Preqin: PE Funds of Funds Getting Creative To Attract Investors

Nov 3 2017 | 9:10pm ET

Multi-manager private equity vehicles are increasingly turning to new avenues to attract capital, according to new research from Preqin, including emerging managers and alternative investment methods. 

Private equity funds of funds have not kept pace with the growth of the overall private equity market since the financial crisis, Preqin writes in the latest edition of its Private Equity Fund of Funds Facts report. This is for many reasons, including the expansion of in-house teams at large investors and a desire to go through direct commitments to comingled funds. 

In response, funds of funds are targeting both emerging managers and the smaller investors that may lack the experience or expertise to evaluate them. They are also differentiating themselves by making greater use of alternative investment methods like co-investments, SMAs and secondaries, Preqin said. 

Key facts from Preqin’s report on private equity funds of funds:

  • Private equity funds of funds represent a smaller proportion of the asset class then they did a decade ago. They made up 18% of funds closed in 2007, and accounted for 15% of capital raised. In 2017 YTD, these figures have fallen to 9% and 4%, respectively. 

  • Just 14% of investors thought that funds of funds offered the best investment opportunities as at June 2017, and the same proportion will target new investments in funds of funds in the next 12 months. 

  • Fund of funds managers put greater focus on emerging manager funds. Over half (56%) will invest in first- time funds, compared to 27% of other investor types. 

  • By contrast, while just 14% of fund of funds managers will not invest in first-time funds, this figure stands at 47% for other investor types. 

  • While 74% of fund of funds managers will co-invest alongside commingled funds, 37% of other investor types will do the same. 

  • Additionally, while 67% of fund of funds managers use separate accounts, only a quarter of other investor types do the same. 

  • Fund of funds managers have also raised dedicated secondaries vehicles, and 2016 saw a record level of capital raised by these funds, with 14 funds securing $23.4 billion. 

“Although the private equity fund of funds industry has seen relatively stable levels of capital raised over recent years, these vehicles are accounting for a smaller proportion of overall private equity fundraising,” observed 
Christopher Elvin, head of private equity products for Preqin, in a statement. “By turning their attention and expertise towards emerging manager funds [and] alternative investment structures, private equity fund of funds managers are adjusting their practices and seeking to offer investors more tailored options for accessing the private equity market. 

“However, the private equity industry is continuing to grow, and large numbers of smaller investors have established or expanded their allocations to the asset class in recent years,” he added. “In this context, funds of funds remain an essential component of the industry, offering these investors the ability to access larger funds, and providing the expertise and experience that most smaller investors do not have in-house.”

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