Funds of funds represent an important source of capital for many private equity fund managers, but they also provide a key outlet for many investors seeking to commit capital to the private equity asset class. The motives institutional investors have for using fund of funds vehicles are varied and typically depend on several factors, including the size and type of individual investors, their experience and expectations of the private asset class, and the resources at their disposal, both in terms of finance and personnel.
A recent survey by Preqin found that just over half of investors in funds of funds use such vehicles to ensure diversification within their private equity portfolio. Approximately 35% of respondents cited the expertise of fund of funds managers as a reason for committing capital, with the financial climate likely to have reinforced this reasoning.
The opportunity to access specific funds and/or markets is another important motivation for fund of funds investors, with 22% highlighting this as a reason for committing capital to such vehicles. Approximately one-fifth of investors revealed that a lack of resources played a role in the decision to invest in private equity funds of funds, while 11% cited a lack of experience of the asset class as a key reason.
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.