Fund of Funds, Secondaries, Co-Investments

GoBuyside facilitates investment level hiring at many of the most well-known fund of funds, secondaries and co-investment platforms across the world. Our placement experience suggests that the world of Fund of Funds, Secondaries and Co-Investments can be opaque to candidates looking to start an investment career. This lack of transparency often leads to missed opportunities as these asset classes provide unparalleled long-term career paths and are better fits than traditional private equity, credit or hedge fund positions for certain types of professionals. Let’s start with a high-level definition of what these investment strategies entail.

Fund of Funds (Primaries)
This strategy involves investing in fund managers. Rather than conducting due diligence on companies, you diligence the investment firms that invest in these companies to decide whether you want to allocate capital to their strategy. A fund of funds investment firm could focus on hedge funds or private equity or hypothetically any space in which they wish to execute their strategy.

Like any investment strategy, the goal is to create value through your investment process so capital is retained and ideally grown year over year. A successful fund of funds investment strategy will net of fees lead to higher returns for investors. There is also a diversification benefit – think of a small endowment that wants access to private equity returns without taking the idiosyncratic risk of investing directly in one or two private equity firms. A fund of funds can provide that endowment with diversified access to the private equity market alongside what they would market as higher returns from their due diligence process. Lastly, do not forget investing is a business! A scaled fund of funds investment platform has institutional credibility and pricing power which can create value in the form of access to higher quality managers and better fee economics with those fund managers.

Secondaries
This strategy involves making a secondary investment in an investment fund. Meaning, a fund is raised and partially or fully deployed (companies have received equity investment) and you look to invest in these funds and their current ownership interests.

Liquidity is naturally the key value driver of a secondaries investment strategy. Investors may look for liquidity for various reasons including but not limited to managing their investment performance, achieving compliance with new regulation and/or executing upon a shift within their own investment strategies. Secondaries is more quantitative from a workflow perspective relative to fund of funds. When you value a fund, it requires a bottoms-up valuation of each private company within that fund and a financial analysis of a capitalization table. The modeling is thus more intricate than what is required in a fund of funds role which some candidates may prefer.

Co-Investment
This strategy involves investing alongside a private equity fund in a deal. You invest directly in the company as a minority investor and at terms outside of the standard GP-LP partnership agreement.

Co-Investing is symbiotic. LPs get more oversight and control on their capital while typically paying less fees. Fund managers are able to access capital without falling out of compliance of any asset diversification clauses in their partnership agreements. For example, a partnership agreement for a $1B fund may limit fund investments to $200M. An amazing platform investment opportunity may come around that will require $400M in capital. Even with financing, the sponsor may still need additional capital to close the deal and a co-investment can provide efficient access to this capital (market forces will determine the terms of the co-investment but the fees are typically discernably less than what would be paid to be a LP in the fund and management fees are often waived).

Co-investing can be a highly interesting role. For starters, if you are spending time conducting due diligence and assessing co-investment opportunities, you are essentially developing pattern recognition on deals that have a high probability of going through (with or without your co-investment). You are in a position to think through investment theses and analyze transactions with a big picture lens while also maintaining autonomy on the analytical workflow you conduct to help support your decisions. You could make a decent argument at the junior level, that co-investing is like private equity with less grunt work (scrubbing data, managing data rooms, etc.) given you can leverage a lot of the diligence already done by the GP prior to seeking a co-investment.

Investment Role Structures
There are a couple ways clients structure their investment roles:

• Some platforms marry all three strategies into one role so a professional could be staffed on fund of funds, secondaries or co-investment deals throughout the year. Others separate their strategies so team members focus on one strategy within the platform.
• Some platforms focus on certain fund sizes or industries and build out teams catered to serving those niche verticals while others focus on having a broader mandate. For example, you could have a Fund of Funds strategy exclusively dedicated to the private equity middle market.

Keep in mind there are synergies across all these investment strategies as everything ties back to the Platform-GP relationship. If a platform has strong relationships within the GP universe, it can leverage this into success via a fund of funds, secondaries and co-investment strategy as whatever a fund manager is looking for can be provided. GPs also benefit as they can work with one platform to raise capital for their funds, receive liquidity for their existing funds and to co-invest on deals outside of their current fund partnership agreements. Note fund managers can use co-investments to lower the all-in fees paid (assuming the co-investor also provided capital for the fund) and build a preferred relationship over time which could make it easier to access capital during fundraising.

Closing Thoughts
A common concern candidates have when considering a role in Fund of Funds, Secondaries or Co-Investments centers around the social stigma of not doing direct investing or private equity. When asked to articulate these concerns in greater detail, it is apparent that most candidates have a limited understanding of the space and are largely influenced by unfounded misperceptions of their exit opportunities, day to day roles and compensation.

We are always happy to discuss the nuances with candidates but never forget that investing has always been an apprenticeship business. Your time is your most valuable asset as you are working towards developing a skill that allows you to extract a growing amount of economics rents. Fund of funds, Secondaries and Co-investment platforms provide a environment for you to learn a replicable investment process within a structured and analytical environment. The asset class provides many things that a traditional private equity, credit or hedge fund path does not. Depending on the platform, candidates looking for a big-picture investment experience, qualitative learning and greater work/life balance earlier in their career (relative to private equity or hedge funds) should consider pursuing a career in the space.