The Evolution of Private Equity Liquidity: From Secondary Markets to Tokenization

Originally published 21 May 2025. Republished in the Tessera archive; figures, platform descriptions and market state are as of that date.

Private equity has delivered strong long-run returns to the investors able to reach it. Cliffwater, studying the private equity allocations of 94 state pension systems, found that over the twenty-one fiscal years ending 30 June 2021 those allocations returned 11.0% annualized net of fees, exceeding by 4.1 percentage points the 6.9% the same pensions would otherwise have earned in public stocks. The cohort in that study is worth noticing: the long-run record belongs to large institutions because large institutions are the ones who could get in. Everyone else has been held back by high minimums, long lock-ups and thin options for selling early. The gap between the returns and the access is the area in which Tessera works, and it is worth setting out how the industry has tried to close it, what blockchain-based tokenization adds, and what still stands in the way.

Why Private Equity Is Illiquid

The constraints are structural rather than incidental. Capital is typically committed for eight to twelve years. Minimums often start at $1 million. Exits before the end of a fund's life have historically been scarce, transfers require cumbersome paperwork and general partner approval, and investors see limited detail about the underlying assets in the meantime.

Those conditions keep most investors out altogether. They also create problems for the institutions that are already in, since a pension fund or endowment that needs to rebalance cannot simply sell a fund interest the way it sells a listed security.

Secondary Markets, 1980s to 2000s

The first serious attempt at a remedy was the secondary market, where an investor could sell an existing fund interest to another investor rather than wait for the fund to wind down. Lexington Partners helped establish the institutional version of that market in 1990.

Early secondary trading looked nothing like an exchange. Buyers and sellers were few, transactions were slow and complex, pricing ran at significant discounts to net asset value, and most activity involved sellers under some kind of pressure. After the equity market collapse of 2000, investors looking for early exits from private equity commitments drew new entrants into the market, but liquidity stayed thin and prices stayed distressed.

The shift came between 2004 and 2007. Over those years the secondary market became materially more efficient, with interests trading at or near estimated fair value for the first time and liquidity improving sharply. What had been a niche corner dominated by forced sellers became an active market with a wide range of participants.

Private Company Stock Marketplaces, 2000s to 2010s

The next development addressed a different problem: liquidity for employees and early backers holding stock in private companies that had not yet listed or been acquired.

SecondMarket, founded in 2004, was the pioneer. Private company transactions on the platform reached $400 million by 2010, and by 2011 it had more than 53,000 registered participants. NASDAQ Private Market followed in 2013 with a more structured approach, and acquired SecondMarket in 2015, combining the two into a business offering company-controlled liquidity programs, structured tender offers and stronger compliance tooling.

These venues mattered for shareholders in high-growth private companies. They did little for investors holding traditional private equity fund interests, which remained a separate problem.

What the Traditional Approaches Left Unsolved

Both generations of solution ran into the same wall. Secondary transactions carried substantial fees. Settlement could take weeks or months. Access remained mostly institutional. No centralized venue existed, so the market stayed fragmented across bilateral deals and competing platforms. And valuation remained genuinely hard, which made pricing contentious in every transaction.

What Tokenization Offers

Tokenization converts ownership rights in an asset into digital tokens recorded on a blockchain. Applied to private equity, the claimed advantages fall into a few categories, and it is worth stating them as claims rather than as settled results.

Fractional ownership is the most direct. Dividing an interest into smaller units could in principle bring minimums down from millions to thousands: a fund that requires $1 million today could issue tokens at $10,000 each. Improved liquidity is the second claim, since tokens can in theory trade continuously on global digital asset exchanges or specialized security token platforms. Blockchain records also offer transparency through immutable record-keeping and real-time visibility into ownership and transfers, which compares favorably with the reporting lag investors accept today.

Beyond those, smart contracts allow compliance rules to be enforced programmatically, and distributions, capital calls and reporting to be automated rather than administered by hand. Tokenized interests can also interact with decentralized finance protocols for lending and borrowing, which is where the deepest potential difference from existing structures lies and also where the least has been demonstrated.

Where On-Chain Private Equity Stood in May 2025

Several platforms were working on bringing private market assets on-chain as of this writing, each from a different direction.

Backed Finance brings traditional assets including stocks and exchange-traded funds onto blockchain rails, offering tokenized securities that track real-world assets such as bonds, stocks and ETFs. Maple Finance began as an undercollateralized lending protocol and moved toward tokenized private credit, facilitating loans to crypto-focused institutions; the platform has said it intends to extend tokenization to assets including real estate, equities and commodities. Securitize focuses on access to alternative investments, offering digital asset securities registered on-chain across a range of investments including private company equity. InvestaX runs an institutional-grade platform for real-world asset token issuance, distribution and trading, covering private equity, digital bonds and tokenized stocks.

Projections for the category are large. Citi has projected that the value of tokenized private equity will reach $0.7 trillion by 2030, which the same projection puts at 10% of a $7 trillion private equity and venture capital market.

The Compliance-Liquidity Tradeoff

The most fundamental obstacle is a tradeoff between compliance and liquidity, and it follows from the difference between a registered security and a bearer instrument.

Bitcoin and Ethereum function essentially as bearer assets. Whoever controls the private keys controls the asset, transfer restrictions are minimal, and the result is immediate settlement, permissionless trading, global access and compatibility with automated market making.

Tokenized private equity generally involves registered securities, where the identity and eligibility of each investor must be verified. Registration and know-your-customer and anti-money-laundering checks are mandatory for tokens classified as securities, and holdings can sit only in whitelisted wallets or with licensed custodians.

Each of those requirements removes some of the liquidity the technology was supposed to add. Every transfer needs verification that the recipient qualifies. Investors must be approved before they can receive tokens at all. Trading is confined to platforms that enforce those restrictions. Cross-border transfers run into jurisdictions with different rules, and regulated custody is required throughout. The technical capacity to trade a token in seconds does not survive contact with the requirement to check who is on the other side.

Regulatory, Technical and Market Limits

Three further constraints sit alongside that tradeoff.

Regulatory frameworks for tokenized securities remain unsettled across much of the world. Rules governing securities, private equity and digital assets vary widely between jurisdictions, many regulators are still developing their approach, compliance across several regimes at once is expensive, and requirements sometimes conflict outright.

The infrastructure is also immature. Blockchain platforms frequently cannot interoperate. Tokenized real-world assets depend on reliable external data feeds, which introduces an oracle dependency the asset itself cannot remove. Private equity terms are complex enough that encoding them faithfully in smart contracts is difficult, and any vulnerability in those contracts puts the assets at risk.

Finally, secondary market liquidity has not arrived even where transferability improved on paper. Trading volumes on most platforms are thin, dedicated market makers are scarce compared with public markets, connecting on-chain and off-chain systems remains technically awkward, and activity is scattered across isolated venues.

Two Paths Forward

Most of what limits tokenized private equity traces back to classification as a security, which triggers the requirements that constrain liquidity. Two routes lead out of that, and they point in opposite directions.

The first is to structure exposure so that it does not qualify as a security. Synthetic approaches would track private equity performance without conveying ownership rights, through total return swaps linked to private equity indexes, prediction markets on private equity performance, or synthetic tokens backed by collateral and pegged to private equity metrics. A protocol-owned model would have a DAO or protocol hold private equity investments directly and issue governance tokens, sharing economic benefits through token mechanisms rather than direct claims. A third variant attaches exposure to tokens with utility features, such as access to private equity data or services, or revenue sharing from platforms that serve the industry.

Each of those carries its own problems. Regulators generally assess economic reality rather than legal form, so structures designed to avoid securities classification may be classified as securities anyway. More indirect structures track private equity performance less accurately. Complexity adds risk of its own. And sophisticated investors tend to require regulatory clarity before committing, which limits institutional adoption of anything novel.

The second route works within securities frameworks while pushing for more efficient ones: automated compliance tooling that reduces friction without lowering standards, regulatory sandboxes that let innovative approaches be tested in controlled conditions, common standards for tokenized securities, trading venues purpose-built for compliant tokenized private equity, and participation by established financial institutions.

What Determines Which Path Wins

The effort to make private equity liquid and accessible has run for decades, from the first secondary transactions through dedicated private stock marketplaces to tokenization. Tokenization is the most recent attempt and potentially the most consequential, but the tension between regulatory compliance and market liquidity has not been resolved by any of them.

Which path prevails will depend on technology and regulation together, and both routes remain open: non-security structures that deliver economic exposure without triggering securities rules, or more efficient frameworks for tokenized securities that balance compliance against liquidity. Experimentation with both should be expected as the market matures. Whether tokenization can deliver access to private equity while preserving investor protection will be settled by the projects that manage to navigate that tension, and not before.

Sources: the return comparison is from Cliffwater, "Long-Term Private Equity Performance: 2000 to 2021", by Stephen L. Nesbitt, published July 2022, which measures the private equity allocations of 94 state pension systems over the twenty-one fiscal years ending 30 June 2021, drawing on those systems' annual comprehensive financial reports, and finds an 11.0% net-of-fee annualized return against the 6.9% otherwise available in public stocks, an excess of 4.1 percentage points. The secondary market history and the platform descriptions are drawn from public commentary and company descriptions available at the time of writing and carry no individual citation. The projection of $0.7 trillion in tokenized private equity by 2030, representing 10% of a $7 trillion private equity and venture capital market, is attributed to Citi. Figures are as of May 2025 and have not been updated since.

This is market commentary, not investment advice. It is not a recommendation to acquire, hold or redeem any Tessera product, or to take or avoid exposure to any company mentioned.

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