Activity in the secondaries market will begin to pick up toward the end of 2009 now that year-end valuations have been released, clearing away the fog of pricing uncertainty, according to Michael Granoff, chief executive officer of secondaries firm and fund of funds Pomona Capital.
“People are not anxious to buy at what they thought was a discount and wake up and find out the portfolio got written down,” Granoff told PEO. “People didn’t have a good idea of what the reality was. That has cleared up now that the numbers are out. I would bet the market activity picks up toward the end of the year.”
Make sure you're getting seduced by the assets and not the price.
Pomona this week closed its seventh secondaries fund on $1.3 billion, over its original target of $1 billion. Pomona Capital VII included some new investors, including US public pensions, financial institutions, endowments and Taft-Hartley plans.
The firm has invested about 20 percent of the new fund but has focused on being very selective about its investments, Granoff said. The firm’s recent investments, on average, have targeted funds that are “about six-years-old, about 80 percent funded, mostly buyout funds, about 75 percent US, 25 percent Europe … a single digit exposure is to mega-buyout funds”, he said.
Caution is an important virtue in today’s secondaries market, because “the margin of safety is smaller and price of getting it wrong is higher … today the price of getting it wrong is real pain”, he said.
One difference between secondaries sellers today and in the past is that sellers today include endowments and foundations, which don’t face any kind of fixed liabilities. “We see selling across the board,” Granoff said. Every type of LP in private equity is experiencing some form of distress, Granoff said, and is “significantly more distressed than it was 24 months ago”.
Several big US university endowments like Harvard, Duke and the University of Virginia have turned to the secondaries market to sell private equity interests. Harvard went to the secondaries market trying to sell $1.5 billion in fund interests last year, but reportedly pulled back from selling.
In June, the Massachusetts Pension Reserves Investment Management Board purchased for $150 million an LP interest in Denham Capital Management Commodity Partners V from Harvard.
Pomona will continue to have patience in choosing its investments, looking for quality assets and not just discounts, Granoff said.
“If you look at secondaries, from a demand point of view, I can’t remember it ever being better. There’s enormous deal flow, choice of assets, pricing power … it adds up to a pretty positive situation,” Granoff said. “You have to make sure you have your eye on the ball and don’t get lost in some number.
“Make sure you’re getting seduced by the assets and not the price,” he said.