New research in Preqin Special Report: Private Equity Funds of Funds shows that it is becoming an increasingly challenging fundraising environment for private equity fund of funds vehicles, with only 72 of these funds closing in 2013 raising an aggregate US$12bn, compared to 87 funds closing on an aggregate US$16bn in 2012 and a high of 164 funds closing on a total of US$58bn in 2007.
As a result many fund of funds managers are diversifying their activities and are starting to offer separate accounts to attract investors to their services. 65% of private equity fund of funds managers surveyed by Preqin stated that separate accounts would be as or more important to their investment activity in the next 12 months than commingled funds.
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Additionally, 24% private equity fund of funds managers surveyed by Preqin stated that they invested more from separate accounts in the past 12 months compared to the previous 12 months.
When Preqin asked investors in private equity funds of funds about separate accounts, 23% of investors surveyed which had never awarded a separate account mandate stated that they intend to do so in the future.
- The leading private equity fund of funds manager by separate account assets under management is Hamilton Lane with US$18.9bn. Pathway Capital Management and BlackRock Private Equity Partners follow, managing US$14.5bn and US$9.3bn respectively.
- The large commitment required for a separate account mandate may be prohibitive for smaller investors. The average size of all private equity fund of funds separate accounts profiled by Preqin is more than US$250mn, beyond the scale of the average investor in a fund of funds vehicle.
- 31% of private equity fund of funds managers surveyed named separate account mandates as the greatest opportunity in the fund of funds industry in the next 12 months.
- 47% of private equity fund of funds managers surveyed consider returns to be the greatest challenge in the fund of funds industry in the next 12 months; a further 20% named investors investing directly, rather than through funds of funds.
Ignatius Fogarty, head of Private Equity Products, Preqin, said: "The tougher fundraising environment for commingled private equity fund of funds vehicles has meant that the capital derived from separate account mandates is increasingly important in the investment activity of private equity fund of funds managers. For investors separate accounts are becoming more attractive as they give the benefits of investing with the guidance of an experienced fund manager, along with lower fees than a traditional fund of funds and more control over where the capital is invested. Our survey shows that this activity could be on the rise, as fund of funds managers rely on it more and LPs that have the capital to invest via separate account mandates look to take advantage of the benefits this method of investment can give them."
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