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Financial Intermediation In Private Equity: How Well Do Funds Of Funds Perform?

Financial Intermediation In Private Equity: How Well Do Funds Of Funds Perform?

Robert S. Harris

University of Virginia - Darden School of Business

Tim Jenkinson

University of Oxford - Said Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); University of Oxford - Said Business School

Steven N. Kaplan

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Rüdiger Stucke

University of Oxford - Said Business School

August 1, 2015

Darden Business School Working Paper No. 2620582

Abstract:

This paper focuses on funds of funds (FOFs) as a form of financial intermediation in private equity (both buyout and venture capital). Compared to investments in Hedge Funds or publicly traded stocks, private equity investments in direct funds are less liquid, less easily scaled and have higher search and monitoring costs. As a consequence, FOFs in private equity may provide valuable intermediation for investors who want exposure to the asset class. We benchmark FOF performance (net of their fees) against both public equity markets and strategies of direct investment into private equity funds. We also examine the types of portfolios private equity FOFs create when they pool investor capital. After accounting for fees, primary FOFs provide returns equal to or above public market indices for both buyout and venture capital. While FOFs focusing on buyouts outperform public markets, they underperform direct fund investment strategies in buyout. In contrast, the average performance of FOFs in venture capital is on a par with results from direct venture fund investing. This suggests that FOFs in venture capital (but not in...


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