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The FOF industry is becoming more saturated and competitive than ever before. There is tremendous pressure on small FOFs to reach at least $1B in AUM. As is discussed below, given current industry trends the overwhelming majority of small FOFs appear unlikely to reach anywhere close to $1B in AUM. Consequently, small FOFs are advised to assess their strategic options.

In contrast, FOFs with at least $1B in AUM enjoy economies of scale and demonstrate “staying power,” which allows them to attract sizable investments from institutions and high quality investors that will not invest in most small FOFs. In addition, at that size they can afford the infrastructure and risk controls that are becoming more important to an increasingly sophisticated investor base.

However, even at $1B in AUM there is significant competition for market share as there are a large number of FOFs in that size range competing for investors. Thus, even large FOFs seek to grow larger and lower fees have been used as a means to compete, putting even greater pressure on small FOFs that cannot afford the impact of fee compression.

Challenges Facing Small FOFs There has been tremendous growth in the number of small FOFs. However, most of these small FOFs have been unable to reach a critical mass of AUM. A key reason why most small FOFs are likely to continue struggling to grow is that large FOFs have been attracting a disproportionate amount of assets as compared to small FOFs, regar......................

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