Full Definition
A fund of funds (FoF) is an investment strategy where a fund invests its capital into multiple underlying venture capital or private equity funds rather than directly into startups. Fund of funds provide diversification and access to top-tier VC funds that might otherwise be difficult to access.
How Fund of Funds Work
- FoF managers select and invest in multiple VC/PE funds
- This provides exposure to hundreds of portfolio companies across funds
- FoF charge an additional layer of fees (typically 0.5-1% management fee + 5-10% carry)
- Returns are net of both FoF fees and underlying fund fees
Benefits
- Diversification across managers, stages, sectors, and geographies
- Access to oversubscribed, hard-to-enter top funds
- Professional fund selection and due diligence
- Suitable for LPs with smaller allocations to VC
Real-World Example
A $200M fund of funds allocates $10-20M each to 15 top-tier VC funds, gaining indirect exposure to 500+ portfolio companies.
Related Terms
An investor who contributes capital to a venture fund but does not participate in day-to-day management.
A form of private equity financing provided by firms to startups with high growth potential.
The managing partner(s) of a venture fund who make investment decisions and manage the portfolio.
The share of investment profits (typically 20%) that fund managers receive as performance compensation.
Investment firms that acquire stakes in or buy out mature companies to improve operations and resell at a profit.
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