Fund of Funds

A fund of funds invests not directly in companies but in other funds, spreading its investors' capital across a range of target funds, vintages, regions and strategies. For investors without an in-house team for fund selection and access it is often the only practical route into private equity, since many target funds set high minimum commitments and are closed to first-time investors altogether. A typical programme covers dozens of target funds deliberately spread across several vintages, because a vintage's outcome depends heavily on where in the economic cycle it starts and that spread reduces exactly this risk.

The price is a second layer of fees: on top of the target funds' usual terms of roughly two percent management fee and 20 percent carried interest, the fund of funds manager charges its own. These are guide values only, as actual terms vary by fund and market environment. It also stretches the J-curve, because capital calls and distributions pass through two levels and total fund life is correspondingly longer than for a single fund. In return, the risk of one weak manager dictating the overall outcome drops sharply.

Alternatives with lower fee drag are purchasing existing fund interests on the secondary market, which can mitigate the J-curve, and co-investments alongside the target funds, often offered without additional fees. Many providers therefore combine all three building blocks in one programme. The decisive question when selecting such a programme is whether the provider genuinely has access to managers otherwise closed, or whether it essentially bundles widely available funds. In the second case the additional fee layer is hard to justify economically. Reporting also deserves scrutiny, because across two levels an investor has considerably less insight into the underlying companies and depends on the provider's analysis.