PEI 300: The rise of funds of funds

Traditional funds of funds have been upping their game in recent years. Gone are the days when fund of funds managers relied solely on primary fund commitments as their main source of investment strategy; today firms such as Partners Group (21) and Ardian (36) have expanded their platforms to become direct investors across multiple asset classes.

Hamilton Lane (101), GCM Grosvenor (102) and Pantheon (103) have also evolved somewhat from their traditional fund of funds roots. The bulk of these firms’ investment activities remain fund of funds activity: 91 percent of Hamilton Lane’s $36 billion invested in private markets last year was primary fund commitments, while more than half of Pantheon’s $42 billion in assets under management as of 30 September were primary commitments to private equity funds.

The fund of funds community has undergone an evolution in recent years with a split between true fund of funds managers – typically smaller shops that focus on a particular fund strategy – and large-scale asset managers who have expanded their investment style and remit.

Bala Cynwyd-headquartered Hamilton Lane has grown significantly since its first fund of funds vehicle in 1998 – a $122 million fund that invested capital from Swedish pension AP7, Hackensack University Medical Center Retirement Plan and the Service Employees International Union.

Hamilton Lane launched its first secondaries fund in 2005 with a $360 million vehicle, and the strategy is set to grow eight-fold if the firm hits the $3 billion target for its fifth secondaries fund, which launched this year. It listed on the NASDAQ in 2017 and had around $469 billion in assets under management and supervision as of last December.

Pantheon’s business has evolved to include real assets funds of funds, secondaries and co-investments. The firm, which was acquired by Affiliated Managers Group in 2010, jumped 67 spots this year, having raised $4.5 billion over the last five years.

Traditional funds of funds have been taking advantage of the mountains of data they collect through fund commitments and are hiring data scientists and building programmes to process, analyse and interpret data for their clients. Hamilton Lane, for example, has more than 4,200 funds in its database, while Schroder Adveq has been using artificial intelligence to rank fund managers and create investment lists.

GCM Grosvenor makes its debut appearance in the ranking this year. The Chicago-headquartered firm manages more than $50 billion in assets and has moved away from its early fund of funds roots: it has backed some novel deals on the secondaries front, including the restructuring of deal-by-deal assets held by Argonne Capital into a continuation fund in May 2018, and has raised separately managed accounts as well as direct investment funds.