Following Dan’s news that HRJ Capital, the over-committed fund of fund manager, will soon cease to exist, I asked several players in the FoF industry: Is this the first of many? Will we see more fund-of-funds sparring with their warehouse lenders before eventually disappearing?
The consensus on this question was a pretty strong “no,” with a few exceptions.
As it turns out, the idea of marketing an already-committed FoF isn’t unique to HRJ, per se. Plenty of firms market pre-committed funds. The idea is you’re not buying into a strategy, philosophy, or even a possibility, you’re buying a certainty. What you see is what you get.
The problem with this strategy, of course, is that it drives the GPs of the underlying funds nuts. It’s kind of like competition, if the underlying fund is also in the market, and furthermore, who wants an investor to speak for your fund? Apparently Sequoia Capital even booted a FoF manager from investing over one such incident.
When I pressed sources to tell me which firms would market a pre-committed fund, I got same answers over and over: large investors with the backing of a financial services conglomerate (AIG and AXA were named). Makes sense, since the consequences of not raising the money are less dire—the fund of funds manager doesn’t have to put itself up for collateral. The other answer I got repeatedly was Swedish funds of funds managers. But after speaking with three such, two of them said “not really” and while only one extolled the virtues of a pre-marketed fund. The investor, Bruno Raschle of FoF manager Adveq, said such a strategy was sometimes necessary to compete.
But either way, FoF managers that pre-commit their funds are far more conservative than HRJ. To circumvent spats with their underlying GPs, they will market which funds they’ve previously invested in and which ones they expect to come to market during their next cycle. Even if they make soft verbal commitments to a GP’s future fund, they rarely often borrow the money to actually sign commitments. In fact, the maximum over-commitment most firms will use is 5% to 10%, and that’s just to make sure every dollar is put to work in case a fund or two gets under-called, according to Thomas Kubr, CEO of European FoF manager Capital Dynamics.
Our friends at HRJ, however, over-committed by a margin of two to one, making them, well, the outlier.
Earlier: HRJ Capital Drops the Ball