Venture capital is an area of private equity that exposes investors to some of the highest risk in the asset class, as there is a high risk of capital loss associated with investing in small companies that are yet to become established in the market and are only in the earlier stages of their business plans. Fund of funds vehicles therefore provide investors further diversification across a range of venture capital funds, reducing the total risk of a portfolio. As shown in the chart below, funds of funds which include an allocation to venture capital funds have made up a significant proportion of all funds of funds closed between 2010 and the present. While exclusively venture capital-focused funds of funds make up a smaller number, there remains some appetite for this fund types, yet predominantly only when combined with other investments.
According to Preqin’s Funds in Market database, since 2010, 448 private equity fund of funds vehicles have held a final close. These funds have secured over $90bn in aggregate investor capital, $50bn of which was raised by funds which either include venture capital in their investment strategy or which are solely focused on these opportunities. Geographically, the majority of funds of funds targeting venture capital opportunities closed between 2010 and 2015 YTD have been focused on the US. In 2014, 71% of the funds raised had a primary focus on investing in the region, and 69% of the vehicles closed so far this year also maintain this primary geographic focus.
In 2010 and 2011, the second largest proportion of funds of funds including venture capital opportunities in their investment strategies (24% and 28% respectively) had a focus on investing in Europe. However, venture capital opportunities in Asia and Rest of World regions such as the Middle East and Africa have also become increasingly sought after, and are broadly in line with the significant numbers seen in Europe for all funds of funds closed between 2012 and 2015 YTD.
There is a level of correlation between these funds’ focuses and the region in which they are based. Over half (56%) of all private equity fund of funds managers to successfully close a fund of funds during this time are based in North America, 33% in Europe, and just 10% in Asia and Rest of World.