LPs of Choice: Fund of Funds

Some large, really large institutional investors (like pension funds and endowments) invest in venture capital funds using an indirect investment approach. They pick an intermediary — a fund of funds (FoF) — as opposed to investing in venture funds directly. The FoF model was established to meet the asset allocation and diversification demands of larger financial institutions. To institutional investors, a fund of funds offers the following advantages: efficiency, access, diversification, and cost structure. This chapter looks at several FoF, each focused on venture capital funds, yet their investment strategy differs based on focus, geography, capital under management, and value provided to their fund portfolio. In comparing all limited partner (LP) types, the fund-of-funds model stands apart from classical institutional LPs such as endowments/pension funds because they bring a much higher level of insights, context, and intellectual rigor to the business.