Fund of Funds
Private Equity glossary · Advanced LBO Modeling Mechanics & Deal Structuring
Definition
A fund whose strategy is to invest in other PE funds rather than directly in portfolio companies, providing smaller LPs with diversified PE access (across vintages, strategies, geographies) without the resources to build a direct primary program. Trade-off: fee-on-fee drag — the fund-of-funds layer adds 50-100 bps of management fee plus 5-10% carry on top of underlying-fund economics, typically resulting in 200-300 bps lower net IRR than direct primary access. Fund-of-funds interests trade at 15-25% discount to NAV in the secondary market reflecting this fee drag.
Fund of Funds in plain English
Most private equity funds buy companies directly. A 'fund of funds' does something one level up: instead of buying companies, it spreads your money across a bunch of OTHER private equity funds. This is handy for a smaller investor who wants broad exposure — many managers, many strategies, many years — but doesn't have the staff to research and pick individual funds themselves. The catch is you pay two sets of fees stacked on top of each other ('fee-on-fee'): the underlying funds take their cut, then the fund-of-funds manager takes another slice — often dragging your final return down by roughly 2 to 3 percentage points a year. It's like ordering a meal-kit box of smaller meal-kit boxes — convenient and diversified, but you're paying two delivery fees, so the real value you keep is noticeably thinner.
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