By investing indirectly across multiple private equity funds, a fund of funds provides broad exposure to unlisted companies, while leveraging the expertise of specialised management companies. This approach is fully consistent with a long-term wealth allocation framework, in which performance must be assessed through the lens of risk, cash-flow visibility and the quality of the underlying assets.
What is a private equity fund of funds? Definition
Fund of funds: definition and the principle of indirect investment
A private equity fund of funds is a collective investment vehicle whose assets are predominantly invested in several underlying private equity funds. It does not hold direct stakes in companies; instead, it allocates capital to different management companies, each deploying a defined strategy (buyout, growth, secondary, infrastructure, etc.).
This indirect investment model enables investors to access, through a single vehicle, a broad spectrum of private assets, while benefiting from enhanced diversification and professional management.
The difference between a fund of funds and direct investment
Direct private equity investing entails demanding requirements in terms of selection, analysis and ongoing monitoring of portfolio companies:
- a granular understanding of business models,
- the ability to assess management teams,
- management of operational and sector-specific risk,
- often substantial minimum subscription amounts.
By contrast, a fund of funds delegates these dimensions to specialised management companies, thereby reducing both concentration risk and the risk of selection errors for the end investor.
The role of the management company in a fund of funds
The management company plays a structuring role across several dimensions:
- sourcing and selecting underlying funds,
- allocating capital across strategies, geographies and vintages,
- monitoring performance, risks and cash flows,
- producing consolidated, intelligible reporting for investors.
It acts as a portfolio architect, ensuring the overall consistency of the allocation.
Key takeaway: a private equity fund of funds provides indirect, diversified and structured access to the asset class, relying on centralised selection expertise.
How does a fund of funds work in private equity?
Structure and organisation of a fund of funds
Like private equity funds, funds of funds may adopt different legal structures and lifespans. Historically, the most common format has been the closed-ended fund, with:
- an investment period of 4 to 6 years,
- an overall fund life typically ranging from 8 to 10 years,
- capital calls drawn progressively,
- distributions linked to exits executed by the underlying funds.
However, the market is evolving, with the emergence of evergreen fund-of-funds structures that offer greater entry and exit flexibility while maintaining exposure to private assets. These structures respond to specific wealth management objectives, but require heightened vigilance regarding liquidity management and asset valuation.
Selection of underlying funds and diversification
The quality of a fund of funds rests primarily on the selection of its underlying funds. This selection is based on a thorough analysis, including:
- the robustness of the manager’s organisation,
- the stability and experience of teams,
- the coherence and clarity of the investment strategy,
- historical performance adjusted for risk,
- financial terms and alignment of interests.
This discipline makes it possible to build a diversified portfolio, limiting dependency on any single manager, strategy or market cycle.
Investment process across multiple private equity funds
Capital is deployed progressively over several years, across different funds and vintages. This approach provides:
- temporal (vintage) diversification,
- exposure to multiple economic cycles,
- greater visibility on value creation over time.
Key takeaway: the mechanics of a fund of funds are anchored in long-term investing, multi-fund diversification and active allocation management.
The advantages of investing in a private equity fund of funds
Portfolio diversification across multiple funds and companies
The first advantage of a fund of funds is diversification. Through a single investment, the investor gains exposure to:
- multiple private equity funds,
- dozens, or even hundreds, of companies,
- different geographies and sectors.
This pooling reduces idiosyncratic risk related to a specific company, management team or market segment.
Access to top-tier funds and management companies
Funds of funds provide privileged access to institutional funds often unavailable to private investors investing directly, due to high minimum commitments or capacity constraints. They represent an effective gateway to proven value-creation strategies delivered by recognised management companies.
Key takeaway: a fund of funds is a tool for access, diversification and professionalisation of private equity exposure.
Risks of funds of funds and how professional expertise mitigates them
Key risks: fees, dilution and illiquidity
As with any private equity investment, funds of funds entail specific risks:
- a double layer of fees (at the fund-of-funds level and at the underlying fund level),
- illiquidity inherent to private assets,
- potential dilution of gross performance if selection is not rigorous.
These risks must be assessed in terms of net performance, which is the only relevant metric for the end investor.
How to limit these risks: rigorous selection and diversification
Mitigating these risks relies on several key levers:
- demanding selection of management companies and their strategies,
- close scrutiny of fee structures and value-sharing mechanisms,
- intelligent diversification across strategies, geographies and vintages.
Private Corner’s expertise to optimise net performance
At Private Corner, the fund-of-funds approach is grounded in a methodology directly inspired by institutional standards. The objective is not to maximise headline gross returns, but to preserve, over the long term, the value created by management teams for the benefit of investors.
In practice, this translates into selective sourcing, based on long-standing relationships with management companies, enabling early access to the best vintages. Each fund is assessed through a multi-criteria framework that integrates organisational robustness, team stability, strategic coherence and track record quality—consistently evaluated net of fees.
Private Corner pays particular attention to economic terms: the waterfall structure, fee levels, alignment of interests through GP commitment, and clawback provisions. A high-performing fund that is poorly structured in terms of value sharing does not meet the standards required for disciplined wealth construction.
Finally, diversification is never accidental—it is engineered. Funds of funds are designed as clear building blocks within a core-satellite allocation framework, with a view to optimising the return/risk profile and improving long-term cash-flow visibility.
Key takeaway: fund-of-funds risks are real, but can be managed through professional expertise, rigorous selection and investor-aligned structuring.
Fund of funds vs feeder fund: what is the difference?
Feeder fund: investing in a single target fund
A feeder fund is an investment vehicle that invests the vast majority of its assets in a single “master” fund. Its purpose is to replicate faithfully the strategy of that target fund, without additional allocation decisions or diversification.
This structure offers a concentrated and transparent exposure to a specific strategy delivered by a clearly identified management company. It is particularly suitable when the aim is to build a tailored allocation around a manager or a thematic focus.
Fund of funds: exposure across multiple underlying funds
By contrast, a fund of funds spreads capital across multiple funds, often managed by different management companies. It seeks to pool sources of performance and reduce idiosyncratic risk.
The fund of funds adds an additional allocation layer, providing diversification, active management and holistic portfolio oversight.
Comparing strategies and diversification levels
- Feeder fund: concentration, “pure play” exposure, dependency on a single manager and a single strategy.
- Fund of funds: diversification, risk pooling, multi-strategy and multi-manager exposure.
The two vehicles are not mutually exclusive; they address different objectives within portfolio construction.
Key takeaway: feeder funds and funds of funds are complementary tools, to be used depending on the desired level of diversification.
Performance and allocation of a private equity fund of funds
Measuring performance: IRR and multiples
The performance of a private equity fund of funds is assessed using the classic private markets metrics:
- IRR (internal rate of return),
- performance multiples (TVPI, DPI).
These indicators must be analysed over the long term, taking into account the pace of capital deployment and distributions.
Allocation across strategies and geographies
A fund of funds may combine several private equity strategies. Some fund-of-funds vehicles are dedicated to a single strategy—for example, buyout—where the objective is to select the best funds currently raising capital in that segment.
Another approach is to diversify strategies within the fund of funds, potentially incorporating Growth, secondary, co-investment, private debt and infrastructure.
This allocation diversifies return drivers and smooths economic cycles, while enabling international exposure aligned with investors’ objectives.
Key takeaway: a fund of funds’ performance is a direct reflection of allocation quality, fund selection and long-term portfolio management.
Funds of funds and diversification with Private Corner
Rigorous selection of private equity funds
Private Corner applies an institutional selection methodology, based on in-depth analysis of management companies, their strategies and their ability to create value consistently over time.
Geographic and sector diversification of the portfolio
Funds of funds are built with a focus on geographic and sector diversification, in order to reduce idiosyncratic risks and strengthen portfolio resilience.
Supporting investors in risk management
Beyond selection, Private Corner supports partners with administrative follow-up, consolidated reporting and continuous educational guidance regarding private assets.
Key takeaway: diversification is central to Private Corner’s approach, serving robust and transparent wealth allocations.
Conclusion – Summary
A private equity fund of funds is a structuring solution for accessing the asset class in a diversified, professional and controlled manner. It addresses the challenges of complexity, risk and access inherent to private markets, while offering attractive long-term performance potential.
When thoughtfully integrated into an overall allocation, it becomes a true pillar of wealth construction.
FAQ – Private equity funds of funds
What is a fund of funds in private equity?
A fund of funds is an investment vehicle that invests in several private equity funds in order to diversify investments, strategies and risks.
What is the difference between a fund of funds and a feeder fund?
A feeder fund invests in a single target fund, whereas a fund of funds allocates capital across multiple funds and management companies.
What are the advantages of a fund of funds?
Diversification, access to institutional funds, risk pooling, professional management and improved portfolio transparency.
What are the risks of a private equity fund of funds?
Illiquidity, fee structuring and potential dilution of gross performance, which can be mitigated through rigorous selection and professional expertise.
Disclaimer: Private Corner is authorised as a portfolio management company on 05/11/2020 by the Autorité des marchés financiers under number GP-20000038. Investment in alternative investment funds (AIFs) entails risks, notably the risk of capital loss and illiquidity. Invested capital is locked up for at least 10 years. Investment in the funds is reserved for professional or informed investors. Past performance is not indicative of future performance and no guarantee is given that objectives will be achieved. All information presented reflects Private Corner’s own opinions and interpretations.
