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Institutional Investors in Private Equity Funds of Funds

by Helen Kenyon

  • 15 Dec 2009
  • PE

Funds of funds form a vital part of the private equity industry, both as a source of capital for funds and as a route for small and new investors in private equity to gain access to the asset class. Fund of funds managers supplied, on average, 16.1% of the capital committed to private equity funds that closed in 2008 (excluding funds of funds, secondaries funds, real estate funds and infrastructure funds), and this rose to 21.7% for funds closed between January and October 2009.

Preqin surveyed 180 institutional investors that have previously expressed an interest in investing in private equity funds of funds in order to ascertain their current appetite for these vehicles, and two-thirds told us they would consider making at least one further commitment to a fund of funds in the next three years. Of this latter group of investors, 45% expected to make their next fund of funds commitment in 2010, 17% in 2011 and 6% in 2012. However, a considerable 32% were unsure of the timing of their next commitment to a fund of funds.

At present, 165 funds are on the road seeking aggregate commitments of $51 billion. The majority of managers will need to secure commitments from investors they do not have a prior relationship with in order to secure their targeted volume of capital. The majority of investors we surveyed, 54%, told us they would be open to forging new relationships with fund of funds managers in the next three years. Fundraising is, however, set to be especially challenging for first-time fund of funds managers; 13% of the investors we polled said they would invest in first-time funds of funds and a further 20% said they would consider such an investment. 19% also told us they would invest in spin-off funds of funds, but not those being managed by teams that have not worked together before.

Profiles of 150 institutional investors that are seeking to invest in funds of funds over the next three years, detailing their preferences, past investments and the key contacts at each institution, can be found in the 2010 Preqin Private Equity Fund of Funds Review.

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