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Private Equity Funds of Funds with an Allocation to Direct Investments – April 2013

by Jessica Duong

  • 19 Apr 2013
  • PE

Diversification of investment strategy often minimalizes the risk in a portfolio, and a private equity fund of funds can potentially have any mix of primary, secondary and direct allocations. Preqin's Funds in Market database shows that for those funds of funds that reached a final close in 2011-2013 YTD, 47% of these vehicles have an allocation to co-investments. The majority (60%) of private equity funds of funds currently in market have some allocation to direct investments, and they are collectively targeting $21.7bn. The difference in proportion between the funds recently closed and funds currently raising could imply fund of fund managers’ growing interest in direct investments or perhaps a response to limited partners’ increasing appetite for co-investment deals.

The largest of the 67 commingled funds in market with a direct investments allocation is Guochuang Kaiyuan Fund of Funds. The vehicle is targeting CNY 10bn (an equivalent of over $1.5bn), and has held two interim closes so far, the latest in April 2012 on CNY 9bn. Guochuang Kaiyuan Fund of Funds is part of a joint venture between China Development Bank and Oriza Holdings. Its main objective is to provide capital for domestic private equity and venture capital firms, but has also allocated up to 30% of the fund to making direct company investments alongside GPs.

Since the start of 2013, 13 private equity funds of funds have reached a final close. Portfolio Advisors Private Equity Fund VII was the largest of these to include direct investments in its strategy. It closed on $1.09bn, which was over 20% above its $900mn target size. PAPEF VII offers investors the option to select from among any number of its seven sector funds, including diversified buyout, venture capital, diversified special situations, Rest of World mid-market buyout, US mid-market buyout, distressed and co-investments.

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