How Fund of Funds can Attract the Next Generation of Investors

Private markets are set to see an influx of new investors, and with the right solutions, Fund of Funds can be perfectly positioned to capitalize.

The long-awaited retailization wave in private funds springs from both opportunity and need. Changes in regulation and the eagerness of individual investors to access the returns of private markets have created demand, while overallocation from institutional investors has brought a need to seek alternative sources of capital.

Fund of Funds (FoF) certainly has this need, as a 2024 dip in fundraising showed. At the same time, the sector’s advantages of diversification, open-ended structures, and access to quality funds make it ideal for retail investors. Roger Vincent, CIO of the Endowment style FoF Summation Capital, and former Head of Private Equity at the Cornell University Endowment notes “it has perhaps never been easier to access private equity, but never harder to do it well”.

We have seen that accessing retail capital is easier said than done. But by anticipating the coming changes to its investor base and catering to the typical investor of the future, FoF could prove to be the perfect vehicle for young savvy individual investors.

Why Fund of Funds is ideal for retail investors

While some retail investors may have familiarity with private markets, many will be investing in alternatives for the first time. The creation of interval funds and semi-liquid vehicles has been an attempt to create more open structures for these investors.

As Preqin notes, “open-ended structures facilitate easier capital inflows and offer greater flexibility for retail investors while balancing liquidity with the nature of underlying assets.” Fund of Funds already offers open-ended structures while also providing access to the high-quality funds retail investors are hoping to invest in.

Many retail investors are entering private markets because they seek diversification. What better way to diversify than with a fund type that is more diverse than other alternatives? Hesitant investors and their advisors looking to test the waters may see their ideal first investment in FoF. Recent research from Oleg Gedil at Tulane University 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.[1]

What does the retail shift mean for fund managers? For starters, additional marketing efforts will be required to reach retail investors, whether directly or through wealth advisors. It also means a greater number of investors committing smaller sums of capital, which means more data and increased back-end needs, making efficiency solutions critical to success.

But retailization isn’t the only change on the horizon. Understanding who the retail investors of the next 10 to 20 years will be—and what they want—will be key to winning their business.

Who are tomorrow’s retail investors and what do they care about?

Another factor fund managers will have to contend with is the coming generational shift, as baby boomers bequeath assets to their descendants. A Merrill report indicates the “Great Wealth Transfer” may involve as much as $124 trillion changing hands by 2048, meaning once retailization becomes the normal course of business, it is Millennials and Gen Z who will hold that capital.

The good news is that they’re interested in alternatives. Merrill says 72% of Millennial and Gen Z investors surveyed believe “it’s no longer possible to achieve above-average returns solely on traditional stocks and bonds.” But the mistake many managers will make is expecting them to behave like their parents.

RFI Global articulates this effectively: “Young investors are more informed and confident, ready to make their own financial decisions without relying solely on traditional financial advisors.” While many funds are targeting retail investors through private wealth advisors, to greet the coming youth wave, it may be smarter to market directly to them.

The same article discusses how these investors are “tech-savvy and value-driven,” two key components of understanding what they’re looking for. “Having grown up in the digital age,” it continues, “these generations are comfortable leveraging technology for all aspects of their lives, including investing. Online platforms, mobile apps, and digital currencies are second nature to them.” They’re going to expect greater transparency, online access and may only work with funds that offer that transparency.

Younger investors also care about impact far more than their parents, with Merrill’s data suggesting investors between 21 and 43 are more than twice as likely as those 44 and older to consider ESG when selecting an investment. The ability to measure and report on social impact could be a differentiator during fundraising.

How Fund of Funds can cater to younger individual investors

Targeting young retail investors will require significant effort, as well as education to explain FoF and its benefits. However, we can anticipate certain expectations these investors will have—key elements that could ultimately influence their decision.

“Retail investors have high expectations for a seamless digital experience and on-demand oversight over their data, so real-time reporting functions are critical,” says Preqin, suggesting fund managers “revamp” the onboarding process and offer “continuous digital engagement via investor portals” and work with “a service provider that supports daily net asset value (NAV) calculations” to facilitate better and more frequent communication.

Along with transparency into the fund’s investments and performance, fee transparency will also be crucial. As managers deal more directly with investors, carefully explaining the FoF fee structure and providing updates will be important to building trust.

With more investors and new expenses, FoF, which already has a reputation for high fees, will need to find operational efficiencies to compete. Streamlining onboarding and AML/KYC will not only keep investors happy, but will lower costs to avoid a fee crunch.

As Preqin puts it, “systems and processes must also be developed with scalability in mind, capable of transitioning from servicing a few institutional clients to managing thousands of individual investors – without compromising efficiency and security.”

They recommend “service providers that offer comprehensive system support” to reduce costs, and we couldn’t agree more. As a global service provider, JTC can help improve efficiency and accuracy in the onboarding process, streamline AML/KYC compliance and offer a 24/7 online portal for investor access. We are more than just a fund administrator—we are a strategic partner offering bespoke services, allowing you to outsource only the specific functions you require without disrupting your existing operations.

If you want to learn more about how JTC can help FoF be more efficient to succeed in an individualized retail fundraising environment, click here to read about our solutions for Fund of Funds.

[1] Oleg Gredil, Yan Liu, and Berk Sensoy. “Diversifying Private Equity” SSRN, January 2, 2025.