Are Private Equity Fund of Funds Returning to Favor?

Funds of Funds are making a reappearance for Private Equity investors who tend not to have the capital, or the access, to optimize their involvement in this sector.

These are what one might call new types of FoFs in that they are not the original types which discouraged many investors because of the fee-on-top-of-fee loading. This new generation of FoFs requires sophisticated administrators such as JTC to cover all the elements of an efficient structure.

The New Fund of Funds Landscape

Until comparatively recently, the opportunity to take advantage of private equity structures was confined to larger institutional investors, with the early front-runners, at least in the US, composed primarily of Ivy-League College endowments. These investors were encouraged by the recognition that returns from a mid-ranked PE portfolio tended to outperform global equities (as measured by the MSCI), and over the medium to long-term, by an average of 300 basis points per year.

This so-called ‘illiquidity premium’, goes a long way to explaining the increasing popularity of private equity in the current, relatively low-interest rate environment – popularity which has led smaller endowments and some family offices, among others, to join the party – but sometimes with mixed results.

The issues faced by extant and potential PE investors may loosely be divided in four closely linked groups: Manager Selection, Diversification, Access, Administration.

Manager Selection
As in all fields of active investment, the quality of management teams varies. While, as stated above, mid-ranked PE managers/funds may usually be expected to outperform global equities by 300bps, the best managers and their funds consistently tend to generate much higher returns adding as much as 10%pa to portfolio returns; however, these manager achieve such results not only through skill and experience but because they have built up a sufficiently large base of assets under management to enable them to become involved in a wide range of projects – in other words to build a series of investible funds with differing projected outcomes across a range of durations.

Equivalently, many of the most successful investors are those with sufficient capital to invest, and who take a long-term view of performance, and moreover are professionally advised – one of the reasons that the large US college endowments are such a significant presence in the PE world.

Diversification
Analytical studies have shown that while PE diversification is critical in smoothing cash flow, risk reduction and, as above, performance enhancement, it is often difficult to achieve. For example, Jeff Drinkwater, Senior Director of Institutional Capital Services at JTC Group, quotes a recent analysis by Oleg Gedil at Tulane University which “estimates that even 80% of institutional investors in private equity are under diversified, resulting in returns that are an estimated 5% lower than average private equity fund performance.” In many cases under diversification is simply a natural concomitant of insufficient investable capital, and this being the case, would suggest that smaller investors should have no place in the PE arena.

However, as Roger Vincent, founder and CIO of Summation Capital, and former PE Head at Cornell University Endowment, explains, this issue was first addressed by smaller US college endowments who decided in as early as the 1970s, to combine forces, to create a sufficient capital stockpile to investment in top-ranked managers, and in so going created the original private equity funds-of-funds (FoFs).

Over the decades, these FoFs became the gateway into PE for a wide range of participants, from smaller institutions through to high net worth and even retail investors, given that the entry level for some is today as low as $20k, and moreover, given the boost to this industry sector by the US Executive Order of August 7, 2025 designed to democratize access to alternative assets for 401k investors.

A September 2025 analysis from Vanguard, Benefits of a Fund-of-Funds Strategy in Private Equity, spells out the attractions, but underlines how broad optimum diversification needs to be: “In an analysis of historical PE returns, we find that FOFs provide improved diversification and downside protection relative to buyout and venture strategies alone, particularly during previous economic cycle peaks. We also find that a PE program that invests in at least 20 to 30 PE funds would be required to achieve a sufficient level of diversification while still retaining the excess return benefits of PE.”

The big issue here, however, is fees. When it comes to FOFs, Business Research Insights notes that “investors can end up paying multiple layers of fees, including fees charged by the FoF manager and fees charged by the underlying funds. These fees can significantly reduce overall returns, particularly in a low-return environment. As a result, some investors may choose to avoid FoFs altogether.”

Vincent agrees and points out that a usual FoF fee structure of 1% management fee and 10% performance charged on top of the manager’s fees – commonly 2% and 20% – may easily wipe out the 300bps illiquidity premium, the minimum target that investors are seeking.

On the other hand, Vanguard notes that “the value provided by an FoF has the potential to exceed these costs through improved diversification and risk-adjusted returns, superior manager access and selection, and capital call and operational simplicity.”

Access
Vincent’s years leading the Cornell endowment, one of the most successful Ivy League PE investors, has led him to believe that, in launching Summation Capital earlier this year, he has provided attractive answers to the questions about access, and about ‘layers of fees’.

As far as access to the best managers is concerned, Vincent believes this is as much about personal contact as about high minimum entry levels. In short, it’s not always about how much you have, but who you know, and more consequentially, how long and how successful the relationship between investor and manager has proven to be.

Vincent is also conscious that one of the reasons that FoFs are not often as popular as their promoters hope is because investors, today’s investors, are unwilling to pay at least two levels of management fee despite the potential benefits. In response to this, Summation Capital works with benchmark-based performance fees.

Unlike traditional models, Summation’s performance fees (carried interest) are only charged on returns that exceed public market benchmarks. This means investors are not charged for average or below-average performance compared to the public markets.

Administration
These arrangements are designed to enhance the appeal of PE FoFs to the new generation of investors who, while looking for long-term sustained performance, require this to be paired with online, transparent access to information about their investments.

“In an environment where capital is scarce, managers must cater to these new segments in order to fundraise. Enhancing efficiency is vital to enabling managers to lower costs, increase fee margins and gain a competitive advantage,” says Drinkwater.

He explained how a global company like JTC can assist funds in testing the European market, for example. Typically, managers would need to establish a vehicle in Europe under the AIFMD or register with each individual country where they intend to fundraise. However, because JTC is already established in those jurisdictions, managers can efficiently explore market opportunities.

“As a global provider, our approach is to create a template that allows you to test marketability,” said Drinkwater. “By using our AIFM license, you can market in Europe and gauge your experience before making a full commitment.”

“Vincent points out that treasury management must be a key focus of the best administrators pointing out there may that monthly cash flow within an FoF is often composed of dozens of movements of cash, responding, for example, to managers’ capital calls.

Drinkwater recommended for those selecting an administrator to “look at their expertise, their specialty and how long they have been established.”

So, in many ways, much the same process as selecting a PE manager, and/or building a successful FoF.