Fund of funds
A fund whose investors' money is spread across other funds instead of individual companies.
Funds of funds pool capital and invest it with a range of managers. They give smaller investors access to top managers and are often a source of early capital for emerging managers, though they add a second layer of fees.
Fund of funds managers typically charge their own fees on top of the underlying funds' fees, often around 0.5 to 1 percent a year plus a smaller carry. In return they offer diversification, access and diligence, which suits smaller pensions, wealth platforms and investors new to private markets.
Many have dedicated emerging manager or seed strategies, and some take a share of a new manager's economics in exchange for early capital. They also give valuable signals: a respected fund of funds in a first close often makes it easier to win other institutional LPs.
Worked example
A fund of funds raises $400M for an emerging manager program and backs 20 first and second time funds with $10M to $25M each. One commitment of $15M anchors a $75M seed fund, and the fund of funds receives a 10 percent fee discount and a seat on the LP advisory committee.
Common questions about fund of funds
Why would an LP pay two layers of fees?
Because the fund of funds provides access, diversification and diligence that the LP could not build itself for that amount of capital. For smaller investors, or for niche strategies such as emerging managers, the extra fee can be cheaper than a full in-house team.
Are funds of funds a good first target for a new GP?
Often, yes. Many are built to find and back new managers early, they understand first-time funds, and their commitment is a credible signal to other LPs.