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Funds of Private Equity Funds Struggle to Find Pre-Crisis Momentum

The investment model that’s attracting fewer investors in the hedge fund industry is also under strain in private equity, according to a new Preqin report.

  • Leanna Orr

Asset managers that offer the opportunity to invest in baskets of private equity funds are finding less interest from clients since the financial crisis.

Funds of private equity funds raised $26 billion last year, the most since 2008 but still less than half the $55 billion garnered in 2007, according to a report Thursday from Preqin. Assets overseen by funds-of-funds managers have increased 43 percent to $381 billion since December 2008, lagging the private equity market’s 81 percent growth over the same period.

The funds-of-funds industry has lowered management fees to attract investors who have shown less interest in paying middlemen to gain exposure to private equity, according to Preqin.

“Investor concerns about fees pose a particular difficulty for fund managers operating a fund of funds model, with the double layer of fees a clear deterrent for cost-conscious investors,” Preqin said in the report. “An increasingly sophisticated body of institutional investors also means that increasing numbers have the expertise to run their own programs, especially with the assistance of investment consultants.”

[II Deep Dive: Funds of Hedge Funds: Skilled, But Expensive]

A Preqin survey in June found that only 14 percent of investors planning to put money to work in private equity were targeting funds-of-funds in the next 12 months, down from 16 percent a year earlier. The median management fee for funds of funds being raised this year is 0.85 percent, down from 1 percent as recently as 2015, according to the report.

Meanwhile, the funds-of-hedge-funds industry has seen a decline in assets over the past decade, with global assets falling to $798 billion in June from $1.2 trillion in June 2008, Preqin said last month. Hedge funds have struggled with poor performance since the financial crisis, though the industry has been making a comeback this year.

The low returns delivered by funds of hedge funds over the past decade aren’t due to poor manager selection, but the double set of fees investors are charged: they pay for the management of fund of funds plus the underlying investments, according to a study from Purdue University’s Krannert School of Management and Loyola Marymount University that was published in July.