Fund of funds (FOF)

Venture capital funds can follow two investment approaches:

• Direct investment consists in investing directly in start-ups.
• Indirect investment involves investing in funds that invest in start-ups. A FOF follows an indirect investment approach.

The main advantage of a FOF compared with investing directly in companies is diversification. Indeed, a FOF will usually own a much smaller, indirect stake in a longer list of companies, thus reducing investment risk.

A FOF earns a return by receiving a portion of the profits generated by each of the funds in which it has invested.

Another important advantage of a FOF is the ability to access the expertise of a number of skilled fund managers. Essentially, investing in a FOF means engaging two tiers of professional expertise for investment strategy and allocation: the investment professional that will conduct research on other managers, and the fund managers that will allocate the final investment dollars.

Another reason for investing in a FOF may be to support the broader venture capital ecosystem. This is particularly relevant for institutions like BDC, which play a crucial role in fostering innovation and nurturing the start-up landscape.