PE Key Trends Blog

Funds-of-Funds & Finding Needles in Haystacks

Dec 14, 2017, 6:44:41 PM

Tags: Palico In Focus, V2


These days, when funds-of-funds search for ideal fund investments, it can be a bit like searching for a needle in a haystack. Fortunately, many funds-of-funds have gotten very good at finding the best funds - in part because of digital marketplaces like Palico.

The Rough Years

In the years immediately following the financial crisis, many private equity investors dealt with losses by becoming more adept at vetting investments on their own. They also became more cost conscious. As annual private equity fundraising entered post-financial crisis recovery, roughly doubling between 2010 and 2014 to $438 billion, commitments to funds-of-funds bounced between $17 billion and $22 billion annually, beginning and ending the period at the former sum.

The Renaissance

Funds-of-funds had to reinvent themselves to stay relevant and since 2014 they have. The average annual fee (charged in addition to fees levied by funds in their portfolios) has dropped by a fifth to 80 basis points and and annual fundraising rose 53 percent through the end of last year to some $26 billion, according to Preqin. At the same time, funds-of-funds have, in general, shifted away from a focus trained overwhelmingly on bigger, mainstream buyout funds. They are now skilled hunters of smaller and mid-sized funds, many of which are specialists in niche investment areas or non-traditional geographies for private equity.

Getting Back to Finding Needles in Haystacks...and Palico

The shift to harder-to-find small and mid-sized funds has done much to revive the fund-of-fund value proposition. But it’s also made the mission of funds-of-funds more difficult. Adding to the generic challenge of searching for promising smaller and mid-sized funds is a more than 50 percent increase in the number of open fundraisings over the last four years to 3,040 today. Finding the proverbial needle in a haystack is a daunting task. That may explain why 329 fund-of-funds organizations, in their role as limited partners, have joined Palico’s marketplace to search for both primary and secondary fund investment opportunities. Out of 11 investor categories on Palico, ranging from family offices to sovereign wealth funds, funds-of-funds account for the second highest concentration, making up some 16.2 percent of the 2,034 accredited LP firms that are part of the marketplace. Only family offices edge them out at 16.

Helping LPs Find Investments, Palico’s Marketplace Can Improve Returns

By bringing investable fundraisings and secondaries to desktops and smart devices, along with a wealth of information on those opportunities, Palico gives limited partners, general partners and their advisors more time to discover, analyze and invest in highly promising, frequently hard-to-find funds. Palico fits seamlessly with all channels of capital commitment, yet its digital marketplace makes fundraisings and secondaries - covering all strategies and regions - more accessible and affordable.

"With Palico, we stay on top of investment opportunities across the globe and across specialties."

Gonzalo Eguiagaray, Arcano Group