Why PE FOF versus PE Direct investing?
Hi People, I have a FOF interview soon.. and this is something along the lines what I am thinking why FOF is better that Direct investing.. can you please add to the below?
•Through this approach you can exercise better diversification in the portfolio – thereby reduction of volatility while maintaining average returns – which is great in markets like we have over the last 2 years and undermines the risk of explosive erosion of investors sentiments, thereby increasing stability
•While an IM selects the best performing securities, and FOFM will select the best performing funds based on past performance, credibility and such ..providing greater stability
•Easier to track a fund, then monitoring individual securities, hence enabling the capability to get rid of underperforming and bad IM over time, and not destroying the portfolio in the whole
Any ideas? What do you think? Thanks in advance for all your help..
You should also include something about ACCESS to managers for investors who may otherwise not be able to invest in a strategic manner.
For example, take a smaller institutional client with $50 million in assets. A lot of PE funds have very high minimums, say $5 million. In this case, it would not be wise from a asset allocation/diversification perspective for this client to invest 10% of their assets in one manager. Also, a 10% PE allocation is likely a huge chunk of the client's threshold for PE. Thus tying their PE performance to a single manager.
This is why FoFs make sense for smaller clients. They can invest the same $5 million (10% of their portfolio in this case) in a FoF and get access to 20+ managers. Obviously, this reduces single manger risk.
Thanks, its a good point.
Dont say its 'easier' to track a Fund (often its not). The benefit of FoF is diversification and the opportunity to access the best in class investment professionals who are able to specialise in niche areas where an individual fund would not have the specific skillset.
There is also the opportunity to co-invest and do secondaries which utilise a similar (but by no means identical) skillset to direct investing.
Also, monitoring a FOF portfolio with say 12 underlying funds means that you will probably have c100 underlying portfolio companies, in numerous sectors and regions with fundamentally different strategies - for some people this is substantially more interesting than monitoring 1/2 companies for 10 years!!!
I'd focus on the ability to analyze PE investors across a range of strategies/geographies/investments. Figure out how this FoF in particular thinks about diversification and piggy back off of that. Often this is hard to do without having access to someone internally, so its absolutely something you need to adapt to in real time by asking your first interviewer that exact question and then spitting it back out in your own words to the next interviewers as why you're interested in FoF and them in particular.
Thanks guys, this is very helpful.
PE FOF or PE Direct? (Originally Posted: 12/16/2017)
I have 2 offers for direct and FoF PE in London. In the medium- to long-term, I would prefer a career in direct because of the modelling and more quantitative nature.
The FoF offer is from a firm that is the leader in secondary FoFs (~$60bn+ AUM and ~$40bn in FoF) and it is a 6-month opportunity and the only way to obtain a FT role. I havent asked how much co-investment exposure I'll get but I don't expect it to be much.
The direct offer is from a firm (~$2.5bn AUM) that specialises in mid-tier buyouts ($100-500mn Enterprise Value). However, it's only a summer internship; I'm going to be finishing my masters degree this year and so the idea of doing nothing for a year after (assuming an offer) the internship doesn't sound great.
Both offers came from networking, I was recommended by an Analyst at the FoF opportunity and by a Partner at the Direct opportunity, so it's also a question of who do I let down.
I welcome anybody's advice or insight on exit opportunities in FoF (majority secondaries) w.r.t. direct PE. I hear that FoF is a dying asset class but this firm appears to be doing excellent in the secondary FoF market.
I don't think FoF is a dying asset class, I actually things theres money to be made there. The issue with FoF is its not very exciting compared to direct investing and its kind of hard to get out of. Its easy to go from direct investing to FoF, much harder to go the other way.
If I were you, I'd lean towards the direct investing internship and hope that you can convert it into a full-time offer. I'd also talk to the partner you know and see what the liklihood is of converting. If you think that chances are pretty high, I don't think its a big deal to do a summer internship, get an offer, take the next year "off", and then start the following year. The issue would be if you don't get a return offer and have to re-recruit.
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