Private equity funds-of-funds (“FOFs”) are funds that invest in other private equity funds, which then invest directly into privately-held companies. By investing in a FOF, a limited partner (“LP”) obtains a diversified portfolio of private equity fund investments as well as a larger portfolio of indirect investments in underlying private companies. I have worked for two private equity fund-of-fund managers and understand well the pros and cons of these vehicles. This post provides an overview of FOFs.
FOFs invest in a portfolio of private equity funds (known as “portfolio funds”), which in turn invest in privately-held companies (known as “underlying portfolio companies”). A FOF will invest in a portfolio of private equity funds and each portfolio fund will invest in a portfolio of private companies. As a result, an LP’s single investment in a FOF can provide the LP with exposure to many funds and potentially hundreds of underlying portfolio companies. The simplified diagram below illustrates this.