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. However in an atmosphere the place funds are usually not seeing constant assist from their present LPs, and there are extra enterprise funds than ever, is their position nonetheless related?
Fund of funds fundraising — say that 5 instances quick! — has declined for years. To match, conventional U.S. enterprise agency fundraising set a document in 2022 with $162 billion. U.S.-based VC FoF raised simply $400 million within the first quarter of 2023, in accordance with 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 enterprise analyst at PitchBook. For one, backers of those funds pay a mixture of charges to each the FoF and the underlying commitments the FoF supervisor makes.
“LPs have that double layer of charges. And that further time it takes after [an LP] invests within the fund of funds after which have it deployed is simply one thing that LPs proper now simply don’t need to take care of,” Stanford informed TechCrunch+.
And with there being so many new corporations and funds out there, the problems surrounding LPs not having access to engaging VC funds is basically moot and that barrier isn’t actually a problem anymore, he mentioned. “There was far more alternative to spend money on a VC than there has ever been up to now,” he mentioned. “For brand new LPs coming into the market, they didn’t have to go to a fund of funds to get entry.”
However to be clear, even when the funding numbers are down, FoF nonetheless holds a spot in the way forward for enterprise — possibly only a totally different one than they did historically. A number of 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 various causes than earlier than.