Congratulations on Fund IX’s close. How do you plan to deploy the vehicle?
The Fund is actually already over 30 percent committed. We’ve done 19 deals from the fund and own interests in 160 underlying funds and over 900 portfolio companies. We were able to buy the assets at an average discount of about 18 percent, which is pretty good considering the market average is about 3 percent.
The goal is to buy higher than market-quality assets at a lower than market price. Obviously that’s easier said than done, so we’re only able to buy a tiny fraction of the dealflow that we see, and that’s typically around 1 to 3 percent.
When you were fundraising, what was the most common question you had from your LPs about the fund or the secondaries market in general?
Our data suggests that you don’t get rewarded for moving further out on the risk curve.
This was our ninth fund, so I’ve done this nine times. Every time you do it, it’s somewhat different. The market environment is different and people’s perception of private equity and the secondaries market is different as well. Folks were concerned about whether you could buy high quality assets at a good price because they see articles about assets going for premiums, discounts shrinking and supply and demand. People also read a lot about how much money is being raised, but they may not see the supply side – just the demand side.
Are you involved in new deal types such as single-asset fund restructurings, fundless sponsor restructurings or launching new products?
We are looking at all of those kinds of deals, but we are not launching new products around those types of investments. We do have the Pomona Investment Fund that is an Securities and Exchange Commission-registered fund that individuals seeking secondaries exposure can access. While we have reviewed many types of the transactions you mentioned, most of them do not fit our risk/reward criteria. In general, having been doing this for quite a long time, our data suggests that you don’t get rewarded for moving further out on the risk curve.
If you looked at the GP restructuring area for example – and that area is evolving – we believe that very few good funds ever need to be restructured. If you start from that premise, then you have to say, “Well, if the best I have are mediocre assets managed by a mediocre manager that I actually have to pay a high price for because I’ve got to convince the existing LPs to sell” – you’re going to have a hard job convincing our investment team that that’s a good thing to do with our investors’ money.
If GP restructurings begin to become a tool that everybody uses then that will create interesting opportunities for us. But today, it’s the exception, not the rule.
And on preferred equity for example, are you offering products in that space?
No, it’s not something we’ve done.
What does Pomona Capital look like in five years’ or 10 years’ time?
We want to make sure that we use the asset that we have created to its maximum benefit and take advantage of all the opportunities that we see. For example, we now have a registered investment fund that is a way for individual investors to invest in our strategy, and traditionally, individuals rarely have access to alternatives. That business is an interesting experiment that’s growing, and in a three-year, five-year timeframe, it could end up being a significant source of capital for Pomona. In addition to the secondaries business, we have a significant primaries business. We invest on a separate account basis in this area, and because of our longstanding relationships, especially with mid-market buyout general partners, we are often able to invest in funds that are particularly hard to access.
We also have a growing co-investment business and the same is true there. Overall, we need to take our core businesses and make sure that we can build and navigate through times that are likely to be challenging.
Could you see yourself launching dedicated or hiring dedicated teams for other asset classes?
I think that we are more likely to grow within the spaces we are in than to get into new spaces. We have more than enough growth potential in the areas we are already in.
How about opening new offices?
We have offices in New York, London and Hong Kong and I think that covers our major areas of interest.
Michael Granoff is Pomona Capital’s chief executive and founded the secondaries firm in 1994. He has 31 years of private equity experience and served on the staff of the US House of Representatives Appropriations Subcommittee on Foreign Operations. He was also a member of the 1992 Presidential Transition Team for the Department of the Treasury.