Thursday, September 01, 2022

Private equity and VC: funds of funds

 Pros for an individual to invest through a fund of funds:

1.    Diversification
2.    Access to large funds with high minimums
3.    Access to small niche funds

Cons for an individual to invest through a fund of funds:

1.   Cost. Double fees! 0.5% to 1% for management and 5% to 10% for carried interest returns. PE are traditionally charging 2% and 20%
2.   Longer Commitment. PE firms are 3-7 years, a FoF is 12 years.

The Fund of Funds idea is in decline. More specifically, it has not grown as fast as PE investments over the last decades. Most PE investors now have staff using databases for their investment. Largest funds of funds include Hamilton Lane, HarborurVest Partners, Pathway Capital Mgt, Fort Washington Investment Advisors, AlpInvest Partners, and Adams Street Partners.  

My priorities.

1.  The longer terms and higher fees feels like a big negative.
2.  How much diversification do I need? A fund generally does 10 investments, there's lots of diversification right there.  

 I had hoped that the funds of funds would provide more (NOT less) liquidity. I thought they could be evergreens with a quarterly price to get in and out, all based on NAV.  

I was also thinking that a VC fund of funds would be the way to go. I just looked at one of their books and the fees seem high, worth it for the access to great VCs?

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