Back in 2008 and 2009 I took an in-depth look at the performance of funds of funds and, well, found them lacking. I raised the question of whether they were worth the added layer of management fees and, in many cases, carried interest.
This year I revisit the subject with a larger, 80-fund, pre-vintage 2007 database at my disposal. For the first time my sample includes 14 funds of funds (or equivalents) from Chicago-based Adams Street Partners, thanks largely to data supplied by its long-time client, Montana Board of Investments.
This time I found the performance of the database again lacking—though improved on an investment multiple basis, thanks in part to the addition of the Adams Street funds. The slideshow below shows the top-10 performing funds in the database.
Adams Street, which started raising funds of funds in the late 1970s, takes the number one spot with its vintage 1993 BVCF III, a combination fund of funds and direct venture fund. It also takes the fifth, sixth, eighth and tenth spots. Boston-based HarbourVest Partners, which formed its first fund of funds in 1982, takes the second, third and seventh spots. Our database includes 12 HarbourVest funds.
For the 71 funds for which we have relevant data, investors in our database saw $11.3 billion drawn down turn into $14.2 billion in distributions or unrealized value, for an investment multiple of 1.3. The median investment multiple for those 71 is 1.2. That’s an improvement over the 1.1 median multiple found for the 39 pre-vintage 2004 funds with relevant data in my 2009 analysis.
The median IRR for the 55 funds of funds with relevant data is 5.84 percent; above 9.60 percent gets you in the top quartile; below 1.50 percent is bottom quartile. Based on an annual review of fund performance this fall by sister publication Buyouts Magazine, investors in domestic buyout funds over a long period of time can expect to achieve a median IRR of 9.93 percent, top-quartile IRR of 18.78 percent and bottom-quartile IRR of 3.18 percent.
All told our 80-member funds-of-funds database spans roughly vintage years 1985 to 2006. (I left out funds younger than that to try to minimize the j-curve effect.) The data comes from 14 public pensions that make their results public, including California Public Employees’ Retirement System and California State Teachers’ Retirement System. Most of the data is current as of March 31.
Some caveats in this analysis. Our sample may not be representative of the funds-of-funds market as a whole. Funds of funds pursue a variety of strategies, and may have allocations to direct investments and secondary investments, among others. Leaving out funds younger than vintage 2007 2006 still may not adequately protect against the j-curve effect, since the underlying funds themselves get drawn down over a period of years. Finally, the underlying funds in our sample may be titled more toward venture capital than the broader market.
David M. Toll is editor-in-charge of Buyouts Magazine.