Private Equity Fund of Funds

Investments in different debt and equity instruments, usually by investment companies, are known as private-equity (PE) funds. PE funds are usually not accessible to most of the public due to their high entry barriers. However, they are often in the news on account of their superior performance related to other market-indexed instruments, creating strong demand from smaller investors to participate in PE funds. For such investors, the best option available is investing in a Private Equity fund of funds. A PE fund that only invests in other funds is known as a fund of funds. Such funds have lower entry barriers and, on account of their diversified portfolios, a good mix of asset classes and a presence across varied geographies, are able to spread risk around better.

Central Banks And PE Funds

With the setback to the global economy due to the COVID-19 pandemic, central banks have taken up an increasingly pivotal role in affecting a recovery through quantitative easing and monetary stimuli. Private equity is known to be a market that is sensitive to changes in credit supply. Increased and easy credit availability, as in the present scenario, has had two major effects on PE funds:

  1. Enabled PE funds to take on greater risks
  2. Allowed them to push for greater operational improvements in the businesses they back, leading to optimised business models and greater innovation

Each of these two outcomes, in turn, has had a circular effect, resulting in an increased flow of capital into PE funds.

Role of Central Banks In PE Funds Of Funds

Since PE funds of funds invest in other PE funds, they are evidently impacted by transformations in the PE landscape. Flexible monetary policy and quantitative easing being pursued by the central banks of the US and European Union have led to a rush of investor interest in PE funds of funds. As economies take the long road to recovery, investors see the potential for better returns and want a part of the PE action. For central banks, this is a desirable outcome, as their policies are targeted to encourage investors to reallocate capital from savings funds and low-risk assets into high-risk, high-return asset classes such as equities, commodities, and real estate. For PE funds of funds, coping up with this unforeseen demand from investors has Created Unique Challenges.

PE funds of funds deal with large volumes of data. To this end, they rely heavily on centralised databases that help in the evaluation of performances and track records, construction of annual and quarterly financial statements and reports, administration of cash flows, smooth transfer of distribution notices and capital calls. With the increased investor interest in the PE fund of funds market, fund managers are finding it hard to balance all the numerous requirements. A pressing need is felt for a centralised database that can help extract all the relevant information in one go.

PE knowledge Partners And PE Funds Of Funds

Many PE knowledge partners are built on the pillars of technology, research and data expertise. This means that we specialise in seamlessly integrating knowledge gleaned from analytics data, enabled by technology. A team of dedicated PE analysts provides database analysis and management services that allow PE fund of funds managers to not just extract information from centralised databases, but also analyse big data sets and generate quality insights from them.

Conclusion

The current round of quantitative easing and easy monetary policy by central banks is here to stay for the foreseeable future. With easy credit, PE funds of funds are seeing unprecedented interest from investors looking to ride the recovery curve. Access to well-managed centralised databases can empower fund of funds managers to deliver greater operational efficiency and reduce costs. In such a scenario, it would be well worth their time for fund of funds managers to consider partnering with specialised PE database service providers to better serve their investors.

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