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How do I choose a fund of funds?

From Charles Soulignac of Fondinvest: Choosing the right fund of funds management team is crucial. Investors should be looking for a specialist, recognised and experienced team able to offer good opportunities in several markets, providing performance, quality reporting and professionalism.

As potential returns have been attractive so far, the proliferation of funds of funds will probably continue in the next two years. This means that investors will have to show even more discipline in their selection process.

Investors should take three main points into consideration when selecting a fund of funds manager:

1. Performance
It is more difficult to estimate performance in private equity during the life of a fund of funds than in traditional financial markets. The concept of performance deals with four elements that cannot be analysed separately: IRR, multiples, timing and return in cash. Only a combination of these elements can show the performance of a fund of funds manager.

Performance also has to be proven - the point is to demonstrate how the performance is obtained - and sustained on a long-term basis. Only a few teams have demonstrated such proven performance over several private equity cycles.

2. Team
The fund of funds management team needs to appear homogenous and coherent with capital under management. Fund managers need extensive experience in private equity and other businesses. Back office departments have to provide investors with useful information and transparent reports. Teams have to be structured as private equity organisations - one manager for one investment - rather than as asset management teams with distinct research, analysis and trading departments.

3. Strategies and deal flow
Investment strategies will differ from one fund of funds manager to another but all the strategies need to be clearly specified to the investor. On the other hand, the fund of funds manager's seniority and established presence in the market will provide investors with investment opportunities.

The attractiveness of the fund of funds business in terms of potential returns and the few barriers to entry have created a lot of ‘me-too' funds entering the market with no proven performance. Yet a solid and consistent performance combined with the seniority of the management teams are still the factors that will give the investor the opportunity to benefit from the most interesting investments in private equity.

In selecting its fund of funds manager, the investor must choose one in the race for performance rather than for volume.

Charles Soulignac is CEO of Fondinvest Capital, one of the first fund of funds to be created in Europe. Founded in 1994, it manages four funds of funds, including secondary funds, and has invested over E350m in more than 120 underlying funds.

Copyright © 2001 Fondinvest Capital