The term private equity refers to an equity investment in non-listed companies. Regularly, this investment is not direct but through private equity funds. These identify companies, carry the interests of their investors, and manage the eventual sale of the participations.
The primary focus of private equity funds is a medium to long-term growth of the value of their investments, as returns to their investors usually materialize only upon exit of their shareholdings. Normally, portfolio companies do not distribute profits, as free cash flows are used for debt repayments and strategic investments.
A private equity fund of funds is an investment vehicle that invests in several private equity funds. This structure enables investors to indirectly participate in large number of companies. As a result, this diversification reduces investment risks. Fund of funds managers with superior expertise might be able to perform a better selection of private equity funds which would lead to higher returns.