PREQIN SPECIAL REPORT: PRIVATE EQUITY FUNDS OF FUNDS

NOVEMBER 2017

alternative assets. intelligent data. PREQIN SPECIAL REPORT: PRIVATE EQUITY FUNDS OF FUNDS FOREWORD

he private equity fund of funds market has changed significantly over the last decade. While most of the private equity industry Thas grown substantially over the last 10 years, funds of funds have faced challenges, with fundraising totals remaining considerably below the levels seen during the peak years of 2007 and 2008.

As the private equity industry has evolved and the sophistication of investors has increased, the fund of funds model has come under increasing scrutiny. Private equity fund of funds managers have had to respond by adapting their businesses and investment approaches. By merging with or acquiring other firms, changing their business models and making increased use of alternative investment methods such as separate accounts and co-investments, fund of funds managers have tried to create opportunities for themselves through gaining scale or becoming more specialized.

In this report, we examine the current state of the industry and how fund of funds managers have adapted to this new environment.

Key findings include: ■■ A Challenging Environment: While most of the private equity industry has seen significant growth over the past decade, investor concerns about fees and the efficacy of the fund of funds model mean that fundraising levels remain considerably below those seen before the Global Financial Crisis of 2007-2008. ■■ A Changing Industry: In the face of these challenges, private equity fund of funds managers are taking a number of different approaches in order to remain competitive: attempting to gain scale through consolidation, changing their fee structures or targeting new investment niches. ■■ The Continuing Relevance of Funds of Funds: Significant challenges remain for private equity fund of funds managers as they seek to adapt to these changing conditions, but the industry continues to play an important role for many investors.

We hope that you find this report useful and welcome any feedback you may have. For more information about how Preqin’s data can help you, please visit www.preqin.com or contact [email protected].

p3 Key Facts p4 A Challenging Environment p7 A Changing Industry p10 The Continuing Relevance of Funds of Funds

PRIVATE EQUITY ONLINE

Private Equity Online is Preqin’s flagship online private equity information resource and encompasses all of Preqin’s private equity and venture capital databases, with unrivalled data and intelligence on all aspects of the asset class, including fund terms and conditions, fundraising, fund managers, institutional investors, fund performance, deals and exits and more.

Constantly updated by our teams of dedicated researchers strategically located in industry centres around the globe, Private Equity Online represents the most comprehensive source of industry intelligence available today.

www.preqin.com/privateequity

All rights reserved. The entire contents of Preqin Special Report: Private Equity Funds of Funds, November 2017 are the Copyright of Preqin Ltd. No part of this publication or any information contained in it may be copied, transmitted by any electronic means, or stored in any electronic or other data storage medium, or printed or published in any document, report or publication, without the express prior written approval of Preqin Ltd. The information presented in Preqin Special Report: Private Equity Funds of Funds, November 2017 is for information purposes only and does not constitute and should not be construed as a solicitation or other offer, or recommendation to acquire or dispose of any investment or to engage in any other transaction, or as advice of any nature whatsoever. If the reader seeks advice rather than information then he should seek an independent financial advisor and hereby agrees that he will not hold Preqin Ltd. responsible in law or equity for any decisions of whatever nature the reader makes or refrains from making following its use of Preqin Special Report: Private Equity Funds of Funds, November 2017. While reasonable efforts have been made to obtain information from sources that are believed to be accurate, and to confirm the accuracy of such information wherever possible, Preqin Ltd. does not make any representation or warranty that the information or opinions contained in Preqin Special Report: Private Equity Funds of Funds, November 2017 are accurate, reliable, up-to-date or complete. Although every reasonable effort has been made to ensure the accuracy of this publication Preqin Ltd. does not accept any responsibility for any errors or omissions within Preqin Special Report: Private Equity Funds of Funds, November 2017 or for any expense or other loss alleged to have arisen in any way with a reader’s use of this publication.

2 © Preqin Ltd. 2017 / www.preqin.com DOWNLOAD DATA PACK: www.preqin.com/PEFOF17 KEY FACTS

$26bn 17 $357mn $381bn Amount secured by private private equity funds of funds The average size of private The size of the private equity equity funds of funds closed in are currently in market, equity funds of funds closed in fund of funds industry. 2016, a post-crisis high. targeting an aggregate 2016. $80bn

LOCATION OF ACTIVE PRIVATE EQUITY FUND OF FUNDS MANAGERS

141

33

21 18 15 13 6 5 5 5 5 5 5 4 4 4 4 US UK Italy Spain China Japan France Canada Norway Australia Germany Denmark Singapore Hong Kong Switzerland South Africa Luxembourg

3

alternative assets. intelligent data. PREQIN SPECIAL REPORT: PRIVATE EQUITY FUNDS OF FUNDS A CHALLENGING ENVIRONMENT FUNDRAISING IS LOWER THAN A 2008, it remains under half of the $55bn increase; however, the rest of the private DECADE AGO raised by 160 private equity funds of funds equity market has grown by 81% over the The private equity fund of funds industry in 2007. same period (Fig. 3). has faced significant challenges over the past decade. While the private equity As a result, funds of funds have come INCREASING INVESTOR industry as a whole has seen sustained to represent a considerably smaller SOPHISTICATION growth in the years since the Global proportion of the overall market. Private This challenging environment for private Financial Crisis, fundraising by private equity funds of funds made up 18% of equity funds of funds has partly been equity fund of funds managers has not private equity funds closed in 2007 and driven by investors’ reconsideration of the increased in line with the wider industry. accounted for 15% of capital raised; by costs and benefits of the fund of funds The scale of the challenge is highlighted in 2016 these figures had fallen to 10% and model and the increasing prominence of Fig. 1, which shows the annual fundraising 7% respectively, and stand at 9% and 4% alternative methods of accessing the asset by these vehicles since 2000. Eighty-four in 2017 YTD (Fig. 2). Since December 2008, class. private equity funds of funds closed in the overall assets under management 2016, raising approximately $26bn; while (AUM) of private equity funds of funds Traditionally, funds of funds have played this is the largest sum raised in a year since has grown from $266bn to $381bn, a 43% a crucial role in helping investors access

Fig. 2: Private Equity Fund of Funds Fundraising as a Proportion Fig. 1: Annual Private Equity Fund of Funds Fundraising, of All Private Equity Fundraising, 2000 - 2017 YTD (As at 2000 - 2017 YTD (As at September 2017) September 2017) 180 20% 160 160 155 18% 16% 140 126 14% 120 109 104 102 99 12% 100 94 88 88 84 10% 80 72 73 76 68 67 8% 9% 55 60 50 6% 43 42 Proportion of Total 40 31 34 25 26 4% 4% 20 19 16 18 21 17 17 21 20 12 13 8 10 2% 0 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD 2017 Year of Final Close YTD 2017 Year of Final Close No. of Funds Closed Aggregate Capital Raised ($bn) No. of Funds Closed Aggregate Capital Raised Source: Preqin Private Equity Online Source: Preqin Private Equity Online

Fig. 3: Private Equity Fund of Funds Assets under Management, Fig. 4: Investor Views on the Key Issues Facing Private Equity in 2000 - 2016 the Next 12 Months 3,000 90% 86% 2,582 80% 2,500 70% 60% 51% 2,000 50% 41% 38% 40% 32% 1,500 30% 20% 16% 11% 11% 10% 1,000 10% Proportion of Respondents Proportion 0% 500 381 Assets under Management ($bn) Assets Fees

0 DealFlow Regulation Performance Transparency Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Exit Environment Pricing/Valuations of Debt Financing Debt of Availability/Pricing Private Equity Funds of Funds Private Equity (Excl. Funds of Funds) in Global Markets Ongoing Uncertainty Source: Preqin Private Equity Online Source: Preqin Investor Outlook: Alternative Assets, H2 2017

4 © Preqin Ltd. 2017 / www.preqin.com DOWNLOAD DATA PACK: www.preqin.com/PEFOF17

private equity. By offering access to a increasing numbers have the expertise portfolio of private equity funds, funds of Investor concerns to run their own programs, especially funds allow smaller investors that cannot about fees pose a with the assistance of investment commit large sums of capital across particular difficulty for consultants. Investors are also utilizing multiple funds to still gain the benefits of alternative methods to the traditional diversification. In addition, investors are fund managers operating private equity investment model such as exposed to the fund manager’s investment a fund of funds model separate accounts, co-investments and expertise, with the expectation that the direct private equity programs. This trend benefits of picking better performing of institutional investors across all areas looks likely to continue, with a significant funds will exceed the additional costs of alternative assets, and ranked fourth proportion of investors surveyed by Preqin introduced by funds of funds’ double layer among the leading concerns of private intending to increase their exposure to of fees (typically a 1% management fee equity investors interviewed in June these areas over the longer term (Fig. 5). and a 5% or 10% carry fee in addition to 2017 for the Preqin Investor Outlook: the fees of underlying funds). Alternative Assets, H2 2017 (Fig. 4). Underlying the cost concerns and the usage of alternatives, however, is the fact As private equity has evolved from a Investor concerns about fees pose a that fund of funds as a sector has not comparatively niche investment to a major particular difficulty for fund managers offered noticeably superior performance part of many investors’ portfolios, investors operating a fund of funds model, to that of the wider private equity market. have developed a more sophisticated with the double layer of fees a clear As shown in Fig. 6, the Private Equity Fund understanding of the asset class and are deterrent for cost-conscious investors. of Funds benchmark has returned lower increasingly aware of the costs of these An increasingly sophisticated body of than the All Private Equity benchmark over programs. Fees are now a major concern institutional investors also means that a one-, three- and five-year horizon (as at

Fig. 5: Investors’ Plans for Use of Alternative Private Equity Fig. 6: Private Equity - Horizon IRRs by Fund Type Structures over the Longer Term (As at December 2016)

100% 3% 18% 17% 16% 90% 25% 34% 80% 14% Increase 12% 70% Activity 10% 60% Maintain 8% 50% 90% Activity 6% 78% IRR Horizon 40% 71% 4% 63% Reduce 30% Activity 2% Proportion of Respondents Proportion 20% 0% 10% -2% 6% 1 Year 3 Years 5 Years 10 Years 0% 3% 4% 5% to Dec-16 to Dec-16 to Dec-16 to Dec-16 Co- Separate Direct Joint Investments Accounts Investments Ventures Private Equity Buyout Venture Capital Fund of Funds Source: Preqin Investor Outlook: Alternative Assets, H2 2017 Source: Preqin Private Equity Online

Fig. 7: Fundraising Success of Private Equity Funds of Funds, Fig. 8: Average Size of Private Equity Funds of Funds, 2007 - 2017 YTD (As at September 2017) 2007 - 2017 YTD (As at September 2017) 100% 400 371 90% 14% 18% 354 357 22% 25% 350 33% 80% 12% 47% 7% 47% 45% 54% 8% 53% 55% 300 287 70% 265 18% Above Target 260 249 260 60% 14% 250 235 240 238 50% 4% 6% At Target 200 3% 18% 40% 10% 14% 74% 75% 69% Below Target 150 30% Proportion of Funds Proportion 57% 49% 53% 47% 20% 42% 100 32% 37% 36%

10% ($mn) Size Fund Average 50 0% 0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD 2017 YTD 2017 Year of Final Close Year of Final Close Source: Preqin Private Equity Online Source: Preqin Private Equity Online

5

alternative assets. intelligent data. PREQIN SPECIAL REPORT: PRIVATE EQUITY FUNDS OF FUNDS

December 2016, the latest date for which Fig. 9: Average Time Spent on the Road: Private Equity Funds of Funds vs. All Private performance data is available). It has, Equity Funds, 2009 - 2017 YTD (As at September 2017) however, generated comparable returns 30 over a 10-year period. Although there are 26 25 many private equity funds of funds that 25 24 22 21 exceed this benchmark, identifying these 20 20 20 20 in advance can present a major challenge 20 18 17 17 17 16 16 for investors seeking to make use of these 15 15 vehicles. With an increasingly sophisticated 15 13 investor universe and greater availability of alternative routes to market, private 10 equity fund of funds managers can face 5 challenges in demonstrating their value proposition to investors. in Market Spent (Months) Time Average 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD BUT THERE ARE SIGNS OF Year of Final Close IMPROVEMENT Nevertheless, while investor caution poses Private Equity Funds of Funds All Private Equity Funds a challenge for private equity fund of Source: Preqin Private Equity Online funds managers, these funds still provide a valuable service by offering a diversified targets dropped significantly from the longer than other private equity funds to portfolio to smaller investors, which previous year, and fell as low as 25% for reach a final close: 22 months compared may not be able to manage an extensive funds closed in 2010 (Fig. 7). Since this to 16 months. The average time spent in private equity program themselves, and low there has been significant recovery market was at a high in 2014 at 26 months; by providing access to top-tier managers and at least half of funds closed each year however, encouragingly, this has since that other investors may not be able to since 2014 have met or exceeded their dropped every year since to 21 months access. Many continue to run successful fundraising targets, with 58% doing so in in 2017 YTD, on par with funds closed in businesses by servicing these needs and 2016 and 63% in 2017 YTD. The average 2010-2013. Beyond this, however, fund the private equity fund of funds market size of vehicles closed has also increased in of funds managers have also sought to has shown signs of recovery. recent years, reaching $357mn in 2016, the adapt their businesses, and the overall highest level since 2007 (Fig. 8). challenging environment has created Although fewer private equity funds of room for consolidation among major funds have held final closes in recent years, A further indication of LP demand can be players. those that have have been increasingly drawn from the speed with which fund of likely to meet their fundraising goals. In funds managers are able to raise capital. 2009, the proportion of private equity As illustrated in Fig. 9, since 2010, fund funds of funds meeting their fundraising of funds vehicles have, on average, taken

Fig. 10: 10 Largest Private Equity Funds of Funds Closed, 2009 - 2017 YTD (As at September 2017) Fund Size Final Close Fund Firm Headquarters Geographic Focus (mn) Date ATP Private Equity Copenhagen, North America, Europe, ATP Private Equity Partners IV 1,375 EUR Dec-10 Partners Denmark Emerging Markets Europe, Asia, Emerging HarbourVest International VII Partnership HarbourVest Partners Boston, MA, US 1,542 USD Apr-16 Markets Horsley Bridge International V Horsley Bridge Partners San Francisco, CA, US North America, Europe, Asia 1,540 USD May-09 Crown Premium V LGT Capital Partners Pfäffikon, Switzerland Europe, US 900 EUR Nov-13 Portfolio Advisors Private Equity Fund VIII Portfolio Advisors Darien, CT, US Global 1,239 USD Dec-15 Horsley Bridge XI Venture Horsley Bridge Partners San Francisco, CA, US US 1,153 USD Apr-15 Axiom Asia Private Axiom Asia III Singapore Asia 1,150 USD Mar-12 Capital SwanCap Opportunities Fund SwanCap Partners Munich, Germany Europe, North America 840 EUR Jan-14 Portfolio Advisors Private Equity Fund VI Portfolio Advisors Darien, CT, US North America, Europe, Asia 1,103 USD Mar-11 Portfolio Advisors Private Equity Fund VII Portfolio Advisors Darien, CT, US North America, Europe, Asia 1,090 USD Mar-13

Source: Preqin Private Equity Online

6 © Preqin Ltd. 2017 / www.preqin.com DOWNLOAD DATA PACK: www.preqin.com/PEFOF17 A CHANGING INDUSTRY

Case Studies – Recent Private Equity Fund of Funds Acquisitions:

SEPTEMBER 2016 FEBRUARY 2017 JULY 2017

Pavilion Financial Corporation Unigestion acquires Akina Schroders acquires Adveq acquires Altius Associates

Pavilion Financial Corporation acquired Asset manager Unigestion acquired Global investment management Altius Associates, a private markets private equity fund of funds Akina, firm Schroders acquired Adveq, a advisory and separate account citing the complementary nature of Switzerland-based private equity fund management firm with offices in the the private equity platforms and the of funds; the firm cited the contribution UK, US and Singapore. Pavilion merged expertise that this acquisition would that Adveq could make to the Altius Associates with LP Capital give them in the small and mid-market growth of its private assets business, Advisors, its US-based alternative assets segments as the reason for the complementing its real estate and subsidiary which it had previously acquisition. infrastructure offerings as the reason. acquired in 2014, to form Pavilion Alternatives Group. The firm cited the increased global presence and wider range of services that it would be able to offer after the transaction as a motivation.

CONSOLIDATION IS SHAPING THE alongside their other offerings can offer it is possible that the industry will become INDUSTRY… benefits. These groups are also likely increasingly dominated by large-scale Fund managers are increasingly exploring to have a base of clients and depth of firms. other options in order to keep their infrastructure in marketing and other areas businesses competitive. Acquisitions and that can make the difference in terms of …AND FUND MANAGERS ARE consolidation have formed a major trend building the scale of these businesses. CHANGING THEIR BUSINESS MODELS... within the industry, with some recent Beyond merging and consolidating notable deals shown above. their firms, private equity fund of funds The combined managers have also begun making There are a wide variety of reasons why effect of this changes to their underlying business fund managers conduct mergers and industry consolidation is models, seeking to gain an advantage over acquisitions (M&A): managers may be that the balance of fund other firms in a competitive environment. looking to gain scale and build assets managers is shifting, with or they may be looking to diversify by larger players becoming With the double layer of fees charged by bringing in additional expertise in markets these vehicles among the key concerns and regions they do not currently cover. more prominent of investors, some private equity fund of In line with broader trends in the asset funds managers have begun to reassess management industry, pressure over The combined effect of this industry their fee models. As shown in Fig. 12, fees and fundraising may make some consolidation is that the balance of fund management fees for private equity funds businesses uncompetitive and create managers is shifting, with larger players of funds have decreased for more recent opportunities for others to cut costs and becoming more prominent. Among fund vintages, with a mean management cross-sell products. private equity fund of funds managers fee of 0.66% and a median of 0.75% for globally, the proportion of firms with 2016 vintage funds. For 2017 vintage Larger asset management groups have more than $20bn in assets was at 6% in funds and those currently raising, the particularly shown an interest in private 2010; seven years later this proportion has mean and median fees are 0.80% and equity fund of funds businesses in recent increased to 9% (Fig. 11). In contrast, the 0.85% respectively. While carry rates tend years. These firms recognize that despite proportion of firms with less than $1bn to be set at either 5% or 10%, 17% of the challenges faced by the industry, in assets has fallen from 50% to 45% over vintage 2016/2017 and raising funds have diversifying into private equity products the same period. If M&A trends continue, a carry rate of less than 5% (Fig. 13).

7

alternative assets. intelligent data. PREQIN SPECIAL REPORT: PRIVATE EQUITY FUNDS OF FUNDS

…BY TARGETING EMERGING While fund of funds managers are and Latin America. The fund also provides MANAGERS... generally more likely to work with warehousing, allowing fund managers Alongside actions on costs, a number of emerging managers, some managers to put their investment thesis into action fund managers are also exploring new go a step further and launch dedicated prior to fund formation by building a investment niches, seeking to demonstrate vehicles aimed at supporting new funds. portfolio on Capria Ventures’ balance their value through expertise in specific Such vehicles may offer a significant sheet. areas. One way that managers can add cornerstone investment and support with value for their clients is by using their marketing and infrastructure, with the aim …AND OFFERING ALTERNATIVE networks within the industry to develop of establishing a long-term relationship STRUCTURES relationships with new managers. With with the fund manager. Private equity fund of funds managers are many investors lacking the experience also differentiating themselves by making to evaluate emerging managers, fund of New York-based Gatewood Capital greater use of alternative investment funds managers’ expertise and industry Partners closed its debut fund, Gatewood methods in order to build the specific networks can offer significant value. Capital Opportunity Fund, in May 2017 portfolio that they want to offer investors. Working with new managers can also help on $221mn. The fund will make seed and These managers are significantly more to establish a relationship which could sponsorship investments in emerging likely to co-invest with GPs and make use allow access to successor funds, if the and new private equity fund managers of separate accounts than other investor investment is successful. This represents a by providing them with capital to launch types (Fig. 15). Highlighting this trend significant opportunity, and fund of funds their funds. Capria Ventures’ Capria is the increasing number of alternative managers are much more likely than other Emerging Managers Fund is targeting structures brought to market by private private equity investors to invest in first- $100mn to invest in emerging markets equity fund of funds managers. The time funds (Fig. 14). equity and debt funds across Africa, Asia period 2012-2015 saw a heightened level

Fig. 11: Private Equity Fund of Funds Managers by Assets under Fig. 12: Private Equity Funds of Funds - Average Management Management, 2010 vs. 2017 Fee by Vintage Year 100% 1.2% 6% 9% 90% 7% 6% 1.0% 80% 9% 10% 0.85% 0.80% More than $20bn 0.8% 70% Mean 28% 60% 31% $10-19.9bn 0.6% Median 50% $5-9.9bn 0.4% 40% $1-4.9bn 0.2% Proportion of Firms Proportion 30% 50% Less than $1bn Management Fee Period Investment 20% 45% 0.0%

10% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

0%

Sep-10 Sep-17 Vintage Year 2017/Raising Source: Preqin Private Equity Online Source: 2017 Preqin Private Capital Fund Terms Advisor

Fig. 13: Carried Interest Rate Used by Private Equity Funds of Fig. 14: Appetite for First-Time Funds: Private Equity Fund of Funds (Funds Raising & Vintage 2016/2017 Funds Closed) Funds Managers vs. Other Investor Types 45% 100% 42% 42% 40% 90% 27% Will Invest in First- 35% 80% Time Funds 70% 56% 30% 8% 60% Will Only Invest in 25% 18% Spin-off Funds 50% 20% 17% 40% Considering Investing 15% 16% in First-Time Funds Proportion of Funds Proportion 30% Proportion of Investors Proportion 10% 47% 20% 14% Will Not Invest in First-Time Funds 5% 10% 14% 0% 0% Less than 5% 5% 6-9% 10% or More Private Equity Fund of Other Investor Carried Interest Rate Funds Managers Types Source: 2017 Preqin Private Capital Fund Terms Advisor Source: Preqin Private Equity Online

8 © Preqin Ltd. 2017 / www.preqin.com DOWNLOAD DATA PACK: www.preqin.com/PEFOF17

of separate account activity, while since Fig. 15: Appetite for Alternative Structures: Private Equity Fund of Funds Managers vs. 2013 the number of co-investment funds Other Investor Types launched by fund of funds managers 100% has been increasing as managers look to 90% 25% expand their product range and provide 80% 37% additional solutions to institutional 70% 11% investors (Fig. 16). 67% Yes 60% 74% 14% 50% Considering Some managers 40% 30% 6% 64% No have looked to 49% Proportion of Investors Proportion 20% 8% acquisitions as a means 27% of offering secondary 10% 19% 0% market-focused solutions Private Equity Other Investor Private Equity Other Investor Fund of Funds Types Fund of Funds Types Managers Managers Recent years have seen a number of fund of funds managers launch dedicated Co-Invest with GPs Use Separate Accounts secondaries vehicles as these managers Source: Preqin Private Equity Online look to expand their product offering into a growing sector. 2016 saw a record level Fig. 16: Alternative Structures Closed by Private Equity Fund of Funds Managers, 2008 - 2017 YTD (As at September 2017) of capital raised by secondaries vehicles managed by fund of funds managers, with 30 29 26 14 funds securing $23.4bn, an 8% increase 25 25 on the previous record figure seen in 2013 ($21.6bn, Fig. 17). Driving the recent high 20 20 19 levels of capital raised in this market are 17 15 15 several large funds, most notably from 15 14 12 Paris-based Ardian: the fund of funds 11 9 9 manager’s Ardian Secondary Fund VI and 10 8 8 No. of Funds Closed of Funds No. 6 6 6 ASF VII (which closed in 2014 and 2016 on 5 $9bn and $10.8bn respectively) are two of 5 2 the three largest secondaries vehicles ever raised. 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD In line with the consolidation trends Year of Final Close seen in the fund of funds sector, some Separate Account Co-Investment Multi-Manager managers have looked to acquisitions as Source: Preqin Private Equity Online a means of offering secondary market- focused solutions. In 2013, Blackstone Fig. 17: Dedicated Secondaries Funds Raised by Private Equity Fund of Funds Group announced the acquisition of CS Managers, 2008 - 2017 YTD (As at September 2017) Strategic Partners from Credit Suisse. 30 Since the acquisition, the firm has been 27 rebranded to Strategic Partners Fund 25 23.4 Solutions and launched several funds 21.6 targeting the secondaries market, the 20 19.4 No. of Funds largest of which is Strategic Partners 18 17.5 16 Closed 15 16 VII, which closed on $7.5bn in 2016; the 15 14 secondaries fund targets investment in 12 12.0 Aggregate 10.6 10 Capital Raised mature private equity funds. 10 9 8.4 7 ($bn)

5 2.8 1.8 1.4 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD Year of Final Close Source: Preqin Private Equity Online

9

alternative assets. intelligent data. PREQIN SPECIAL REPORT: PRIVATE EQUITY FUNDS OF FUNDS THE CONTINUING RELEVANCE OF FUNDS OF FUNDS y acquiring other firms and changing resources, skills and network that their a single figure. An average score of 2.50 Btheir business models, private equity team is able to draw on and the impact indicates that the fund of funds manager fund of funds managers are attempting that this has on their ability to develop has selected an equal number of top- and to stay on top of trends in the industry relationships with top-tier fund managers. bottom-quartile funds, while a score lower and deliver competitive products that add than this indicates that the manager has value for their clients. Their ability to do so FUND SELECTION selected a larger proportion of top-quartile will define their future outlook – while not Fig. 18 shows the leading private equity funds. These rankings give an indication of all will be able to deliver on these grounds, fund of funds managers by average fund the value that some fund managers have a number of leading firms will continue to quartile ranking. Each fund has been been able to add for their clients through be sought by investors. assigned a value between 1.00 and 4.00 their fund selection abilities, although it based on its quartile ranking (where 1.00 must be noted that the table is based on What distinguishes the firms that will is top quartile, 2.00 is second quartile known investments for each manager and be able to succeed in this challenging and so on) and these values have been may not reflect the complete portfolio of environment? A lot comes down to averaged across all known underlying underlying investments. the expertise of the fund manager, the funds with performance data to produce

Fig. 18: Top 10 Private Equity Fund of Funds Managers by Quartile Ranking of Average Underlying Fund* No. of Underlying Proportion of Proportion of Proportion of Proportion of Average Firm Funds with Funds in Top Funds in Second Funds in Third Funds in Bottom Quartile Performance Data Quartile Quartile Quartile Quartile Ranking Accolade Partners 14 57% 21% 14% 7% 1.71 Franklin Park 12 33% 42% 25% 0% 1.92 Greenspring Associates 71 31% 45% 23% 1% 1.94 Constitution Capital Partners 10 40% 30% 20% 10% 2.00 Brooke Private Equity Associates 10 30% 50% 10% 10% 2.00 Fairview Capital Partners 47 38% 30% 23% 9% 2.02 Grove Street Advisors 32 41% 31% 13% 16% 2.03 Fort Washington Capital Partners 48 29% 46% 17% 8% 2.04 GoldPoint Partners 56 30% 43% 18% 9% 2.05 Top Tier Capital Partners 14 36% 21% 43% 0% 2.07

Source: Preqin Private Equity Online

Fig. 19: Fund Types** that Private Equity Investors View as Fig. 20: Strategies Targeted by Private Equity Investors in the Presenting the Best Opportunities Next 12 Months, Q3 2016 vs. Q3 2017 80% 70%71% Small to Mid-Market Buyout 63% 70% 60% 51% 50% 51% Venture Capital 33% 50% 42% Q3 2016 40% Growth 30% Q3 2017 30% 16% 20% 15% 14% 13% Large to Mega Buyout 22% 9% 5% 10% 5% 5% 3% Proportion of Fund Searches of Fund Proportion 2% 0% Secondaries 20% Buyout Growth

Fund of Funds 14% Balanced Turnaround Secondaries Fund of Funds Co-Investment

0% 20% 40% 60% 80% VentureCapital Proportion of Respondents Strategy Targeted Source: Preqin Investor Outlook: Alternative Assets, H2 2017 Source: Preqin Private Equity Online

*Only firms with at least 10 underlying funds have been included. **Respondents were not prompted to give their opinions on each category individually but to name those they felt best fit these categories; therefore, the results display what was at the forefront of investors’ minds at the time of the survey.

10 © Preqin Ltd. 2017 / www.preqin.com DOWNLOAD DATA PACK: www.preqin.com/PEFOF17

Accolade Partners, a Washington DC-based investors in private equity surveyed by 21, 47% of investors with a preference firm specializing in investments in venture Preqin in June 2017, just 14% thought that for funds of funds have less than $1bn in capital and growth equity investments, fund of funds was among the fund types AUM, compared to 35% of private equity leads the field with an average quartile offering the best opportunities at present investors generally. There are currently ranking of 1.71. Among the firm’s 14 (Fig. 19). In terms of investors planning 147 multi-manager vehicles currently in underlying funds with performance data, new private equity commitments in the market, targeting an aggregate $80bn in 57% are top-quartile funds and a further next 12 months, as tracked by Preqin’s investor capital. With the private asset class 21% are in the second quartile. Franklin Private Equity Online database, just 14% continuing to grow and the number of Park, based in Bala Cynwyd, PA, and are targeting new investments in funds of smaller investors increasing substantially Greenspring Associates, headquartered in funds, down from 16% this time last year in recent years (Fig. 22), fund of funds Ownings Mills, MD, also have an average (Fig. 20). vehicles remain an essential offering for quartile ranking of below 2.00. these LPs. Ultimately, continued industry Nevertheless, despite these challenges, growth will depend on the ability of these FUTURE DEMAND funds of funds continue to play an managers to identify new areas where Despite these cases, it is clear that important role in the industry, particularly their expertise can add value to investors, significant challenges remain as the for smaller LPs that do not have the adapt their businesses and models to private equity fund of funds industry resources or expertise to run their own meet investors’ concerns about costs, and seeks to redefine its role for LPs. Among private equity programs. As shown in Fig. deliver competitive returns to these LPs.

Fig. 21: Investors with a Preference for Private Equity Funds of Fig. 22: Investors with a Preference for Private Equity Funds Funds by Assets under Management vs. All Investors in Private of Funds by Assets under Management, 2012 - 2017 (As at Equity September 2017) 100% 2,500 5% 6% 3% 121 90% 5% 81 12% $100bn or More 80% $100bn or More 6% 17% 2,000 69 311 67 58 70% $50-99bn 61 49 9% 58 50 164 46 235 235 $50-99bn 60% 27% 208 $10-49bn 1,500 191 131 139 143 618 $10-49bn 50% 28% 5344 140 $5-9.9bn 40% 173 531 533 119 466 487 $5-9.9bn 30% 1,000 $1-4.9bn of Investors No. Proportion of Investors Proportion 47% 349 20% $1-4.9bn 35% Less than $1bn 10% 500 1094 849 865 893 935 Less than $1bn 0% 659 Investors with a All Investors in Preference for Private Private Equity 0 Equity Funds of Funds 2012 2013 2014 2015 2016 2017 Source: Preqin Private Equity Online Source: Preqin Private Equity Online

Fig. 23: 10 Largest Private Equity Funds of Funds in Market (As at September 2017) Target Size Fund Firm Headquarters Geographic Focus Fund Status (mn) HarbourVest International Private Equity Europe, Asia, Rest of HarbourVest Partners Boston, MA, US 1,000 USD Raising Partners VIII World North America, Europe, Portfolio Advisors Private Equity Fund IX Portfolio Advisors Darien, CT, US 900 USD Raising Asia Access Capital Fund VII - Growth Buyout Access Capital Partners Paris, France Europe 750 EUR First Close Europe GC Oriza Fund of Funds II Oriza Holdings Suzhou, China China 5,000 CNY First Close Adams Street 2017 Global Fund Adams Street Partners Chicago, IL, US Global 800 USD First Close Mesirow Financial Private Equity Mesirow Financial Private Chicago, IL, US US, West Europe 775 USD Raising Partnership Fund VII Equity BlackRock Private Equity BlackRock Private Equity Partners VII Princeton, NJ, US Global 757 USD Raising Partners Rongqu Fund of Funds Hangzhou Touzhong 101 Hangzhou, China China 5,000 CNY First Close Adveq Global II Schroder Adveq Zurich, Switzerland Global 499 EUR Raising SCS Private Equity V SCS Financial Boston, MA, US Global 500 USD Raising

Source: Preqin Private Equity Online

11

alternative assets. intelligent data.

alternative assets. intelligent data.

PREQIN SPECIAL REPORT: PRIVATE EQUITY FUNDS OF FUNDS

NOVEMBER 2017

PREQIN

Alternative Assets Data & Intelligence

Preqin provides information, products and services to fund managers, investors, consultants and service providers across six main areas:

■■ Investors – Allocations, Strategies/Plans and Current Portfolios ■■ Fund Managers – Funds, Strategies and Track Records ■■ Funds – Fundraising, Performance and Terms & Conditions ■■ Deals/Exits – Portfolio Companies, Participants and Financials ■■ Service Providers – Services Offered and Current Clients ■■ Industry Contacts – Direct Contact Details for Industry Professionals

New York ■ London ■ Singapore ■ San Francisco ■ Hong Kong ■ Manila

[email protected] www.preqin.com