Harsh Environment Leads To Private Equity Funds Of Funds Evolution

Private Equity Funds of Funds fundraising

Private equity funds of funds had to weather difficult conditions last year as they could garner only $12 billion compared to $58 billion peak achieved in 2007.

However, Preqin in its “Private Equity Funds of Funds” report points out that such a challenging fundraising environment has driven the continued evolution of the private equity fund of funds industry.

Lowest since 2003

The Preqin’s report highlights that only $12 billion was raised by 72 funds of funds closed in 2013, as compared to a peak of $58 billion secured by 164 vehicles closed in 2007. The following graph captures the annual fundraising of private equity funds of funds since 2000:

As can be deduced from the above graph, the annual fundraising of private equity funds of funds from 2010 to 2013 has been fairly steady with regard to both the number of funds holding final closes and the aggregate amount of capital garnered.

The report highlights that 2013 was the lowest year for both the number of funds of funds that reached a final close and also for the annual aggregate capital raised since 2003.

Turning its attention towards fundraising by geographic focus, the report points out that of the private equity funds of funds that held a final close in 2013, over 57% had a primary geographic focus on opportunities in North America. However, since 2012, the industry witnessed a proportional shift of focus to opportunities in Asia and Rest of World regions as compared to European countries.

As can be deduced from the following graph, 26% of private equity funds of funds that closed in 2013 primarily targeted vehicles with a focus on Asia and Rest of World, second only to the 58% accounted by North America but 9% ahead of Europe.

PE FoF-Geographic Focus

Separate accounts – Valuable vehicles

The Preqin report notes a growing trend towards separate account mandates. The report highlights that billions of dollars of separate account mandates have been awarded to private equity fund of funds managers over recent years. The report points out that of those investors surveyed that have never awarded a separate account mandate, 23% would consider doing so in the longer term.

The report notes that possible reason towards this trend could be the fact that separate account mandates tend to be relatively large in size relative to the commitment to a traditional fund of funds vehicle.

The following table captures the leading private equity fund of funds managers by separate account AUM:

PE FoF-Separate Account

The Preqin report also highlights the investment potential held in the venture capital market as the world begins its ride on a new wave of technological innovation. Moreover, the outlook for venture capital investments is positive as it becomes a common choice for fund of funds managers.

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About the Author

Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports