In a world that is continually evolving, economic and technological advancements have forever changed the landscape of business ownership. From the earliest stock exchanges to today’s digital economies, the ways in which we invest and share in business opportunities have seen a dramatic shift. Among the most recent of these changes is the concept of asset fractionalization, a trend that’s creating new frontiers in the way we approach business and high-value asset ownership.
Deciphering Asset Fractionalization
Asset fractionalization is a concept where a high-value asset is divided into smaller, tradable parts, also known as ‘fractions’. Instead of a single individual or entity owning the entire asset, multiple investors can buy a stake. This allows a more widespread distribution of ownership. This method has been a cornerstone in the world of finance for a long time, with examples found in the sharing of stocks, bonds, and even real estate.
But with the advent of digital technologies like blockchain, asset fractionalization has found new applications. Today, it’s rapidly being applied to tangible, high-value assets, including works of art, luxury vehicles, and even businesses themselves.
The Intersection of Art and Business Fractionalization
Before diving into the nitty-gritty of business fractionalization, it’s helpful to understand its parallels with the art world, which has been a key player in fractionalization history. The art market is notoriously exclusive, and until recently, only the ultra-rich could afford to participate. Asset fractionalization has significantly disrupted this scene.
The first notable instance of fractionalized art occurred in 2018 when a painting by Andy Warhol, “14 Small Electric Chairs,” was tokenized on the Ethereum blockchain. The artwork, valued at $5.6 million, was divided into 800,000 digital certificates or ‘tokens,’ each representing a fraction of the artwork. This democratized art investment, allowing a larger audience to own a piece of Warhol’s work.
Business Fractionalization: A New Approach to Ownership
This concept, though a relatively recent trend in the art world, has existed in business in some form for much longer. Stocks, for instance, represent fractional ownership of a corporation. What is new, however, is the application of fractionalization to privately held companies and certain business assets, and a key example of this is private jets.
Owning a private jet is a costly endeavor. Between the purchase price, maintenance costs, and crew salaries, the expenses quickly add up. NetJets, a subsidiary of Warren Buffet’s Berkshire Hathaway, came up with a solution to this back in the 1980s: fractional jet ownership.
In this model, customers purchase a share of a specific aircraft type, guaranteeing them a set number of hours of flight time per year. The smallest share NetJets offers is a 1/16th interest, which equates to 50 hours of flying time. This fractional ownership means customers enjoy the benefits of owning a private jet (such as availability on short notice), but at a fraction of the cost and without the responsibilities that come with full ownership.
Since its inception, NetJets has grown tremendously, and several other companies have also adopted the fractional ownership model, providing further validation of the concept.
The Implications and Opportunities
Fractionalization allows greater access and democratization of previously inaccessible markets, whether it’s art or private jets. In the business world, fractionalization provides potential investors with the chance to invest in high-value assets that were previously beyond their reach.
From a company’s perspective, fractionalization offers a way to raise capital by selling off fractions of their assets or even the business itself. This could open up new avenues for businesses to manage their assets more effectively, offer unique investment opportunities, and bring in a more diverse set of investors.
Looking Ahead
While business fractionalization is still relatively nascent, its potential is massive. Blockchain and other digital technologies enable the fractionalization of various high-value assets. However, as this sector grows, regulation will become a challenge. Businesses will have to address concerns of various institutions as well the concerns of the public. At WeFraction we are firm believers that transparency will be the saving grace of the sector.
Asset fractionalization in businesses, as in the world of art and other sectors, represents a new era of democratized ownership. The next article digs deep into the world of art fractionalization.