At least 12 firms that made it into this year’s PEI 300 have active fund of funds programmes. While the PEI 300 does not include capital raised for FoF strategies – only capital raised for a dedicated programme of investing directly into businesses – traditional FoF managers have over the years diversified their businesses and raised capital for direct investments, among other strategies.
These managers, the highest-ranking of which include Neuberger Berman, Partners Group, Adams Street Partners and Ardian, account for $103 billion, or 4 percent, of the total capital raised among this year’s 300 firms.
Ardian, for example, launched its secondary FoF unit – its second business line after its $110 million debut French buyout fund – in 1997, when it was still part of French insurer AXA. Today, its AUM has grown to around $130 billion, and while its FoF business accounts for the lion’s share – around 53 percent – of its AUM, the firm is active across asset classes including buyouts, real estate, infrastructure and private credit, to name a few.
Benefits and challenges
Are pure FoF strategies still relevant? Many argue that FoFs still provide investors with offerings that are challenging to find elsewhere, such as connecting LPs with fundless sponsors via initial deal-by-deal transactions, or by acting as a gateway to co-investment opportunities. Others point out that the natural way for the roughly $11 trillion defined contribution pension market to access private equity is via FoFs.
Indeed, the US Department of Labor’s 2020 decision to make it easier for 401(k) plans to invest in private equity came after years of lobbying, as well as the launch of several DC-focused products. These included collective investment trusts that focused on private equity, notably from Partners Group and Pantheon – two firms active in FoFs.
Still, the strategy faces challenges from new sources. Digital platforms such as Moonfare and iCapital grant a range of smaller investors access to high-quality private equity funds, circumventing the traditional FoF model. The burgeoning secondaries market – FoFs’ star sibling – has become both a common way for institutional investors to build up their private equity programmes and a way to access diversified private equity across vintages, strategies and regions.
One way the FoF model is changing is in the shift from commingled fund products to separately managed accounts. For some firms, SMAs have overtaken commingled products as the favoured way for large investors to deploy capital on a primary fund commitment basis.
“We started raising capital at a point in time where everybody already saw that FoFs was a market that was in decline,” says the head of a unit that invests in primaries, secondaries and co-investments at a top 50-ranked PEI 300 firm. When it comes to FoF products, the head says, the SMA market has been a “thriving business”.