Key takeaways
LPs now compete with GPs. The largest allocators build internal teams, set terms, and access deals directly.
Fund-of-funds serve a narrower role. Emerging managers still depend on intermediated capital to reach institutional audiences.
Co-investment is a baseline, not a bonus. At major institutions, co-investment access is a condition of commitment, not a negotiated term.
Two audiences, two conversations. Direct-investing LPs and intermediated capital require different positioning and different materials.
When the intermediary becomes redundant
Somewhere between the financial crisis and the last fundraising cycle, a quiet reclassification happened. The pensions, endowments, and sovereign wealth funds that once wrote checks to fund-of-funds managers started hiring their deal teams instead. The intermediary didn't get disrupted, it got absorbed.
Fund-of-funds were built on a genuine structural advantage: they knew private markets in ways their clients didn't. They had the manager relationships, the due diligence infrastructure, the ability to construct a diversified program across geographies and strategies. For institutions running lean investment offices, that expertise carried a fee premium most boards were willing to absorb.
What changed was the institutional investor. The largest allocators spent two decades building exactly the capabilities that fund-of-funds had. By the time fee compression made the headlines, the capability argument was already settled.
Fund-of-funds solved a real problem until institutions solved it themselves
The Yale endowment model reinforced this logic. David Swensen's framework rested on the premise that illiquid alternatives managed by specialist external teams offered return advantages unavailable through conventional portfolios, and that the LP's role was manager selection, not execution. That framing held for most institutions because they lacked the teams to do anything else.
Canada's largest pension funds drew a different conclusion. Rather than outsourcing manager selection, CPPIB and Ontario Teachers' spent two decades building internal investment teams staffed by professionals recruited directly from GPs. They wanted people with underwriting and portfolio management experience, not just selection and monitoring capability.
CPPIB closed fiscal 2025 with C$714 billion in net assets, with private equity among its largest allocations and private credit expanding alongside it. Ontario Teachers' ended 2025 with C$279 billion in net assets, managing approximately 75% of assets internally across private equity, infrastructure, credit, and real assets.
Neither institution needs a fund-of-funds to access private markets. They are private markets.
The consolidation that changed who GPs are actually raising from
This capability build happened at scale. BCG's 2024 Global Principal Investors Report estimates that sovereign wealth funds and public pension funds together manage $36 trillion in AUM, with private markets allocations growing at roughly 10% annually over the prior decade. BCG estimates these institutions now account for about 70% of private AUM globally.
By BCG's estimate, a significant share of allocatable private capital is controlled by institutions that no longer require an intermediary to deploy it. The hedge fund-of-funds category tracked the same trajectory earlier.
Large allocators migrated toward separately managed accounts, direct allocations, and managed account platforms that gave them fee transparency, look-through, and portfolio control that commingled structures couldn't replicate. The PE fund-of-funds decline followed as institutions built comparable internal capability across private asset classes.
Capital concentration cuts both ways
The consolidation of capital in fewer, more capable institutions creates a structural constraint that receives less attention than the fee and access arguments. The largest direct-investing allocators increasingly set terms in LP negotiations on co-investment, reporting, and fee structures. But their scale also creates genuine execution constraints.
Not every fund can accommodate a $300m or $500m minimum check, offer co-investment on every deal, or absorb the governance overhead that comes with a major institution as an anchor LP. This is partly why the intermediated market hasn't collapsed so much as sorted.
The institutions that can't or won't build full internal programs still rely on fund-of-funds for access, diversification, and manager selection. That's a different, and smaller, addressable market than existed 20 years ago, but it's a real one.
What institutions gained, and what the performance record actually shows
Internalization delivered real advantages, particularly for institutions that committed to it fully. Direct control over portfolio construction, no second fee layer, better visibility into underlying exposures, and the ability to hold assets beyond a fund's contractual life rather than selling into secondary markets at the GP's convenience.
The performance evidence, however, is more qualified than the institutional narrative suggests. Academic research using two decades of data from seven large institutions found that:
Solo direct investments (transactions originated and executed entirely by the LP) outperformed both co-investments and traditional fund benchmarks.
Co-investments underperformed the funds alongside which they were made. The paper attributes this to adverse selection: GPs tended to offer larger, more complex transactions as co-investment opportunities.
The performance advantage of solo deals was strongest where informational problems were limited, with more proximate transactions, later-stage deals, strategies where the LP had genuine expertise.
This is a 2013 paper with a dataset pre-dating the current co-investment expansion, and more recent evidence suggests the gap has narrowed as institutions have scaled dedicated co-investment teams. But the underlying dynamic of GPs controlling which deals get offered as co-investments hasn't changed on a structural level.
The organizational cost that rarely makes the case study
Building and sustaining a direct investment program is not simply a question of hiring. It requires compensation structures competitive enough to retain deal talent against GP carry economics, governance frameworks that can move at investment speed, and a board that understands why the internal team just passed on three deals in a row.
Several large institutions that built ambitious direct programs have experienced meaningful talent attrition when internal compensation couldn't keep pace with carry structures at the GPs they used to write checks to. The Canadian funds navigated this more successfully than most, partly because they built governance and compensation structures before the talent market for this capability became fully competitive.
Where fund-of-funds still earn their allocation
Fund-of-funds aren't a category in structural decline across the board. They're a category serving a more defined segment of the market than existed ten years ago.
Three contexts where they still perform a genuine function:
Smaller institutions: endowments, family offices, and smaller corporate pension plans that want private markets exposure without the governance complexity and cost of building internal teams across multiple strategies and geographies.
Niche and emerging market strategies: early-stage credit, certain Asia-Pacific PE, and specialist sectors outside the coverage of most internal investment teams where information asymmetry between a dedicated intermediary and a generalist internal team remains real.
Vintage year diversification: institutional investors managing complex liability profiles who need programmatic diversification across managers, vintages, and strategies simultaneously, where a fund-of-funds remains the most efficient vehicle.
The emerging manager channel that large LPs can’t fill
The most consequential remaining role for fund-of-funds is as a capital channel for emerging and first-time managers. The largest direct-investing institutions almost universally require multi-fund track records, demonstrated performance, and a team stability that rules out managers on funds one through three.
For managers at that stage, the fundraising challenge isn't only track record, it's demonstrating the operational and presentational readiness that institutional-grade LPs expect before committing capital. That preparation has its own framework.
Fund-of-funds remain one of the few institutional-grade channels willing to commit to a manager before that track record is fully established, which, in the current fundraising environment, makes them the most accessible institutional on-ramp available to many emerging GPs.
What this means for GPs raising capital today
The largest allocators (those with full internal investment teams) evaluate fund managers the way GPs evaluate companies: with proprietary benchmarks, internal due diligence processes, and a clear thesis about what differentiated exposure they're paying an external manager to provide. They are not looking for access to private markets. They already have it.
What they're evaluating is whether a specific manager offers return, strategy, or sector access that their internal program can't replicate efficiently. That's a narrower brief, and it demands more precise positioning.
Co-investment has become structural, not optional
Co-investment rights have moved from relationship enhancement to a standard term expectation at the institutional level. Capital committed through co-investments hit a record $33.2 billion in 2024, even as deal count fell. This reflects LP appetite for larger transactions and GP reliance on co-investment capital to execute them. 82% of PE firms now offer some form of co-investment, up from 75% in 2020.
How materials are structured, how risk is framed, how the fund thesis is sequenced for an audience that already holds a view. These are the signals that precede the co-investment conversation and, increasingly, determine whether it happens at all.
At a growing number of institutions, co-investment access is a condition of commitment, not a term subject to negotiation. GPs who can't offer it aren't at a disadvantage in those conversations — they're absent from them.
The materials problem that most GPs underestimate
A fund manager presenting to an institutional investment committee with an internal PE team is not presenting to a room that lacks information or context. The committee often knows the competitive set as well as the manager does.
Generic market narratives, standard LP deck formats built for less internally capable allocators, and positioning that relies on broad market framing rather than fund-specific differentiation are increasingly inadequate in that setting.
The shift in who sits on the other side of the fundraise has raised what "investor-ready" actually means. But positioning determines whether a manager gets evaluated at all.
Bottom line
What does the fund-of-funds decline mean for the next fundraise?
The LP base has bifurcated. At one end, large direct-investing institutions that underwrite funds the way GPs underwrite companies: with internal benchmarks, proprietary views, and the ability to access comparable exposure without a fund commitment. At the other, smaller institutions, family offices, and intermediated capital that still rely on manager selection rather than direct analysis.
The fund thesis doesn't change between those two conversations. The framing, the evidence, and the assumed starting point do. Investor materials built for one audience tend to create friction with the other, not because the underlying case is weak, but because the presentation misjudges the reader. Getting that right is the part of fundraising preparation that tends to get addressed last.
The practical implications of that calibration across LP segmentation, materials, and positioning are examined in this guide to private equity fundraising strategy.
Collateral Partners helps fund managers to translate investment strategy into investor-ready materials calibrated for the audience that's actually across the table.
