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Fund Selection Performance of Private Equity Fund of Funds Managers

by Joe Childs

  • 12 May 2011
  • PE

Superior selection and due diligence capabilities that enable the creation of top performing private equity fund portfolios are factors often cited as advantages of investing in funds of funds. These vehicles have also offered access to well-established top-tier fund managers that have, at certain points in the past, been out of reach for many investors, particularly those that are new to the private equity asset class or have limited experience of specific geographic regions or fund types.

In order to gain a measure of the fund selection skills of fund of funds managers, we analyzed data from Preqin’s Investor Intelligence online database, which contains 9,200 private equity fund investments made by fund of funds managers. The results showed that over half (55%) of fund of funds managers’ underlying investments beat the median benchmark and are ranked in the top two performance quartiles. Furthermore, only 18% of their portfolio funds post net IRRs in the bottom quartile.

Additional analysis in Preqin’s recent research report provide support to these findings and to the notion that investors in private equity funds of funds profit from the industry expertise of managers. The data indicates that there is a considerable degree of skill among successful fund of funds managers. The benefits that derive from participating in funds of funds, including portfolio diversification and superior fund selection, are difficult for private equity investors to successfully replicate when acting alone and are particularly important amid continuing financial and economic uncertainty. This suggests that funds of funds continue to represent a compelling investment solution for investors that are able to identify successful managers.

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