Private equity manager of the year
Michael Granoff, chief executive and founder of Pomona Capital, talks about the specialist strengths of his company in the secondaries market
How has Pomona been assisting insurers to manage their PE assets this year?
Pomona Capital has a history of working closely with multiple insurance companies from around the world on a secondaries, primary and co-investment basis, which comprise nearly 25% of Pomona's overall investor base. Pomona is also a strategic partner of Voya Financial, which provides us with first-hand knowledge of the needs and goals of insurance companies.
During this past year, we have worked with insurance companies to help them achieve their investment goals, including solving their liquidity needs, building customized private equity programs tailored to meet investment objectives, and providing exposure to secondaries. We recently created a several hundred million dollar bespoke liquidity solution for an insurance company, and for other groups, we offered ways to start their private equity program through secondaries. We often share the same value-oriented investment approach with insurance companies. We both seek long-term capital appreciation with enhanced liquidity and a lower risk profile.
What are the key challenges for insurance investors moving to PE investment?
Key challenges for insurance investors moving into private equity investment are both access to high quality managers and the length of time it takes to build a well-diversified portfolio. Keep in mind, when building a private equity portfolio, your selection may be restricted depending on which managers are capital raising that particular year, limiting your potential vintage and asset diversification and the speed in which you can build a diversified portfolio. It most likely will be a multi-year process, resulting in prolonging the j-curve effect. Secondaries is a commonly used tool to reduce these challenges.
Secondaries can provide instant diversification across vintage, strategy, geography, asset manager, and industry. At Pomona, we construct our portfolios with a margin of safety through a couple of steps: acquiring the highest-quality assets, building substantial diversification across individual private companies, industries, and vintages; and investing with a value orientation that provides an immediate financial cushion against the unexpected. These factors – plus a focus on investing in assets that present multiple paths to liquidity – create resilience in our portfolios that limit loss. Furthermore, secondary private equity investments are typically more mature than primary investments, and secondary investors may enjoy shorter investment periods and accelerated returns on invested capital. Pomona typically purchases seasoned funds well into their 10- year life cycle whose commitments are 70%-90% called. As a result, cash distributions to Pomona's investors tend to occur early in the life cycle of a Pomona secondary fund and may be more evenly distributed.
The secondaries niche has proven particularly successful in recent times--could you say how you've tapped this market?
Pomona was one of the earliest pioneers in secondaries. We started in 1994 with a focus on secondaries and today the program has nearly $9bn of committed capital. Pomona overall has approximately $14.3bn of committed capital with the remainder of the capital mostly in our primary platform.
Through the integration of Pomona's secondary and primary businesses we have built very deep and broad relationship with general partners specifically with those that are often restrictive and hard to access. We also tap into our database that includes both subjective and objective information collected across hundreds of funds and thousands of companies. We built a team with expertise in analyzing assets over a long period of time and multiple economic cycles. As a result, we execute on a differentiated strategy that seeks to provide access to better than market quality assets at lower than market prices.
How do you see the opportunity set unfolding for secondaries?
The secondaries private equity market has been the fastest-growing segment for several years, and we expect the momentum to continue ahead. There are a couple of reasons for this trend. First, demand for alternative assets continues to grow from institutional limited partners. Continued commitments by these investors creates an ever-increasing pool of assets from which secondary investors like Pomona can invest. In addition, the secondaries industry has continued to innovate, creating solutions for limited partners and fund managers to unlock liquidity and value.
Pomona has been in the forefront in these efforts, creating liquidity solutions for institutional asset managers and closing preferred equity investments that have accelerated distributions to limited partners and provided growth capital for existing portfolio companies.
In combination, the natural growth of private equity assets plus continued innovation in secondary transactions is likely to support further opportunity for the foreseeable future. In fact, some predict that in 2021 secondaries may close over $100bn in transactions for the first time. We are as optimistic as we have ever been about the opportunity set going forward.