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ASK 2021 Interview

Secondary PE deals headed for record year: Pomona Capital

A broader pool of investors and innovative transactions likely to boost PE secondary market

Jun 16, 2021 (Gmt+09:00)

Pomona Capital founder and CEO Michael Granoff
Pomona Capital founder and CEO Michael Granoff

Secondary private equity deals have been the fastest-growing segment of the private equity market for several years and this year, they could exceed $100 billion in transaction value for the first time, said Pomona Capital's founder and Chief Executive Michael Granoff.

A broader pool of investors and innovative approaches to secondaries investing will likely create further opportunities for the private equity interests held by existing limited partners, with different firms of varying sizes, capabilities and strategies jumping into the arena.

"Demand for alternative assets continues to grow from institutional limited partners and increasingly even retail investors," Granoff said in a written interview, conducted on the sidelines of the ASK Conference 2021 hosted by The Korea Economic Daily last month.

"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."

Pomona Capital, a US private equity firm specializing in secondary deals. The following is a transcript of the interview.

▲ How was Pomona positioned to maneuver through an unprecedented 2020 and deploy capital during COVID-19? Do you believe we can prepare for the likelihood of a black swan event like COVID 19?

"Over more than 25 years of investing at Pomona, we have navigated multiple market cycles and events, and have learned to prepare for the unexpected. No one can predict exactly when the next market disruption may occur or how it will manifest, so our approach is to invest and construct portfolios that achieve two goals: protecting capital and capitalizing on growth opportunities."

"At their core, these two objectives reflect our investing values as an organization, and are a north star for us in sourcing, executing, and managing our investments especially in moments of uncertainty. In 2020, this proved the case again for us as we all witnessed sharp, unexpected movements in consumer demand, public markets, and credit availability that impacted performance and valuations across asset classes."

"Here are some examples of how we put our values into practice. Prior to the crisis, we constructed our portfolios with a margin of safety through a couple of steps: acquiring the highest-quality assets that we could source; building substantial diversification across individual private companies, industries, and 
vintages; and investing with a value orientation that provided an immediate financial cushion against the unexpected."

"These factors – plus a focus on investing in assets that presented multiple paths to liquidity – created resilience in our portfolios that both limited losses and supported a quick, sustained recovery. As the crisis unfolded, we also looked within our markets to identify opportunities for growth, and worked with sellers who sought liquidity solutions for their private portfolios."

"Through this effort, we acquired several high-quality portfolios at attractive valuations that since have appreciated substantially and returned capital to our funds."

▲What lessons can we learn from the COVID-19 pandemic?

"At a macro level ... our global system is deeply connected, and that actions and events in one part of the world can impact others is now clear for all to see."

"We also continue to witness cascading effects through markets and supply chains, whether for rental cars or computer chips or housing in the US, that were not immediately clear at the outset of the pandemic. Closer to home, we’re also continuing to reexamine prior assumptions about the most effective ways to conduct business travel and even for how teachers and students interact in our schools."

"As an organization, we’ve discussed these and other lessons, and also are reminded that fast-moving events require us to be both nimble and disciplined. On one hand, we must have the ability to react quickly to changing circumstances, whether to protect assets or capitalize on opportunities."

"This requires an organizational structure that is responsive and supports a free exchange of the best ideas. At the same time, we also must keep a discipline and structure in our execution and decision making that ensures we make investment and operating choices that are consistent with our strategy and core values." 

How do you see the opportunity set unfolding for secondaries in a post-COVID 2021? How do you see deal flow shaping up for 2021 vs previous years?

"The secondaries private equity market has been the fastest-growing segment for several years, and we expect 2021 to present even further opportunities."

"There are a couple of reasons for this. First, demand for alternative assets continues to grow from institutional limited partners and increasingly even retail investors. Continued commitments by these investors, in turn, 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."

"Other secondary market investors have led the charge on GP-led transactions, providing liquidity for limited partners exposed to concentrated pools of assets. Pomona participates in these opportunities too, when we see an appropriate combination of pricing, quality and liquidity." 

"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 $100 billion in transactions for the first time. We are as optimistic as we ever have been about the opportunity set in front of us and our investors."

What advice would you give to investors looking to invest in secondaries – how should investors differentiate between PE secondaries managers?

"As the secondary opportunity has grown, so have the number and range of firms investing across the opportunity set. Much like the buyout industry, secondaries today are pursued by different firms of varying sizes and capabilities and strategies. There also are new entrants and of course firms such as Pomona with 25 plus years of experience."

"For some limited partners, this universe initially may seem confusing and difficult to navigate. Here’s how we think about it: one of the clearest ways an investor can evaluate secondary managers is to consider how much risk a particular firm is assuming to achieve the returns they are seeking. Are they making concentrated bets, or building diversified portfolios? Are they exposed to illiquid assets of unknown duration, or do they have multiple visible paths for liquidity in their portfolios? Are they creating downside protection through careful asset selection, pricing and contractual protections? We all were reminded a year ago of the importance of these questions."

"For us, the answers to these questions are in our strategy, execution, and also our values. Today, our flagship funds are well-diversified across hundreds of private-equity backed companies that are managed by the highest-performing managers we can source."

"We build downside protection through our value orientation – in practice this means we buy them at meaningful discounts – and through contractual 
protections such as in our preferred equity investments when we can."

Yeonhee Kim edited this article.

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