Fund of funds (FoF) had been created to function a bridge for LPs to get entry to managers they couldn’t again in any other case. But in an atmosphere the place funds are not seeing constant help from their present LPs, and there are extra venture funds than ever, is their role nonetheless related?
Fund of funds fundraising — say that 5 instances quick! — has declined for years. To examine, conventional U.S. venture agency fundraising set a report in 2022 with $162 billion. U.S.-based VC FoF raised simply $400 million within the first quarter of 2023, in accordance to PitchBook, and $3 billion in 2022. This compares to $24.4 billion in 2021 and $33.7 billion — the fundraising peak — in 2017.
It’s not stunning why many LPs have soured on the technique, mentioned Kyle Stanford, a senior venture analyst at PitchBook. For one, backers of these funds pay a combine of charges to each the FoF and the underlying commitments the FoF supervisor makes.
“LPs have that double layer of fees. And that extra time it takes after [an LP] invests in the fund of funds and then have it deployed is just something that LPs right now just don’t want to deal with,” Stanford advised Ztoog+.
And with there being so many new corporations and funds available in the market, the problems surrounding LPs not getting entry to enticing VC funds is basically moot and that barrier isn’t actually a problem anymore, he mentioned. “There has been way more opportunity to invest in a VC than there has ever been in the past,” he mentioned. “For new LPs coming into the market, they didn’t need to go to a fund of funds to get access.”
But to be clear, even when the funding numbers are down, FoF nonetheless holds a place sooner or later of venture — perhaps simply a different one than they did historically. Multiple corporations have began innovating on the mannequin, and FoF can nonetheless assist LPs get entry to the managers they’ll’t spend money on in any other case, albeit for different causes than earlier than.