Curated service: the value of good advice

To remain relevant in a fast evolving private markets environment, funds of funds need to constantly reinvent themselves.  A fund of funds can serve as a practical on-ramp into private markets, providing access and diversification, but also accelerating investors’ learning curve and ideally making itself redundant over time. But In a landscape where investors face an overwhelming number of options, the value of curated advice comes to the fore once more.

The traditional fund of funds model has had to evolve as many investors have found it difficult to justify the infamous “double layer of fees” for generic portfolios that do little more than track market averages. For most institutional investors, funds of funds can no longer be simply about diversification. Technology improvements have simplified monitoring and reporting for all sides, allowing funds to accommodate a multitude of even relatively small tickets, and investors to automate their portfolio monitoring and reporting themselves. Only for truly subscale tickets, coupled with compliance and regulatory restrictions, such as with retail investors, do aggregator vehicles make sense. The latest iteration of this has led many large GPs to launch dedicated feeder funds for retail clients and spurred the rise of digital platforms that democratise access to top-tier managers.

Tapping into these constraints, major generalist firms have begun leveraging their brand across a multitude of strategies. Investors could ‘diversify’ across strategies without leaving the comfort of one global umbrella brand. If you have been following us for some time, you will know that we have written before in defence of emerging managers, suspecting that “platform” PE firms seek AUM growth over performance.

Amid the proliferation of funds, strategies and managers, there is once more a growing need for expert gatekeepers. Specialist advisers focused on specific corners of the market can help investors navigate this complexity, differentiating themselves through thoughtful curation of opportunities.

In the past, funds of funds often marketed themselves on their ability to access oversubscribed opportunities. Today, aside from a few top-performing and disciplined early-stage venture managers, most GPs can find room for any interested investor. However access remains a key value additive proposition from advisers, not so much in securing a scarce allocation than in selecting the best risk-return combination. Identifying the managers of the future, with replicable strategies and staying power, requires deep understanding and knowledge.

Take, for example, the rapidly growing impact investing space. Beyond the above-mentioned side funds within larger groups, many impact managers are newer entrants, deploying relatively modest amounts of capital, commensurate with a nascent but growing investment opportunity.

An important part of advisers’ role is also to aggregate and standardise disparate data to create meaningful, comparable metrics for clients. In doing so, they help shape best practices, promote transparency and drive competition - all of which ultimately lead to better outcomes for investors. In doing so, the risk is once again to “do themselves out of a job” - until the next emerging opportunity calls for their expertise and targeted curation again.