Fund of funds (FoF) were created to serve as a gateway for LPs to access managers they otherwise could not support. But in an environment where funds lack consistent support from their existing LPs and where there are more venture capital funds than ever, is their role still relevant?
Raising funds of funds of funds — let’s say five times faster! – has been declining for years. By comparison, traditional fundraising by U.S. venture capital firms set a record in 2022 at $162 billion. US-based VC FoF raised just $400 million in Q1 2023, according to PitchBook, and $3 billion in 2022. That compares to $24.4 billion in 2021 and $33. $7 billion – the fundraising peak – in 2017.
It’s no surprise that many LPs have downgraded on strategy, said Kyle Stanford, senior analyst at PitchBook. On the one hand, the backers of these funds pay a combination of fees to both the FoF and the underlying commitments made by the manager of the FoF.
“LPs have this double layer of fees. And that extra time it takes after (an LP) invests in the fund-of-funds and then rolls it out is just something that LPs just don’t want to deal with right now,” Stanford told TechCrunch+.
And since there are so many new companies and new funds in the market, the problems of LPs not having access to attractive venture capital funds are largely moot and this barrier is not really a problem anymore, he said. “There have been many more opportunities to invest in a VC than there have ever been in the past,” he said. “For new LPs coming into the market, they didn’t have to go to a fund of funds to get access to it.”
But to be clear, even though the funding numbers are down, FoF still has a place in the company’s future – perhaps just a different place than they traditionally had. Several companies have started innovating on the model, and FoF can still help LPs access managers they can’t otherwise invest in, albeit for different reasons than before.