4.3 PE FoFs Flashcards

1
Q

Fee structure of PE FoFs? Why still better to invest in FOFs?

A

Double layer of management and incentive fees.

For institutional investors still more cost efficient that in house

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Otterlei and Barrington (2003) findings?

A

That an in-house team’s annual costs can be substantial compared to that of a typical FoF, and even a 5% carried interest charged by FoF managers has little adverse effect on PE investors’ net returns.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Successful PE funds require which 3 elements?

A

1) Broad network of contacts in order to gain access to high-quality funds

2) Well-trained investment judgment

3) Ability to assemble balanced portfolios

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Probability of total loss of direct investment?

A

30%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

How do FOFs provide reasonable downside protection?

A

Via greater diversification across GPs, vintage years, stages of investment, industries, and geographies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Benefits of FoFs for investors?

A

1) ACCESS: FoFs’ better access to top fund managers may also be because these managers consider FoF investors a more stable and experienced source of capital.

2) EXPERTISE: FoFs can also manage the challenging task of liquidity management that requires insight, an industry network, adequate resources, and access to research databases, as well as skills and experience in due diligence, negotiation, and contract structuring.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Differences of PE fund investment and FoF investment among 4 categories: diversification, cost, selection & monitoring skill and access

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

PE FoF key traits?

A

1) offer investors diversified access to PE

2) aim to add value by selecting top-quartile PE funds

3) may offer economies of scale

4) allocations to oversubscribed
PE funds.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

PE FoFs differ in which 3 key dimensions?

A

1) Geographical focus

2) Focus (VC / growth equity / buyouts) or size

3) Portfolio Construction (diversification)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Diller and Herger (2009) findings?

A

Using two dimensions (i.e., number of fund commitments per year and number of vintage years) find that diversifying across 15 funds over 3-5 vintage years can reduce the loss of invested capital to zero and increase a PE fund portfolio’s average performance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Dompé (2019) findings?

A

20-25 is the optimal size for a portfolio of PE funds diversified across stages, vintages, and geographies.

Once an optimal size is attained, adding more funds has negligible effect on risk reduction and may reduce the value added from manager selection.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

2 broad categorizations of PE FoFs?

A

1) Primary FoFs - invest in individual funds at their inception, 20-50 funds, over several vintage years. Similar J curves to individual PE Funds

2) Secondary - acquire LP interest in secondary market. Hundreds of LP interests, know which investments the funds holds. Have shorter J curves than individual PE Funds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

3 phases of PE FoF portfolio construction?

A

1) Portfolio construction (top down)
- number of PEs for adequate diversification
- spread across vintage years, geographies, PE Categories

2) GP and Fund selection (bottom up)
- qualitative & quantitative assessment of funds
- avoid investing if commitment amount is a large % of the total fund

3) Ongoing monitoring
- Regular interaction with the GP to know the status of the fund’s portfolio companies and the GP’s outlook on risks and opportunities.
- Regular performance analysis of the fund.
- Regular valuation of the fund.
(Some LPs sit on the fund’s LP advisory board to monitor potential conflicts of interest between the PE fund and the GP)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

PE FoF investors rely on the FoF managers for what? Why should they evaluate them?

A

To perform portfolio construction

The investors should evaluate these managers to determine if they are able to select and access top quartile GPs.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Pros of PE FoFs investing?

A

1) Diversification benefit

2) Professional management - experienced investment teams, long-term horizon; targeted pool of capital; economies of scale

3) Access to funds, specific strategy, or geography

4) Lower capital commitment - single PE fund’s minimum investment is around $1 million

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Weidig and Mathonet (2004) findings?

A

1) For Venture capital, the probability of a total loss of invested capital is around 30% for direct investments and close to zero for funds and FoFs

2) the probability of a loss for a fund is around 30%, but small for a FoFs.

17
Q

Cons of PE FOF?

A

1) additional layer of fees:
- 0.5-1% management fee of committed capital
- 5-10% carried interest of realized gains

2) GP relationship remains with the PE FOF manager (unless introduced)

3) Less transparency

4) Lack of liquidity
- longer lives than PE funds (because of diversification across vintage years)
- close ended
- less activity of secondary markets

18
Q

4 Value propositions to PE FOF investors

A

1) easy access to PE

2) smaller PE Program

3) complement existing PE program - access to other GPs or regions, etc

4) Increased complexity of PE Operational Due diligence (ODD) - FOFs help those lacking ODD expertise

19
Q

Gresch and von Wyss (2011) findings in relation to PE FOF performance?

A

They compared investments in PE FoF’s to those in single PE funds, using IRR and multiples of invested capital, and find that PE FoFs have lower return dispersions (i.e., possible range of returns; serving as a measure of risk) than single PE funds in the same vintage year

20
Q

Harris, Jenkinson, Kaplan, and Stucke (2015) benchmark PE Fos and portfolios of PE funds to public equity market performance using the Kaplan-Schoar PME (KS-PME).

What are the results? What are the interpretations?

A

1) PE FoFs offer diversification benefits by reducing performance dispersion.

2) PE FoFs have higher returns than public equity investments, but at a cost of higher illiquidity.

3) PE FoF returns are lower than returns on a portfolio of PE funds, possibly due to FoFs’ double layer of fees.

21
Q

St dev of KS-PMEs buyout and VC funds to S&P?

A

1) buyout - half of SnP

2) Vc - third of SnP

22
Q

Funds of funds have included what types of account over the past decade?

A

Secondaries, co-investments and separate accounts

23
Q

Which form of private equity investment format suffers from the greatest illiquidity?

A

Open ended FOFs - limited monthly/quarterly liquidity