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US-Based Fund of Funds Investors – December 2014

by Brian Orlay

  • 23 Dec 2014
  • PE

Preqin’s Investor Intelligence database contains detailed profile information on 5,495 private equity investors globally. Private equity fund of funds are one of the most utilized strategies by investors, with approximately 40% of private equity investors allocating to these vehicles. US-based investors make up the majority (64%) of fund of funds investors, while Europe-based investors account for a further 25%.

Foundations, private sector pension funds and endowment plans form the largest numbers of US-based private equity fund of funds investors, making up 30%, 21%, and 20% respectively. Foundations may be the most numerous US-based investors in private equity fund of funds but they have, on average, the smallest amount of assets under management (AUM) at $828mn. In contrast, banks and investment banks comprise one of the smallest groups of US-based fund of funds investors (0.4%) but combined hold an average of $1.1tn in AUM. 

Fund of funds vehicles are different in structure compared to other fund types. While other fund types generally focus on one private equity strategy, fund of funds can provide LPs with a diversified portfolio of fund strategies and regions as well as providing access to niche strategies. Furthermore, investing in a fund of funds generally requires smaller capital commitments, making the strategy attractive to new or inexperienced LPs that lack the size and expertise to run their own private equity portfolio. Larger LPs are generally more sophisticated investors in private equity and have sufficient resources to run a diversified portfolio of vehicles. The double layer of fees associated with investment in a fund of funds vehicle also drives many larger LPs to other fund types in order to enhance returns. 

An example of a US-based LP that will be investing in fund of funds over the coming year is the Jewish Federation of Metropolitan Chicago. The endowment plan intends to commit $20-30mn to two or three private equity funds of funds in the next 12 months, investing $10mn per fund. It will invest in a mix of both new and existing managers globally. Additionally, Minnesota Philanthropy Partners is likely to make one new private equity fund commitment to a fund of funds vehicle over the next 12 months. The foundation expects to commit just over $10mn and anticipates re-upping with a fund manager in its existing investment portfolio.

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