1. Executive Summary - Sample Pages 1. Executive Summary Fig. 1.1: Length of Time Taken to Raise Capital for Funds of Funds Compared to 12 Months Ago 5% Increased Executive Summary fi nal closes dropping from $369mn in 2007 49% to $234mn in 2011. Fund of funds managers have long played a 46% Stayed the Same signifi cant role in providing the private equity In addition to garnering smaller pools market with a fl ow of capital. They supply of capital from investors, fund of funds investors that possess insuffi cient knowledge managers are also taking longer to raise or experience to invest directly in private capital for their funds. In October 2011 equity funds with a way of accessing the Preqin surveyed 103 private equity fund of Decreased asset class, and are therefore an important funds managers to determine their current source of capital for fund managers. Despite views on the market and, as shown in Fig. the key position of multi-managers within 1.1, 49% of managers stated that the time the industry, the ongoing global economic taken to raise a vehicle has increased this volatility has left fund of funds managers year compared to 12 months ago. A further Fig. 1.2: Proportion of Investors in Funds of Funds that Anticipate Making a New Commitment to feeling the strain and under pressure to fi nd 46% stated that they have not seen an a Fund of Funds in the Next Three Years ways to maintain their position in the market. improvement in time taken to raise funds in Adapting to these uncertain fi nancial times 2011 compared to 2010, suggesting that the will be vital for fund of funds managers in the market is still sluggish and investors remain months ahead. cautious. Fund of funds managers were also 22% Will Make New asked to express which factors they thought Fund of Funds Commitments in Fundraising Market were currently of the most importance to the Next Three the private equity industry. It is unsurprising Years Private equity fundraising markets have that economic uncertainty came out on top, Will Consider been tough over recent years, and it has receiving an average importance rating of 58% New Fund of been no exception for funds of funds. Diffi cult 4.1 out of 5. 20% Funds market conditions have seen fundraising Commitments in the Next Three fi gures for funds of funds drop signifi cantly in The 2012 Preqin Private Equity Fund of Years 2009-2011; $11.3bn has been raised during Funds Review presents detailed analysis Will Not Make Jan-Nov 2011, compared with $60.2bn when of the current and recent global fundraising New Fund of Funds fund of funds fundraising reached its zenith market for funds of funds, as well as Commitments in in 2007. We have also seen a decline in the comprehensive listings of the vehicles that the Next Three Years amount of capital fund of funds managers are currently seeking capital and those that are targeting for their funds, with average have closed since 2010. © 2011 Preqin Ltd 1 1. Executive Summary - Sample Pages Fig. 1.3: Relationship between Predecessor and Successor Fund of Funds Performance Investor Appetite For Funds of Funds year period to March 2011, where funds of Quartiles funds produced a horizon IRR of 14.8%, 100% Despite a poor fundraising environment and compared to 10.5% reported one-year to 14% 90% increasing numbers of investors choosing to March 2010. The fi ve-year horizon returns 24% 26% invest directly in private equity funds in order have also improved for funds of funds, Bottom Quartile 80% 37% Successor Fund to avoid the double of layer of fees, there with the fund type showing returns of 8.4% 16% is still a healthy appetite for funds of funds as at March 2011, which is substantially 70% among a large portion of investors. Of 121 higher than the 5.5% posted as at March 20% Third Quartile 60% 32% Successor Fund investors in funds of funds interviewed by 2010. It is important to bear in mind that the 27% 50% Preqin in October 2011, 78% advised that performance data for funds of funds generally 30% they are likely to consider making a new lag by one quarter, due to the reporting of the Second Quartile 40% Successor Fund commitment to a fund of funds within the underlying funds compared to other private 32% 21% next three years. Many investors feel that the equity fund types. 30% private equity market is still presenting good 20% Top Quartile 20% 43% investment opportunities despite the current Due to the disparity in returns between Successor Fund economic instability, due to the long-term the best and worst performing managers, 10% 23% 22% 13% nature of the asset class and ability of the manager selection is of the utmost 0% best managers to take advantage of market importance to investors, and examining Top Quartile Predecessor Second Quartile Third Quartile Bottom Quartile volatility to provide attractive returns. the fund manager’s track record of past Fund Predecessor Fund Predecessor Fund Predecessor Fund funds can be a useful indicator. While Fig. 1.4: Five Largest Funds of Funds Currently Raising While investors are still expressing an interest past performance cannot be a guarantee in funds of funds, the market is competitive of future performance, an examination of Fund Firm Target Size (mn) GP Location and it has become more challenging for the relationship between fund managers’ HarbourVest International VI HarbourVest Partners 3,000 USD US fund of funds managers to identify potential predecessor and successor funds of funds Partnership investors. Consequently, intelligence is a demonstrates that there is some correlation more vital part of the fundraising process for between the quartile ranking of a fund of Guochuang Kaiyuan Fund China Development Bank 10,000 CNY China fund managers than ever. Within the Review funds manager’s last fund and its current of Funds Capital we present details of 150 institutions that are fund. Fig. 1.3 shows that 43% of fund of HarbourVest Partners IX - HarbourVest Partners 1,500 USD US investing in funds of funds, plus highlights funds managers with a top quartile fund go Buyout of the plans of 25 key investors that are on to produce a top quartile follow-on fund Morgan Stanley Private Morgan Stanley Alterna- 1,250 USD US expected to be particularly active in 2012. of funds, while only 14% go on to produce Markets Fund V tive Investment Partners a vehicle in the bottom quartile. Conversely, Euro Choice V Akina 720 EUR Switzerland Performance of Funds of Funds of the managers who administer a bottom quartile vehicle, 37% go on to manage a Horizon IRRs provide a good indication of follow-on fund that is also in the bottom how the private equity industry is performing quartile of performance. over a defi ned period, such as over one year or fi ve years. The recent performance of This demonstrates how important it is for funds of funds has improved over the one- investors to build strong relationships with © 2011 Preqin Ltd 2 1. Executive Summary - Sample Pages the top performing fund of funds managers, Consequently, fund of funds managers as they are more likely than their peers to will have to continue to work hard to continue to perform well and provide their attract capital, market their funds correctly limited partners with consistently high and strive to meet potential investors’ returns. requirements. What Does the Future Hold for the Fund of The 2012 Preqin Private Equity Fund of Funds Funds Market? Review Funds of funds continue to play an The 2012 Preqin Private Equity Fund of important role in the private equity industry, Funds Review – an annual publication in its and the fundraising environment – while sixth year – is a vital guide to the private depressed – shows that the top managers equity fund of funds universe, featuring have adapted well to market conditions and 240 profi les of fund of funds managers, will likely continue to attract capital going with information on their investment forward. As Fig. 1.4 illustrates, several strategies and the performance of their managers remain confi dent about raising funds; 25 listed funds of funds; over 150 large amounts of capital for their vehicles, investors, including important investors to with HarbourVest Partners seeking $3bn for watch in 2012 and their key contacts. The its latest fund of funds. Review also contains listings of funds of funds raised over 2010 and 2011, vehicles It is unlikely that the core investor base of currently seeking capital and analysis on all funds of funds will change in the short term. aspects of the industry. Funds of funds are still essential to investors looking to access the asset class for the fi rst We have gone to considerable lengths to time and for small investors that lack the in- ensure that the publication is as accurate as house resources to seek meaningful direct possible, gathering intelligence through a fund exposure. Institutions will also continue number of different channels, primarily and to invest with fund of funds managers to most importantly via direct communication further diversify their portfolios into sectors, with fund managers and investors or niche markets, where they have little or themselves. We hope that you fi nd this no experience. Likewise, funds of funds are year’s edition to be a valuable resource and often the vehicle of choice for investors that as ever we welcome any comments and intend to return to private equity after fi rst feedback that you may have.