Why do firms that are essentially FOFs like Harbourvest and Adams Street still exist? At this point, aren't nearly all insitutional investors investing directly with PE/HFs and not using FOFs? I simiarly don't understand the GP stakes trend. Curious if anyone has insight or thoughts.
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Because sponsors don’t want to have the reporting obligations of 10,000 individuals. And it’s a fairly administratively and time consuming job to pick good managers. These funds have decades of experience, relationships and data on PE sponsors so pensions, endowments, foundations, family offices, etc outsource their private markets portfolio to them.
Should add, starting a FoF today would be incredibly hard because the advantage in these businesses is scale. The proprietary data these funds have is their edge.
The only new fund of funds you see these days are ones targeting nicheir strategies like independent sponsors or first time funds as most of the established players don’t do those as often.
Certain of these FOFs have performed 1st or 2nd quartile, net of their own fees. Some have underperformed. Value add is not investing in latest $20b MF raise, its manager selection in lower MM PE with niche strategy, access to unique first time funds / spinouts, more of a steady hand with coinvest underwriting (alleviates liability from pension). Also can be a core / satellite approach, where institutional investor invests in a few of their strategies and then invests in a FoF for diversification ($50m is spread out to 10-12 different funds vs concentrated in 1 strat). Also FoF of scale are able to negotiate better terms relative to smaller institutional investors that can't write $100m checks.
Because if you only have 100m to invest in PE you can’t possibly build a diversified portfolio or get access to managers below the mega cap names
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