New research shows funds of funds underperform direct investment in private equity funds. It has experts questioning the need for PE fund of fund vehicles, reports PI Online. A growing number of consultants consider the “plain-vanilla” private equity funds of funds a quaint relic of days gone, says the PI Online.
PEHub also reported on the study, explaining that the sample compared returns on 567 funds of funds, vintages ranging from 2000 to 2009, compiled by Preqin, discovering that more than half of the funds (59.8 percent) had yet to clear an 8 percent rate of return (in some cases using a total value multiple of 1.1 times as a proxy). Even first-quartile performance was not that high, coming in at 9.9 percent IRR and 1.35 times total value multiple. One in ten fund of funds have actually lost money.
Both articles suggest a cautious approach to FoF investment. The good news is that the probability of actually losing money in a FoF is low, but returns are also lower and there’s the issue of the fee costs. In fairness, the PI Online report pointed out at least three studies found there are indeed FoFs that actually outperformed. (Image source: TorreyCove)