Fund of funds continue ‘phenomenal run’ outperforming private capital markets with 14-quarter winning streak


Private capital funds of funds have continued their “phenomenal run” with a 14-quarter streak of outperforming the rest of the private capital universe, new data from PitchBook shows.

The impressive run followed eight lagging quarters in a row between 2016 and 2017, during which time many were speculating whether fund of funds vehicles had had their day, given the need for LPs to expose themselves to two sets of management fees.

Not only have funds of funds been outperforming since, but they have been doing so by significant margins, PitchBook’s latest Global Fund Performance Report reveals.

In the year through Q3 2021, FoF returns rose to 50.9%, compared with the overall fund universe pooled return of 37.9%.

The report warned, however, that if PE and VC succumb to the recent negative returns seen in the public markets, less volatile, income-producing, inflation-protecting asset classes could instead have their time in the sun in the coming quarters.

PitchBook said, “Because FoF include many specialists that only invest in one area, such as VC or oil & gas, the dispersion around FoF returns can be high.

“The 2009 vintage class had a spread of 12.2% between the top- and bottom-decile boundaries, but the 2016 vintage, still largely unrealized, has a 27.7% spread.

“With the bottom decile at 15.9%, however, even poor performers have been above historical norms.

“Another recent high spot for FoF has been an impressive positive net cash flow profile.

“While most of the private capital strategies have been in a cash flow negative or a slight positive position, FoF in 2021 returned $29.3bn more than they called, a massive proportion for a strategy that only raised $29.6bn in 2021.

“Both the excellent returns and the positive net cash flow profile should bode well for FoF fundraising in 2022.”

PitchBook said PE returns had cooled in the third quarter of 2021, the last full quarter the report covers, with returns dropping to 6.8% in the strategy – its lowest quarterly IRR since the pandemic rocked markets in Q1 2020.

Factors including soaring inflation, higher interest rates, slowing quantitative easing and the prospect of quantitative tightening were swiftly changing the liquidity paradigm, it added.

Returns dropped across all fund size buckets and regions, but greater resilience was seen coming out of Europe and for funds sized under $500m.

Mega-funds of $5bn and larger continued to drive PE returns in the year through Q3 2021, the report added, buoyed by a healthy exit market for larger assets from cash-rich corporates.

PitchBook said the rolling one-year IRR for VC dipped to 59.9% as of Q3 2021, ending five consecutive quarterly increases since Q1 2020.

It said that despite the record exit value in 2021 and healthy exit environment during the past few years, market conditions have shifted in Q1 2022, with a sharp decline in exit activity globally.

The report said, “We could see further declines in the coming quarters as exit markets tighten amid a volatile macroeconomic backdrop and inflationary pressures.”

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