PE firms hesitant to add cryptocurrencies as an investment option

Private equity is taking a cautious approach to cryptocurrencies, or digital assets, as an alternative investment option. Only 3% of private equity firms with more than $15 billion of AUM have invested in cryptocurrency, according to EY's 2022 Global Private Equity Survey.

S&P Global Market Intelligence data shows that just 67 private equity and venture capital funds launched since 2017 have investments in the digital assets.

Larger funds that have forayed into cryptocurrency are SoftBank Vision Fund 2, which has amassed $108.00 billion since its 2019 formation, and TPG Tech Adjacencies LP, which launched in 2018 and closed at $1.60 billion the following year. The SoftBank Investment Advisers (UK) Ltd.-managed fund has invested in companies such as Elliptic Enterprises Ltd., Blockdaemon Inc. and FTX Trading Ltd., while the TPG Capital LP fund backed Au10tix Ltd. in August 2019.

Only a handful of buyouts were struck each year from 2017 to 2022, the highest being 11 deals in 2018, Market Intelligence data shows.

Venture capital investments in cryptocurrency surged in 2021 with 243 transactions, but deal values were small.

Regulatory scrutiny

A continued appreciation in the value of digital assets versus fiat currencies would attract more private equity investments, according to Bruce Daley, a senior research analyst at 451 Research.

"Relative to the US dollar and most other global stores of value, many cryptocurrencies, but bitcoin and ethereum in particular, have appreciated significantly in value. If this trend continues, it will be inevitable that private equity firms turn to cryptocurrency to build wealth," Daley said in emailed comments.

Overall, however, cryptocurrencies remain a highly speculative asset, beset by bouts of strong volatility and the uncertain direction of regulators. China has banned cryptocurrencies and Russia proposed a ban last month. Dozens of other countries have implicit prohibitions in place, according to the Library of Congress Law Library cryptocurrency regulation report from November 2021.

However, El Salvador was the first country to accept bitcoin as legal tender.

Other countries, like India, plan to tax cryptocurrencies.

"As cryptocurrency becomes more accepted as a medium of exchange, many governments could use tax policy as a means to discourage it," according to Daley. "How taxation affects overall return on investment will then impact PE investment."

451 Research is part of S&P Global Market Intelligence.