Fund of Funds Mechanism

A fund of funds is an investment vehicle that places capital in other investment funds rather than directly in individual enterprises. These underlying funds, managed by specialist fund managers, select and finance enterprises according to agreed investment mandates.

How capital is channelled

The mechanism creates a layered flow of capital from the sponsor to enterprises through professionally managed intermediary funds.

• The sponsor commits capital to the fund of funds, whose manager evaluates and selects suitable underlying funds.
• The fund of funds acquires units or partnership interests in selected funds instead of acquiring securities of individual enterprises.
• Underlying fund managers conduct due diligence and make equity or debt investments in enterprises within their sector, stage or geographical mandate.
• Investment proceeds return first to the underlying fund and are then distributed to the fund of funds according to contractual terms, after applicable fees and expenses.

Why the intermediary structure is used

The structure delegates enterprise-level investment decisions to specialist managers while allowing the sponsor to influence broad priorities through fund-selection criteria and investment mandates.

• It spreads capital across several funds and enterprises, providing portfolio diversification compared with selecting a few enterprises directly.
• It can reach specialised areas such as early-stage or technology-intensive ventures where sector knowledge and active portfolio support are important.
• A public or institutional commitment can attract additional investors into underlying funds, increasing the pool available for enterprise financing.

Governance requirements and limitations

Because capital passes through two management layers, effective manager selection and monitoring are central to the mechanism.

• Investment mandates, reporting requirements, conflict-of-interest rules and performance review help align underlying managers with the fund's objectives.
• Multiple layers may increase fees, delay deployment and weaken the sponsor's control over individual investment choices.
• Diversification reduces concentration risk but does not remove technology, market or business failure risk.