Separate accounts play an important role in the fund of funds landscape, providing investors with a tailored alternative to traditional fund of funds vehicles. Funds of funds enable LPs to gain exposure to a variety of private equity vehicles via a single commitment, thereby significantly diversifying their portfolios. Fund of funds separate accounts share this advantage, although they involve capital invested by a GP typically on behalf of one client or a small number of investors. There are many benefits to the separate account investor, as they can utilize the experience and knowledge of their GP to structure a vehicle that more specifically meets their investment requirements with regards to fund type, investment type and geographic focus.
Preqin’s Funds in Market database details 70 private equity funds of funds to have held a final close so far in 2015, 15 (21%) of which are separate accounts. An aggregate $3.6bn was committed across these 15 separate accounts, a figure that represents 21% of the $17bn total raised across all private equity funds of funds this year. This is a significant proportion of the total number of funds and capital closed, and demonstrates a clear appetite for such customizable vehicles. The largest fund of funds separate account awarded so far in 2015 is BT Pension Fund Private Equity Mandate. The $1.5bn separate account is managed by London-headquartered Hermes GPE and will be invested over three years, with half of the capital allocated to private equity funds, and the other half to direct investments.
The chart above illustrates the proportion of private equity fund of funds vehicles closed since 2010 that are separate accounts. Should the ratio of traditional private equity funds of funds to separate account funds of funds remain consistent for the rest of the year, 2015 will represent the year with the highest proportion of separate accounts since 2010. Though the increase is marginal, the positive trend is clear and indicates a growing investor base that is seeking greater control over the direction of their capital. Whether this is a trend that will continue into 2016 and beyond remains to be seen, but it looks considerably likely that the importance of fund of funds separate accounts will endure.