We sat down with Brian McNulty, General Partner at Lingfeng Capital (DVF / DTTF Funds) about the firm’s Digital Venture Fund (DVF), the first tokenised venture capital fund being launched, in collaboration with Archax on the London Stock Exchange’s Digital Markets Infrastructure (DMI).
The fund is designed to broaden the investor base for venture capital funds by enabling subscriptions at lower minimums, while offering improved liquidity compared to traditional non-tokenised venture funds.
Q: How can tokenisation be applied to venture capital funds?
The underlying investment case comes first. DVF is not a token product looking for a thesis; it is a venture fund built on Lingfeng Capital’s established platform and sector focus. You need a strong underlying strategy, with the tokenisation as a secondary element.
With the DVF, we’re able to improve private market distribution through our tokenisation model. It allows us to reduce the ticket size of the investors that are coming into the fund considerably, immediately offering the opportunity for more potential investors to participate in growth stage ventures than previously would have been feasible under a traditional model.
We’re also able to bring greater liquidity to investors. The fund’s structured liquidity mechanism improves the transferability of units, although it doesn’t offer continuous liquidity. Funds are still largely an illiquid asset class compared to other instruments, but by allowing these units in the DVF that have been tokenised to come up for auction on a quarterly basis, it’s a much higher degree of liquidity compared to the limited transfer options and opaqueness associated with most traditional models.
Q: Why partner with Archax?
We partnered with Archax firstly because it is an FCA regulated exchange. In addition to that, but it also has a brokerage arm, and a custody arm, so we can work closely across more of the asset’s life cycle with less fragmentation.
By tokenising units in the fund within a regulatory, safe environment, we can then improve liquidity for the appropriate investors and by working with one of the leading firms in this space, we can also focus on the next phases and explore further benefits realised by tokenising the underlying as Archax already had excellent plans and capabilities in this area that strongly aligned with our innovative plans for a future phase.
Q: Where are the challenges and opportunities?
We need to be careful in the digital asset space that we’re not creating a future state where there’s assets locked up or isolated on different platforms. When we were developing DVF we wanted it to be available in numerous locations for appropriate investors to be able to discover and invest in the DVF.
That’s why we are selective as to who we work with either to list, tokenise or service our fund to ensure that the model is scalable, regulatory robust and interoperable as both we as a fund manager and our end investors will require.
Q: How are you working with traditional finance players?
Some traditional funding service providers are embracing the opportunities that may result by extending their services in digital assets. It’s not always easy, because that allocation of budget tends to come hand in hand with a top-down desire for early investment returns. However, the scale is not there, and neither is the maturity of the operational models to generate significant fees. Most likely the fund services providers that are going to prosper the mid- to long-term are the ones that are able to work out right now how to best evolve their services but are aware that it’s not going to be a big bang with lots of revenue, lots of customers and lots of scale.
Those brave enough and innovative enough to use trial and error in a new space to be first to provide the services that are required and you have patience, you’ll see success. To reiterate, that can be difficult if shareholders, investors, institutional P/L etc are seeking earlier ROI. This doesn’t really impact us though as we are engaging fund service providers either for traditional services such as Administration or Transfer Agency and as I mentioned earlier, only working with selected parties that we know are market leaders, such as Archax and London Stock Exchange’s DMI – another fantastic advancement in the digital assets space.
Q: How is demand growing for tokenised venture capital funds?
It depends on the type of fund, but most fund managers are active in some level in this space. Obviously, the ones that gets much of the attention are money market funds as a treasury and cash product or certain more sensible real estate fund structures.
DVF is something different, but I believe equally transformational, and we hope we are soon just one of many and we see growing demand for tokenised VC Funds, or as we call it VC 3.0, so that end investors can benefit as we have discussed.
It makes sense, as we regularly see the three questions more widely asked“ how can the private markets Funds industry improve distribution, inclusivity and liquidity in private funds?” Well, we’ve solved all three! And to bring it full circle, equally importantly we have solved it in a way that gives access to what is an excellent investment opportunity in the DVF – an intentionally traditional and fundamental driven Fund, managed by a proven Fund Manager in Lingfeng. As for us, VC 3.0 means making venture more accessible, transparent and operationally efficient without weakening the underlying investment quality.
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