In the second part of sister publication Private Equity International’s interview with Michael Granoff, the chief executive of Pomona Capital discusses the importance of primary investing to being a secondaries buyer, and the launch of its retail investor-focused vehicle.
In addition to buying fund stakes, Pomona has made primary investments in private equity funds almost since inception.
The firm continues to invest several hundred million dollars a year on the primary side, mainly from separately managed accounts. Granoff describes this as an important benefit to Pomona’s secondaries business, as it allows the firm to forge and maintain bonds with general partners and helps it analyse underlying portfolio companies.
“We want GPs to tell us what is going on in the funds, we want them to agree to transfer to us and they certainly have no obligation to do any of those things,” he says. “The multi-dimensional relationship that we can create with them is a huge strategic edge in our business.”
In fact, in the past year, Pomona has benefited from such a connection. A GP objected to a potential buyer and instead directed the seller to Pomona.
Forging affinities with GPs is crucial at a time when information in the secondaries market has become scarcer. It’s not uncommon for LPs to put fund stakes up on the block, but only name the vehicles and disclose the net asset value they hold, without divulging details of the underlying investments.
“If you don’t have the information, you effectively can’t be a buyer,” Granoff says. “In some ways the barriers to entry to our market are rising because if you don’t have that information, you can’t compete.”
In addition to keeping in constant contact with both LPs and GPs, private equity firms are also recognising the need to reach out to retail investors as a new but growing source of capital.
To that end, Pomona launched a secondaries fund targeting retail investors in May 2015.
The Pomona Investment Fund is a vehicle registered with the Securities and Exchange Commission, into which individuals can commit a minimum of $25,000. The goal is to give accredited investors access to private equity-like returns.
The retail fund mainly makes secondaries investments, with some of its largest stakes in funds like Bain Capital Fund X, Insight Venture Partners VIII and Advent International GPE VIII. Other investments include Clayton, Dubilier & Rice Fund VIII, GSO Capital Opportunities Overseas Fund and TPG Opportunities Partners III, according to an SEC filing from June.
The vehicle represents an important step toward the inclusion of the alternative asset class in defined contribution (DC) plans and US retirement 401(k) plans.
“It’s an evolutionary process,” Granoff said. “It’s very hard for private equity to fit into a 401(k) structure because you need to provide daily liquidity, for example. So we’re somewhere along that path and we have kind of a hybrid product that can provide a different structure with more liquidity than institutional private equity funds, but not the same as what’s in your 401(k). We’re not quite there yet, but we are making significant strides.”
The vehicle already has a lot of the components that could make it easier ultimately to include private equity in DC plans. The fact it focuses on secondaries brings greater diversification and more mature portfolios than primary funds would. It also has a periodic redemption system that allows investors to redeem on a regular basis, albeit not yet daily.
Granoff envisions that ultimately private equity could fit into retirement plans via target-date funds, where the mix of liquid assets would provide daily liquidity, while private equity assets would provide above-average returns to investors.
“We’re interested in having a registered product that individuals can invest in because it’s a very large growing pool of capital that ultimately will be a big source of capital for private equity, if private equity can figure it out,” Granoff says. “We want to be on the leading edge of it. Maybe this will be the cherry on the cake, maybe it will be the icing on the cake, or maybe it will become the cake. We will see over time.”
Click here to read the first half of the interview.