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FoFs shakeout on the horizon

A major shakeout in the fund-of-funds market is set to end the period of rapid growth in this sector, according to research from AltAssets. The report predicts as many as 40 per cent of present managers will struggle to survive the current pronounced downturn in fund raising conditions.

The fund-of-funds market has grown from less than 30 specialist managers in 1990 to around 120 in 2002. According to AltAssets the market was flooded in 2002 by over half of the present fund-of-funds population looking to raise new capital. But their relative lack of success has given a clear signal that the industry is now well past its peak and on the cusp of a major consolidation, says the report, which is based on the activities of 120 international fund-of-funds managers. Europe stood out as particularly vulnerable.

Chris Davison, head of research at AltAssets, said: “A large proportion of fund-of-funds managers were born in an atypically accommodating period, when the private equity industry was booming and new investors were flooding into the asset class. The world has become a different place over the last few years and the fund-of-funds industry is now being asked to prove its worth. That is going to be impossible for many players,” he says.

Among other findings the report said there is only a small number of fund-of-funds managers with a distinct or boldly differentiated investment strategy, with most following a very similar regional or stage approach. They are also very alike in the detail of their buyout and venture strategy.

The report explores the type of business models that will be sustainable in present market conditions and explains what type of firms will be able to endure the harsher investment climate and the dramatic change in the fundamentals of the industry.