Fund Information. Fund of Funds Investment Detail.
This article from the Fund Information section contains the brief information about Funds of Funds that hold multiple fund interests in Portfolio Assets.
Purpose
Funds of Funds (“FoFs”) invest as Limited Partners (LPs) into funds managed
by other fund managers. FoFs hold multiple fund interests (“Portfolio Funds”) with potentially hundreds or even thousands of underlying investments in Portfolio Assets. This impacts their reporting in different ways:
- Due to the nature of FoF investing, the primary investment asset is – in contrast to primary or direct Private Equity funds – not a Portfolio Asset, but a Portfolio Fund. Several of the metrics for monitoring Portfolio Fund investments differ from those applied to Portfolio Assets as noted below.
- The reporting timeline for a FoF naturally lags 30 to 45 days behind the average reporting timeline of its underlying Portfolio Funds (which in reality usually means 90 to 120 days after quarter end). In practice FoFs sometimes offer their investors accelerated (“cash-adjusted” or “roll-forward” – see Glossary for definition) simplified valuations in orderto speed up their reporting cycles. Investors should be familiar with the assumptions of a cash-adjusted/roll-forward valuation method and assess whether it meets their needs (e.g. trade-off accuracy versus speed of reporting).
- FoFs often have to agree to NDAs with their underlying fund managers placing limits on the disclosure of information on the Portfolio Companies their Portfolio Funds have invested in. Given this limited degree of transparency, the FoF may not be able to report on all disclosures regarding Portfolio Assets to the extent that a primary or direct Private Equity Fund would report. Thus FoF reporting on underlying Portfolio Assets will be limited and/or will be based on aggregated figures or on a no-name basis to comply with such legal requirements.
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Basic information
Requirements
- A meaningful aggregate exposure analysis covering all Portfolio Funds. Disclosures may differ by investment strategy and focus of the FoF and should be determined between the Fund Manager and its LPs but typically should include some or all of the following:
– Exposure diversification by geography or region (based on NAV and/or Cost);
– Exposure diversification by currency (based on NAV and/or Cost);
– Exposure diversification by vintage year/year of investment (based on NAV and/or Cost);
– For multi-strategy funds: Exposure diversification by strategy (based on NAV and/or Cost);
– Top five exposures (based on NAV and/or Commitment and/or Fund Managers);
– Drawdowns/Distributions over a materiality threshold to the FoF with an explanation of the activity driver.
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Additional Possible Disclosures
- Comparison of Gross and/or Net IRRs to market/top quartile/ other meaningful benchmarks.
Fund’s Investment
A FoF will typically report its investments on two levels: first on the Portfolio Fund level and second on the (look-through) Portfolio Asset level.
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Portfolio Fund Level
FoFs should disclose the following information for each individual Portfolio Fund:
Requirements
- Portfolio Fund name;
- Vintage year of the Portfolio Fund;
- Geographic focus of the Portfolio Fund;
- Strategy of the Portfolio Fund;
- Amount Committed/Total committed capital of the Portfolio Fund;
- Total amounts drawn down/contributions/Invested Capital of the Portfolio Fund;
- Total amounts distributed;
- Remaining unfunded commitment to the Portfolio Fund;
- Net Asset Value of the Portfolio Fund;
- Net IRR of the Portfolio Fund;
- TVPI of the Portfolio Fund;
- Split between primary and secondary investments (if applicable).
Additional possible disclosures
- TV of the Portfolio Fund (NAV + Total Distributed);
- DPI of the Portfolio Fund;
- Gross multiple of cost of the Portfolio Fund;
- Gross IRR of the Portfolio Fund;
- Exposure to individual Funds/managers (e.g. NAV plus uncalled commitments);
- Split of total amounts distributed between recallable and non-recallable;
- Split of remaining unfunded commitment between original unfunded and recallable;
- For FoFs with significant foreign exchange exposure it might be beneficial to show the key performance indicators of the Portfolio Funds both in local currency of the Portfolio Fund and in reporting currency of the FoF;
- Actual or estimated management fees of underlying Portfolio Funds (if available).
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Portfolio Asset Level (look through reporting)
FoFs should disclose the following aggregated information for all Portfolio Assets held indirectly through their Portfolio Funds:
Requirements
- Portfolio Asset diversification by industry (based on NAV and/or Cost)
- Portfolio Asset diversification by geography or region (based on NAV and/or Cost)
- Portfolio Asset diversification by currency (based on NAV and/or Cost)
- Portfolio Asset diversification by vintage year/year of investment (based on NAV and/or Cost)
- Portfolio Asset diversification by strategy (based on NAV and/or Cost)
Additional possible disclosures
- Largest Portfolio Assets by NAV (if allowed by NDA);
- Largest additions/realisations in the underlying Portfolio Assets;
- Portfolio Assets at/above/below cost (aggregated based on total number and/or NAV and/or Invested Cost).
Trading and Financial Overview
Other than the metrics above, FoFs typically do not disclose financials of underlying Portfolio Funds nor Portfolio Assets.
Recommendations & Factors That The Fundraising Team Should Consider
Recommendations according to factors that the fundraising team should consider and address during its initial planning. Doing so will help to ensure that the GP will be able to keep its promises to investors and operate the fund with due skill, care and diligence.
Valuation
Requirements
Given the limited degree of transparency into the underlying portfolio companies held within the Portfolio Funds in which the FoF holds an interest, the FoF is usually inadequately positioned to comment upon the valuation basis of the underlying Portfolio Assets in their Portfolio Funds. However, the FoF should disclose the following:
- Whether a Portfolio Fund valuation is valued at reported NAV or at “cash-adjusted” or “roll-forward” NAV, and
- Valuation standards/guidance applied by the managers of the underlying portfolio funds, e.g. US GAAP, IFRS, IPEV.
Additional possible disclosures
- Whether the FoF manager has made its own adjustments to the reported NAV of a Portfolio Fund and an explanatory narrative;
- The date of the reported Portfolio Fund NAV if not the Fund of Fund’s reporting date.
