GLOBAL – Rapid growth in the private equity market may spell good news for fund of funds managers, but only those offering distinct strategies will last the duration, according to a report by London-based private equity research firm AltAssets.

As many as 40% of present managers will struggle to survive the current pronounced downturn in fundraising conditions, says the research.

The huge surge in growth in the private equity fund of funds market which has helped the industry grow from 30 specialists in 1990 to around 120 in 2002, is expected to "end with a major shakeout over the next few years" as it "has yet to adjust to the dramatic change in the fundamentals of the broader private equity world," says AltAssets.

It is believed that the industry is well past its peak, and on the cusp of major consolidation – particularly in Europe. The main problem is that only a very small number of fund of funds managers offer a distinct or boldly differentiated investment strategy. Most follow a similar regional approach and behave similarly in the detail of their buy-out and venture strategy.

"A large proportion of fund of funds managers were born in an atypically accommodating period, when the private equity industry was booming and new investors were flooding into the asset class. The world has become a different place over the last few years and the fund of funds industry is now being asked to prove its worth. That is going to be impossible for many
players," said Chris Davison, head of research at AltAssets.

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