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Fund of funds sector growth boom looks set to end with a bump

The unprecedented boom in the private equity fund of funds industry looks set to come to an abrupt end, with more than 40 per cent of present managers likely to disappear in the next few years, according to new research released by AltAssets.

The report said the fund of funds population had yet to register the massive downturn in private equity fundraising more generally and a dramatic change in the fundamentals of the industry since 2000.

‘A large proportion of fund of funds managers were born in an atypically accommodating period, when the private equity industry was booming and new investors were flooding into the asset class. The world has become a different place over the last few years and the fund of funds industry is now being asked to prove its worth. That is going to be impossible for many players,' said Chris Davison, head of research at AltAssets.

The report argued that survival rested on a firm's ability both to access capital and to select the best funds. It described a variety of different approaches to each objective but found as many as 40 per cent of players lacked the requisite combination.

‘There are too many bandwagon firms,' said Davison. ‘Survival hinges on a strategy that guarantees access to capital and successful fund selection. Being able to raise money in the good times is not enough over the long-term.'

The report identified 120 fund of funds managers globally, with the US accounting for the majority both in terms of number and their share of the $130bn managed by the sector as a whole. But it said that an increasing share of the industry was operating on a global basis - predominantly US and Europe - which was having a homogenising effect on the way it operated.

Copyright © 2003 AltAssets