Top Private Equity Fund of Funds Guide 2023

Top Private Equity Fund of Funds: Expert Insights on Leading Choices

The private equity industry has seen a significant growth in recent years, with fund-of-funds playing an essential role in this expansion.

As financial vehicles that invest in various private equity funds, these fund-of-funds offer investors increased diversification and the potential to access high-performing funds.

With their ability to spread capital across multiple funds, investors can gain exposure to several industries, regions, and strategies.

Major regional players and leading global firms dominate the landscape of private equity fund-of-funds, offering a range of services aiming to maximise returns while managing risks effectively.

In a challenging period marked by the impact of the Covid-19 pandemic, fund-of-funds have adapted by focusing on key sectors such as technology and healthcare.

Investor profiles play a crucial part in shaping the direction in which these funds operate, with financial operations taking centre stage for effective management of assets and resources.

Key Takeaways

• Private equity fund-of-funds offer diversification and access to high-performing funds.

• Major regional players and leading global firms dominate the landscape.

• Covid-19's impact has driven fund-of-funds to focus on technology and healthcare sectors.

Understanding Private Equity Fund-of-Funds

Private equity fund-of-funds (PE FoFs) are investment vehicles that pool capital from multiple investors to invest in a diverse range of private equity funds.

By contributing capital, investors become Limited Partners in the fund-of-funds, while the private equity firm managing the fund serves as the General Partner.

This structure allows investors to access multiple underlying private equity funds, increasing diversification and spreading risks across different investment strategies and sectors.

One of the key aspects of PE FoFs is their fee structure. Typically, FoFs charge both management and performance fees, which in combination with the underlying funds' fees, could result in investors potentially paying up to a 3% management fee and 30% carried interest.

However, some PE FoFs are adapting to the competitive landscape by consolidating, changing their fee structures, or targeting new investment niches to remain competitive and profitable.

Private equity fund-of-funds managers aim to identify and select the best-performing funds in the market, thus creating a portfolio of strong, complementary investments.

For instance, ATP Private Equity Partners, the private equity arm of Danish pension fund ATP, has been ranked as a top-performing fund-of-funds manager by Preqin, an alternatives data provider.

Investors who choose to invest in PE FoFs generally do so for risk diversification and access to a wider range of investment opportunities.

Additionally, FoFs also offer investors who may not have the expertise or resources to directly invest in individual private equity funds an opportunity to participate in the private equity market.

However, it is essential for investors to carefully consider both the potential rewards and risks of investing in PE FoFs, including the fee structure and the track record of the fund-of-funds manager.

In conclusion, private equity fund-of-funds can provide an attractive option for investors looking to enter the private equity market, offering diversified exposure to multiple funds and investment strategies.

By understanding the structure, fee system, and performance indicators of PE FoFs, investors can make informed decisions about whether or not this investment strategy aligns with their financial goals.

Major Regional Players

US Private Equity Scene

The US holds a dominant position in the private equity fund-of-funds landscape.

According to the HEC-Dow Jones Performance Ranking of Private Equity Fund-of-Funds 2021, American firms occupy all of the top five spots and eight out of the top ten positions.

These firms have a strong track record in growth equity, with notable investments in various industries across the nation.

Some of the largest private equity firms in the US include TPG Capital, which has invested in Ducati Motorcycles, J. Crew, and Del Monte Foods, and Advent International, an early investor in Lululemon Athletica. For more details on US-based private equity firms, refer to this Visual Capitalist chart.

Asia's Rising Influence

Asia, particularly Hong Kong, has witnessed a surge in private equity activity in recent years.

As the region experiences rapid economic growth and increasing cross-border investments, several Asian-based private equity firms have emerged to claim a significant share of the market.

While the US and European firms still dominate the global rankings, Asia's rising influence cannot be ignored and is expected to become a major player in the private equity landscape in the years to come.

Europe's Leading Players

In Europe, the United Kingdom boasts the largest private equity scene.

London-based Hg is the leading private equity company in the UK, having raised over 51 billion US dollars between 2018 and 2023.

Nevertheless, European firms have not yet matched the prowess of their US counterparts, as indicated by the HEC-Dow Jones Performance Ranking, where European companies only managed to secure two spots in the top ten list.

Leading Global Private Equity Fund of Funds Firms

The Carlyle Group and Warburg Pincus

Two noteworthy private equity firms are The Carlyle Group and Warburg Pincus.

The Carlyle Group has a global presence, with offices in several countries.

They are known for their diversified investments in various sectors. Warburg Pincus, on the other hand, has made a name for itself in the private equity space by focusing on growth investments and partnering with portfolio companies for long-term value creation.

KKR and Blackstone

KKR and Blackstone are also leading global private equity firms.

KKR has exceeded the $100 billion mark in terms of private equity capital raised, while Blackstone, headquartered in New York, leads the industry with $941 billion in total assets under management.

Advent International and Vista Equity Partners

Advent International and Vista Equity Partners are known for their early investments in successful companies.

Advent International invested in Lululemon Athletica, while Vista Equity Partners focuses on technology and software companies and has made an impact by backing well-established firms as well as start-ups.

Bain Capital and General Atlantic

Bain Capital has a diverse investment portfolio, with dealings in sectors such as healthcare, technology, and consumer products.

is also a prominent firm with investments in various fields, including financial services, healthcare, and technology.

Cinven and Permira

Cinven and Permira are European private equity firms who have doubled their presence in global rankings. Both companies have strong track records in acquiring and growing businesses across Europe.

Thoma Bravo and Francisco Partners

Thoma Bravo and Francisco Partners are well-regarded in the technology sector, with a focus on software and technology-enabled services. Their investments have helped companies grow and achieve significant market presence.

FoF Investor Profiles

Institutional investors such as pension funds, endowments, and insurance companies play a significant role in private equity fund of funds' allocations.

These investors seek to diversify their portfolios and access the expertise of top-performing fund managers through their investments in fund of funds vehicles.

Pension funds, for instance, have been among the top allocators to private equity over the years. One notable example is ATP Private Equity Partners, the private equity arm of Danish pension fund ATP, which was ranked as the most reliably top-performing fund-of-funds manager by Preqin.

The focus on generating stable returns to meet their long-term obligations has driven pension funds to explore alternative asset classes like private equity.

Endowments, another category of institutional investors, have also been active participants in private equity fund of funds.

These entities, often linked to educational institutions, have a long-term investment horizon and focus on capital preservation while providing annual income for their beneficiaries.

Therefore, they find private equity's potentially higher returns and diversification benefits appealing.

Insurance companies, known for their conservative investment strategies, have gradually increased their allocations to private equity, including fund of funds, to diversify their portfolios and generate higher returns.

Their ability to assume longer-term illiquid investments aligns well with the nature of private equity investments.

Overall, institutional investors from various industries have been essential in propelling the growth of the private equity fund of funds sector.

Their involvement ensures a continuous flow of capital to managers, who in turn can enhance their expertise and discover new investment opportunities in the market.

Conclusion

In the world of private equity, fund of funds have gained prominence and demonstrated considerable growth over the years.

A recent HEC-Dow Jones Performance Ranking of Private Equity Fund-of-Funds showed that the sector has become more competitive, with US firms dominating the top five positions.

European firms, on the other hand, were able to double their presence within the top 10 global ranking of private equity fund-of-funds, even though they still lag behind US counterparts.

Higher competition among fund-of-fund managers has been beneficial for investors, as it often results in a better selection of investments and a more efficient strategy for enhancing potential returns.

This is reflected in the performance metrics of top quartile private equity funds that achieve higher returns compared to those with bottom-quartile performance.

In conclusion, the continued growth and increasing competitiveness within the private equity fund-of-funds landscape has created opportunities for both investors and fund managers alike.

However, it is crucial to remain diligent when assessing potential investments and strategies, ensuring they align with an investor's risk tolerance and long-term objectives.

Moreover, staying informed about industry trends and developments will likely be pivotal for making well-informed decisions in an ever-evolving market.

FoF FAQ

What are the leading private equity fund of funds?

The leading private equity fund of funds are those that consistently deliver strong performance and are managed by experienced teams.

Some top funds include HarbourVest Global Private Equity Ltd, which aims to provide returns superior to the FTSE 100, and the Invesco Global Listed Private Equity Portfolio ETF (PSP), which invests in businesses focusing on private equity investments.

How do PE fund of funds rankings work?

PE fund of funds rankings are generally based on several factors, such as historical performance, assets under management, reputation, and the quality of the investment team. Industry publications, like Preqin, PitchBook, or Institutional Investor, provide rankings that investors can refer to when evaluating fund performance.

Which are the largest investors in private equity funds?

Some of the largest investors in private equity funds include pension funds, endowments, insurance companies, and sovereign wealth funds.

These institutional investors seek to allocate a portion of their investment portfolios to private equity to potentially generate higher returns.