Advantages and disadvantages analysis of private placement FOF The first advantage is that it lowers the threshold for participating in private placement investment and brings opportunities for obtaining high returns.
The second is to obtain the professional services of fund managers, including the knowledge of FOF managers in selecting sub-funds and the professional knowledge of a certain investment business field owned by sub-fund managers.
The third is to enrich investors' means of asset allocation. In addition, private placement FOF has also solved the financing difficulties of some fund managers. Through private equity FOF, managers can break through the restrictions on the number of relevant private equity fundraisers.
Disadvantages Although the use of private equity FOF provides many possibilities for investors, there are still many obstacles to realize investors' good intentions.
The first is the problem of multiple management fees. Private equity investment funds themselves have higher management fees, and the structure of FOF makes investors need to spend an extra layer of fees. Double management fees further dilute the income level of investors, and it is difficult for investors to obtain higher income by participating in private equity investment.
The second is the dual agency problem. The relationship between investors and managers is essentially a principal-agent relationship. Compared with the single-layer principal-agent problem of private equity direct investment funds, FOF investors are faced with the dual principal-agent relationship between investors and managers, which will increase the conflict between investors' goals and managers' goals, and at the same time, the multi-layer relationship will aggravate the opacity of investment decisions.
The third is the problem of adverse selection. In the private equity investment market, excellent managers often have direct contact with fund providers. The knowledge level of fund providers, investment experience and the degree of recognition of managers' investment views will all be important considerations for managers to accept customers. Managers prefer to deal with high-quality customers, because high-quality customers can continue to support investors' decisions when the performance of the management company declines, and the probability of recovering investment is lower when the market environment is bad. The source of funds raised through FOF is usually unstable, so the source of FOF funds will not be the first choice for excellent managers. In 2006, Sequoia Capital publicly stated that it no longer regarded FOF as its investor.