Fund of funds (FoF) have been created to function a bridge for LPs to get entry to managers they couldn’t again in any other case. However in an setting the place funds will not be seeing constant help from their current LPs, and there are extra enterprise funds than ever, is their function nonetheless related?
Fund of funds fundraising — say that 5 occasions quick! — has declined for years. To match, conventional U.S. enterprise 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, based on 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 shocking 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 wish to take care of,” Stanford advised TechCrunch+.
And with there being so many new companies and funds out there, the problems surrounding LPs not having access to enticing VC funds is essentially moot and that barrier isn’t actually a difficulty anymore, he mentioned. “There was far more alternative to put money into a VC than there has ever been up to now,” he mentioned. “For brand spanking new LPs coming into the market, they didn’t must 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 — perhaps only a completely different one than they did historically. A number of companies have began innovating on the mannequin, and FoF can nonetheless assist LPs get entry to the managers they will’t put money into in any other case, albeit for various causes than earlier than.