Private Equity Fund of Funds

Private Equity Fund of Funds Manager Selection

Private equity fund of funds are investment vehicles that pool investors' money to invest in private equity funds. A fund of funds manager is, of course, important for the success of the fund of funds, therefore selecting a qualified fund of funds manager should be considered thoroughly.


There are three major qualifications to look at when selecting your manager: performance, management team, and the strategies and deal funds.

Performance
Unlike traditional financial markets, the performance of private equity fund of funds is more difficult to analyze. This is because in private equity the investor must consider four elements: the internal rate of return (IRR), multiples, timing and return of cash. These all must be taken into consideration and weighted more or less equally when examining a manager's global performance. Additionally, the private equity manager should have a proven long-term record, showing that he is capable of surviving good and bad financial cycles.

Management Team
When performing due diligence on a fund of funds you should follow the basics that apply to other funds, and a consistent focus is on the management team and operations. This is a critical point for selecting a manager, while he is the head manager, his management team often decides the success of the fund. 'Back office' operations should be a big concern for investors, and as private equity evolves a greater transparency in the 'back office' is expected by investors. Overall, you should look for a coherent and competent team standing behind the manager.

Strategy
In terms of strategy, many managers differ but the quality to look for here is clarity. A good manager can clearly and expertly explain his strategy to the investors. Specifically in the area of private equity fund of funds, a manager should have prior experience in private equity that has constructed his strategy.

Experience
The popularity of fund of funds has led to the emergence of many "me too" funds that have little to no prior experience in private equity or managing a fund of funds. Proven experience in private equity or managing a fund is a big factor to consider when selecting a manager. Seniority often makes for a more knowledgeable and competent manager--although there are also very successful rookie fund managers--but also an experienced manager usually brings a strong staff that has confidence in the manager.

These are just some major points to consider when selecting a private equity fund of funds manager, but extensive interviews and research will ultimately weed out the less qualified managers and hopefully lead the fund of funds to success.

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