Couple of his tweets sparked a half-hour phone call with @APompliano about tokens and a potential role in PE. Here were my takeaways:
First, glad people like him are thinking deeply and often about the space. It's exciting to explore how a new technology could create efficiency.
First, glad people like him are thinking deeply and often about the space. It's exciting to explore how a new technology could create efficiency.
The value of tokens for PE-specific use cases isn’t in decentralized accounting or the ledger. A debt-based token will carry rights and obligations like any other debt instrument. Power is in millions of people bidding on assets in realtime in a permissionless manner.
Instead of a handful of banks competing to provide financing, it could be a coalition of 5K Americans, 3K Indians, 1K Australians, etc. The retention of a portion of the tokens allows for a sharing of risk/reward.
A deal's debt could be funded through an ICO and priced at face value, but only 80% of the debt tokens are sold. This leaves 20% of the financing at risk to be realized when the dust settles and the market-clearing price is determined.
That upside/downside could be shared with the transaction stakeholders. The larger the percentage of the tokens are floated, the lower the potential volatility in outcomes, assuming the intended allocation was sold at face value of the required financing.
Unlike existing financing sources, a portion of the capital could be raised. It's non-binary. The risk of an under/over subscription could be shared amongst the transaction’s parties. What does it say about the deal if no one wants to buy what’s being offered? Who's responsible?
A challenge to be overcome is what happens when things go poorly? Speaking specifically about debt tokens, defaults happen. I’m struggling to understand how you could hard-code the consequences of a default.
Oftentimes, the best solution is to rework the debt, but that requires human intervention and judgement. If tokens merely had a nuclear button attached to debt, it provides an inferior product to traditional financing.
When you start talking about a widely available opportunity with the ability to trade in real time, it sounds like the public markets, which are highly regulated.
How would the SEC treat a PE firm that decided to float tokens, based on equity or debt, to retail investors in exchange for equity/debt rights? My guess is that they’ll smack them around, and fast.
If the SEC would signal otherwise, I see a path to viability. I would love access to a wider array of debt/equity structures that would help us craft as-close-perfect deal as possible for all our stakeholders.
I would also welcome the opportunity to spread returns across more families. But right now, the risks are huge, the payoff for taking that leap are small, and the technology isn’t far enough along.
I have no clue if, or how, tokens will actually impact private equity, but as I told @apompliano, I’m up for experimenting. If you know of anyone putting together private transactions of boring assets with tokens, reach out. I’d love to hear about it.
