How's it going, everyone? Today, I want to answer this crucial question for all fund managers out there: What is a Fund of Funds?
Check out this video of me walking through this topic in more detail
The Basics
Let's start with an example...
In a basic real estate fund model, there is the GP (manager) entity and the LP (fund) entity.
Let's say the fund buys 3 real estate properties with the $100M they've raised.
Now, let's add another entity to the picture.
This is an outside entity called a "fund of funds (FoF)."
When the capital is raised for that FoF, all of the money goes into the initial LP entity.
What're the Investor's Options?
So, as an outside investor, you 2 options...
You can the opportunity to place your money in the main fund - to be managed and to gain returns...
Or, you could place your money into the fund of funds entity that will be indirectly invested in the main fund.
Why would you decide for the fund of funds instead of the main fund? It'd be less complicated, wouldn't it?
Well, that fund of funds could diversify and not only invest in that one real estate fund. It could diversify and invest in a VC fund, a PE fund, and more!
More Advantages
Additionally, the fund of funds could negotiate fees...
Because the FoF usually comes in as a whole unit with substantially more money than the other LPs, they can leverage that to negotiate lower fees or better terms.
The FoF fund manager could say to the real estate operator, "because we are bringing so much money into your deal, precisely 40%, we only want to pay a 1% acquisition fee instead of 2%...
...this way, we pay less fees and my investors make more money! Deal?"
I want to tell you one more advantage to investing in a FoF...
In normal funds, the minimum investment is usually very high, but a lot of "fund of funds" fund managers will lower the minimum investment amount, thus making it more accessible for more people.
Conclusion
So, what is a fund of funds?
It is an investment vehicle that leverages its unique position to invest in multiple funds with diversification, lower fees, and a lower buy-in.
Check out this video of me walking through this topic in more detail
If you want to see more content like this, visit the Fund Launch Blog!
Or, visit Fund Launch if you're ready to start or scale your own fund of funds!
Thanks for stopping by,
Bridger Pennington
Want to get direct guidance for your fund? Schedule a time with my Fund Advisors!
DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the author
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