Pensions increase commitments to FoFs

A recent study shows the world's largest private equity fund of funds managed $177bn last year, a 27% rise from 2007.

Private equity funds of funds as a percentage of total alternative assets managed by the world's 100 largest investment managers increased from 16 percent to 20 percent in 2008, according to a Watson Wyatt study.

HarbourVest Partners was the largest private equity fund of funds manager with $22.4 billion under management. It was followed by JPMorgan Asset Management at $18 billion; Pantheon Ventures with $17 billion; Adams Street Partners with $12 billion; Pathway Capital Management with $11 billion; and Partners Group with $9.5 billion.

The largest private equity fund of funds manager outside North America and Western Europe was Australia’s Industry Funds Management, which was ranked 17th with assets worth $2.9 billion.

The amount of capital managed by the 50 largest private equity fund of funds managers on behalf of pension funds increased to $177 billion in 2008 from $139 billion in 2007. Assets under managment overall, however, declined slightly less than 1 percent to $817 billion, down from $823 billion in 2007. That contrasts starkly to the 40 percent increase in the alternative investments of pension funds from 2006 to 2007.

“I would expect a more significant net decline in global assets under management this year” given that many revaluations did not come through until the first half of 2009, said Ross Barry, head of portfolio construction group at Watson Wyatt in Australia.

However, he added that if longer term trends are looked at, pension funds’ allocations to alternative assets have grown from 7 percent to 17 percent in the past decade.

The results of the recent study, however, do not provide allocation figures to private equity as a whole. They only take into consideration capital invested with funds of funds as according to Watson Wyatt, pension funds have traditionally been most interested in investing in the asset class through funds of funds as opposed to making commitments to private equity funds directly. The same is the case for hedge funds. For real estate, infrastructure and commodities, direct investment managers have been included in the study.

With that in mind, real estate accounted for 58 percent of assets managed by the 100 largest alternative asset managers,

I would expect a more significant net decline in global assets under management this year.

Ross Barry

while funds of hedge funds accounted for 13 percent of assets managed, infrastructure 9 percent and commodities 0.4 percent.

Private equity fund of funds assets in Asia increased from 5 percent in 2007 to 8 percent in 2008, while their assets in North America “decreased slightly” to 47 percent, the study noted. Europe accounted for 43 percent of their assets, with the remaining 2 percent in other regions.

Interestingly, in the fund of hedge funds segment, Blackstone Alternative Asset Management is the largest player in the sector with assets worth $13.5 billion.

In all, 143 managers participated in the survey, of which 52 manage private equity funds of funds.