structures were evaluated from the perspective of private equity funds, institutional investors, private investors or other relevant intermediaries. Also, benefits and challenges for the different structures and participants were discussed. The benefits include an increase in efficiency of several processes, potential cost savings, the possibility for funds to reach more investors or the possibility for investors to diversify their portfolio more. Still, these benefits could only be made use of, if major challenges are mastered by the market participants. These include an insufficient legal framework, different hurdles when implementing a secondary market, or the problem that theoretical approaches might work differently in reality.
Table of Contents
1 Introduction
1.1 Motivation and objective of the thesis
1.2 Research questions
1.3 Structure of the thesis
2 Core concepts of tokenization in Germany
2.1 Digital ownership
2.2 Distributed Ledger Technology and Blockchain Technology
2.3 Crypto tokens and security tokens
2.4 Legal matters of security tokens
3 Core concepts of Private Equity in Germany
3.1 Characteristics of Private Equity
3.2 Development of the German Private Equity market
3.3 Legal matters in Private Equity
4 Approach for tokenization of Private Equity Funds
4.1 Indirect participation in Private Equity with tokenized products
4.1.1 Legal structure
4.1.2 Involved parties and mechanisms
4.2 Direct participation in Private Equity with tokenized products
4.2.1 Legal structure
4.2.2 Involved parties and mechanisms
4.3 Considerations for tokenization of equity products
4.4 Secondary market
4.5 Further considerations
5 Feasibility of tokenization in Germany
5.1 Added value through tokenizing Private Equity
5.2 Challenges of tokenization of Private Equity
5.3 Effects of tokenization to the Modern Portfolio Theory
6 Conclusion
6.1 Essential findings
6.2 Critical evaluation and limitations of the thesis
6.3 Recommendations and areas for further research
Objective & Scope
This master thesis examines the feasibility and implementation of tokenizing private equity funds in Germany. It aims to develop and evaluate legal and operational structures for both direct and indirect participation, while assessing the influence of tokenized private equity on portfolio diversification according to the Modern Portfolio Theory, against the backdrop of the current German legal and regulatory framework.
- Analysis of tokenization processes using Blockchain and Distributed Ledger Technology.
- Comprehensive review of the German legal environment for security tokens and private equity funds.
- Development of direct and indirect tokenization models for private equity participation.
- Evaluation of challenges regarding market implementation and investor protection.
- Application of Harry M. Markowitz’s Modern Portfolio Theory to assess the impact of tokenized private equity assets on portfolio performance.
Excerpt from the Book
3.1 Characteristics of Private Equity
The processes of investing capital, creating value and exiting an investment again does differ from investment to investment and is especially dependent on how mature a company already is (Demaria, 2013). This is why within private equity there is a basic distinction between different categories of private equity. There is Venture Capital, Growth Equity and Leveraged Buyouts (LBO), describing private equity for very early stage companies which might not even be profitable, companies which are profitable already but need further capital to expand the business and very mature companies, respectively. Each categories can be further broken down and will be explained in the following paragraphs.
Venture capital funds tend to invest in early stage companies with a huge long-term growth potential. The growth potential is based on the fact that the targets are often young and sometimes not even profitable. When acquiring a target, it can be difficult to find a “fair” valuation. This is also due to the early stage of the company, including missing recurring cashflows. Often the founders of the target still own a share of the company, which is one reason why venture capital funds often only acquire minority stakes (Espinosa, 2022b).
In addition to the use of smart contracts, the Ethereum blockchain offers another attractive feature for tokenization, which is the possibility to set up a private blockchain on the Ethereum blockchain. The difference between public and private blockchains is described in the following paragraph. Chapter four will later return to the reasons why this could be important for certain tokenization structures (Buterin, 2014b).
Summary of Chapters
1 Introduction: Defines the motivation and research questions focusing on the potential of tokenizing private equity funds in the German market.
2 Core concepts of tokenization in Germany: Explains foundational concepts of digital ownership, Blockchain technology, and the regulatory classification of different token types under German law.
3 Core concepts of Private Equity in Germany: Provides an overview of private equity as an asset class, its market development, and its regulatory environment within the German investment landscape.
4 Approach for tokenization of Private Equity Funds: Develops practical legal and structural models for direct and indirect participation in private equity through tokenization.
5 Feasibility of tokenization in Germany: Evaluates the added value and core challenges of tokenization and analyzes the impact of private equity on portfolio diversification using Modern Portfolio Theory.
6 Conclusion: Summarizes the essential findings, provides a critical evaluation, and offers recommendations for both the industry and the legislator along with areas for further research.
Keywords
Tokenization, Private Equity, Blockchain, Ethereum, Security Token, German law, KAGB, eWpG, Modern Portfolio Theory, Portfolio diversification, Smart Contracts, Asset Management, Decentralized Finance, Financial Regulation, Investment Funds
Frequently Asked Questions
What is the core focus of this master thesis?
The thesis focuses on the concrete implementation, legal feasibility, and strategic benefits of tokenizing private equity funds within the German financial sector.
What are the primary thematic areas explored in this work?
The study navigates through Blockchain technology, the private equity industry, German financial law, and investment theory, specifically the Modern Portfolio Theory.
What is the ultimate research goal of this paper?
The goal is to determine if private equity is suitable for tokenization, identify the necessary structures for implementation under current German law, and assess how these assets serve as a portfolio complement.
Which scientific methodology is utilized?
The thesis employs a traditional literature review combined with the development of new, theoretical structural models based on existing industry regulations and technical standards.
What topics are fundamentally covered in the main section?
The main part covers the theoretical foundations of Web 3.0 and tokenization, market analysis of German private equity, specific tokenization models (direct vs. indirect), and an assessment of both operational benefits and legal hurdles.
Which keywords best characterize this research?
Key terms include Tokenization, Private Equity, Blockchain, Security Tokens, German Financial Regulation (KAGB, eWpG), and Modern Portfolio Theory.
How does the thesis evaluate the legal risks of indirect participation structures?
It highlights the creation of an additional legal layer (the SPV) and the associated solvency risk, noting that these structures often operate in a legal grey area to bypass certain investment minimums set by the KAGB.
Why is the "Modern Portfolio Theory" (MPT) relevant to this study?
MPT is used to analyze how adding tokenized private equity, which provides access to non-correlated return profiles, can shift the efficient frontier and optimize a risk-adjusted portfolio for investors.
What challenges does the author identify for a secondary market?
The author identifies high infrastructure costs, the lack of a uniform market standard, and the inherent difficulty of valuing illiquid private equity assets as primary obstacles for secondary market liquidity.
- Arbeit zitieren
- Philipp Rothe (Autor:in), 2023, Tokenization of Private Equity Funds in Germany. Direct and Indirect Participation and Feasibility, München, GRIN Verlag, https://www.grin.com/document/1357319
