Private-equity investments can be enticing, but also complicated. It can be expensive for institutional investors, endowments, and pension funds to find and monitor private-equity investments—which can then be illiquid and difficult to scale.
A private-equity fund of funds, which holds a portfolio of other funds, potentially provides diversification and economies of scale, as well as specialized investment services. But are the advantages worth an extra layer of fees? Private-equity FOFs typically charge investors an annual fee of around 1 percent, and management gets 5 percent of all gains. That’s on top of the standard “2-and-20”—2 percent of total asset value and 20 percent of any additional profits—usually charged by each of the private-equity firms in which FOFs invest. Research by University of Virginia’s Robert S. Harris, University of Oxford’s Tim Jenkinson, Chicago Booth’s Steve Kaplan, and Rüdiger Stucke of private-equity firm Warburg Pincus suggests that one type of private-equity FOF has been able to overcome that fee hurdle.
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