Investors’ Attitudes towards Private Equity Fund of Funds Vehicles – December 2012

by Philippe Alteirac

  • 04 Dec 2012
  • PE

Although buyout and venture funds have historically attracted the most attention from institutional investors in private equity, funds of funds continue to be an attractive route to market for many LPs. Funds of funds are often used by smaller, less experienced or new investors in private equity due to the advantages associated with such vehicles. The recently launched 2013 Preqin Fund of Funds Review details the attitudes of 100 global institutional investors that have an appetite for funds of funds, and explores their motivations for gaining access to the private equity asset class through this fund type.

Nearly two thirds (63%) of the investors interviewed stated they invest in fund of funds vehicles for diversification purposes, allowing exposure to a range of different underlying vehicles and geographies. Other key reasons cited by investors for investing in funds of funds include manager expertise (37%), access to specific and niche markets (34%) and lack of internal resources (32%).

Preqin’s Investor Intelligence database currently tracks over 4,600 active investors in private equity funds, with 40% of LPs having previously invested in a fund of funds vehicle or with a preference for doing so. Of the LPs with an appetite for funds of funds, the most prolific are foundations, which represent 22%. Public pension funds make up 19% of investors with an appetite for fund of funds vehicles, followed by private sector pension funds which account for 18%.

Geographically, North America is home to the greatest number of LPs with a preference for funds of funds, with nearly two-thirds (65%) of such investors based in the region. Twenty-six percent of LPs with an appetite for fund of funds vehicles are Europe-based, with the remaining 9% of investors located across Asia and Rest of World.

Looking forward, 81% of LPs interviewed stated that they will commit, or will consider committing capital to funds of funds in the next three years, an increase from 78% in a similar study conducted last year. Importantly for fund of funds managers looking to raise capital over the coming years, LP interest in the fund type remains strong and many investors will continue to look to access private equity through fund of funds vehicles, primarily as a means to diversify their private equity portfolio and gain exposure to specific markets.

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