The 2009 Preqin Fund of Funds Review - Sample Pages The 2009 Preqin Private Equity Fund of Funds Review - Sample Pages © 2008 Preqin Ltd 1 The 2009 Preqin Fund of Funds Review - Sample Pages Contents 1. Executive Summary 7 11. Fund of Funds as Investors 121 - Regional breakdown of fund of funds managers, attitudes to fi rst-time funds, 2. Data Sources 13 attitudes to emerging markets, allocations to fund types, allocations to secondary purchases and co-investments 3. Review of Fundraising Market 17 12. Fund of Funds as Advisors 131 - Historic fundraising, market share, funds closed by geography, funds closed by GP location, funds closed by fund size, average fund size evolution, - Overview of advisory services offered, proportion of managers offering advisory placement agent use, fi rst-time funds services, geographic breakdown, advisory clients of the largest managers, league table of the top fund of funds providing advisory services 4. Listings of Funds Closed: 2007 - 2008 27 13. Profi les for 230 Leading Fund of Funds Managers 139 5. Review of Funds Currently in the Market 51 14. Analysis of Investors in Fund of Funds 435 - Growth in fundraising market over time, funds raising by geography, funds raising by GP location, funds raising by fund size, biggest funds on the road, - Reasons for investing in fund of funds examination, investor sizes, investor placement agent use, fi rst-time funds experience, make-up of investors in closed funds, investor base by GP location, investor types, returning investors, investor appetite going forwards 6. Listings of Funds Currently Raising 63 15. Investors to Watch 449 7. Fundraising Outlook 79 - Most important 25 institutional investors to watch in 2009 - Fund of funds coming to market in the next 12 months 16. Profi les for 250 Key Investors in Fund of Funds 459 8. Fund Terms and Conditions Analysis 83 17. Index 557 - Typical management fees, reductions for larger LPs, reductions after investment period, carry, preferred return, GP commitments - Fund of funds managers - LP investors 9. Fund Terms Listings 95 - Figure index - Key terms and conditions for disguised fund of funds 18. Other Publications and Services 575 10. Review of the Performance of Fund of Funds 107 - Other Preqin products - Net IRR dispersion, median, top and bottom IRRs, net return multiples, DPI, RVPI and TVPI, cash fl ows, fund selection performance, top managers, synthetic IRR benchmark analysis, fund of funds vs. other PE sectors, experience effect relationship between predecessor and successor fund quartiles, risk and return by strategy © 2008 Preqin Ltd 2 1. Executive Summary - Sample Pages Fund of funds have traditionally been used by access to geographies and sectors where they might Executive Summary investors in private equity in two principal ways. lack expertise, and can be used as a launching pad They are fi rstly used by smaller investors to provide to test out new areas before direct investments are a means of gaining access to a diversifi ed pool of made. Fund of funds have historically served an important investments that would be impossible to assemble function in the private equity world. For investors without considerable expertise, resource and high Fundraising for the sector reached a peak in 2007, they provide instant access to a diversifi ed portfolio levels of available capital. As Fig. A shows, over 50% with a total of $55 billion being raised by 138 vehicles of investments without the need for a complex and of investors currently investing in fund of funds have achieving a fi nal close. It was also a record year for costly private equity investment program, while for made 10 or less fund investments historically. Fig. overall private equity fundraising, with a total of $633 fund managers they act as a vital source of capital – A also shows that a signifi cant minority of investors billion being collected by the industry as a whole. especially for those without a long track record and in fund of funds are very experienced, with over As seen in Fig. B, this represents the continuation those focusing on niche industries and regions. 100 fund investments made historically. These of a period of sustained growth the fund of funds experienced investors use fund of funds to gain industry. Fig. A: Split of Investors in Fund of Funds by Previous Private Equity Fig. B: Funds of Funds Fundraising, 2003 - Nov 2008 Investment Experience % of Fund of Funds Investor No. of Funds in Portfolio © 2008 Preqin Ltd 3 1. Executive Summary - Sample Pages In 2008, the credit crunch has hit hard, and throughout fact that there are now more fund managers than new investments being made. With private equity the year, and especially towards the end of the ever on the road with new fund offerings – a total being an entirely new asset class for many of those year, fundraising for the private equity industry has of 196 funds seeking an aggregate $67 billion. The previously considering fund of funds, the recent slowed dramatically. Fund of funds has been one of majority of these fi rms would have hit the road before turmoil in fi nancial markets has led to priorities being the hardest hit sectors in the industry, and since the the current fi nancial crisis hit with full force, and shifted, and reassessment of current portfolio values Lehman bankruptcy of September 15th and the end although we have yet to see managers pulling out is postponing commitments to new fund of funds of November 2008 there were only 6 fund of funds of the market, we are already seeing reductions in vehicles. achieving a fi nal close, raising just $1.4 billion. This target fund sizes, and extensions in fundraising. represents an 87.5% reduction in fundraising when In addition, fund of funds tend to have the largest compared with the same period in 2007 when 31 It is often the case that newer investors in private investor base of all fund types, typically being made vehicles raised an aggregate $11.2 billion. Typically equity will initially gain access through fund of funds, up of many small commitments. With conditions December represents a strong month for fund of before moving on to invest a larger proportion of their as they are in 2008, it can be very challenging to funds fundraising, with many managers seeking to allocation into direct investments as they become coordinate the completion of fund commitments close their vehicles before the end of the year – it is more knowledgeable and experienced in the asset agreements with so many LPs facing uncertainty with not unusual to see 15% – 20% of annual fundraising class. They are then replaced by additional new regards to their investment portfolios. coming in this month alone. In 2008 it is likely that investors gaining access to private equity for the fi rst fundraising will pick up somewhat during December time, completing this churn of activity in the asset Light at the end of the tunnel in comparison with the barren period between class. September and November, but with many investors Conditions are clearly very tough for fund of funds currently reluctant to commit to new vehicles, we One of the reasons behind the recent decline managers at present, but there is encouraging would not expect to see a dramatic recovery. in fundraising is that many investors are not in news for the industry, and evidence that the recent a position to be making new investments in the drop in fundraising is a temporary situation that will Compounding the challenging conditions for fund current environment. The decline in value of other be overcome in time. The evidence is still showing managers seeking investors for new vehicles is the areas of investors’ portfolios has led to a halt in that fund of funds are performing well and represent © 2008 Preqin Ltd 4 1. Executive Summary - Sample Pages a viable investment choice for both new and Fig. C : Split of Underlying Fund Investments made by Fund of Funds Managers experienced LPs. by Fund Quartile Ranking Although there has been a drop off in fundraising, there is evidence that fund of funds are still doing an excellent job in terms of fund selection. Fig. C shows how successful fund managers have been in selecting the top performing funds. This analysis is based upon information on over 7,366 investments made by fund of funds managers, including 3,206 underlying fund investments made by 94 fund managers for which we have performance quartile information on at least 10 underlying investments. Nearly two-thirds (61%) of the funds invested in by these fund of funds managers were either fi rst- or second-quartile, while investing in a fund of funds they are able to achieve partnerships - fund of funds of vintage 2003 need to only 14% were bottom quartile. a diversifi ed portfolio including exposure to the most achieve IRRs above 24% to be ranked top quartile in demand funds. while those of vintages 2001 to 2002 require IRRs in This positive skew towards the upper quartiles is a excess of 19%. signifi cant achievement, and confi rms that fund of The median IRR performance of fund of funds has funds managers possess strong selection skills. It been good on average, with median IRRs currently Clearly fund of funds remain a viable and popular is important to note that many of the top performing fl uctuating around 5% to 8% for fund of funds of choice for both new and experienced investors, and funds can be the most oversubscribed and therefore vintages 1997 to 2000, increasing from 12% to with such strong historical performance, it is certain hardest to gain access to.