Michael Granoff is a good listener. He listens to the market, he listens to his investors and he listens for opportunities. It's a trick he picked up from Bill Clinton.
“He was probably the most active listener that I have ever met,” the chief executive of Pomona Capital says. He used to be a Congressional staffer and worked as part of the presidential transition team for Clinton.
Granoff took note of Clinton's ability to listen intently, not just as a way to get information and process it, but also in terms of the connections he could make with people. The secondaries specialist is quick to link those skills with his market.
“Investors invest with us, not just because of what our track record is, but because they get a feeling that we look at the world in the same way that they do. That we connect with them.”
He started in the space when it was barely a market at all, by buying a stake in a venture capital fund amid 1989's US savings and loan crisis after hearing about it from a VC contact.
Granoff quickly understood the opportunity, and its potential. He left his job four years later to partner with Fran Janis and found Pomona, which he named after the street he grew up on in Worcester, Massachusetts. Pomona is also the Roman goddess of abundance.
“When I started Pomona, and was raising its first fund, we thought the transactions were interesting, but we really didn't know who would sell or how much supply there would be,” Granoff says in his Midtown Manhattan office.
“People would say, 'You seem like a nice guy but why would anyone sell you an interest in a good fund? If you're only going to be buying interests in lousy funds, maybe it's not such a great business.'”
The firm surmounted the understandable scepticism and closed its first fund, Pomona Capital I, on $42 million in 1994.
Since then, the secondaries market has developed into a fully-fledged sub-asset class, with $40 billion in closed transactions in 2015, according to advisory firm Greenhill Cogent.
“Today, there isn't a good private equity fund that we haven't bought an interest in or seen an interest in,” he says. “Last year, we looked at $35 billion of dealflow.” He adds that his firm is extremely careful in what it buys, focusing on quality assets and typically acquiring only 1 percent to 3 percent of what he calls “the doable dealflow that we see”.
Pomona, which has $8.1 billion of aggregate capital commitments, has now raised eight funds. In March, it launched Pomona Capital IX, which is targeting $1.75 billion, and held a first close on half the capital in November.
Limited partners have learned to embrace the secondaries market and the firm's brand. Its LPs are diverse and come from 17 countries, with many of them backing several funds.
In the US, LPs include the Highland Street Foundation, Macalester College, the City of Tallahassee Pension Fund, Western Conference of Teamsters, Firemen's Annuity and Benefit Fund of Chicago and Oklahoma Firefighters Pension & Retirement System, according to data from PEI.
Diversity in its investor base is an asset for Pomona and the firm places a strong importance on cultivating these relationships, as LPs can provide leads on potential secondaries transactions or in-depth information on funds the team may not know well.
Another important factor for Pomona is its strategic partnership with its largest LP, Voya Financial, previously called ING.
The relationship has evolved naturally: one of the affiliates of the insurance and investment company had been an early LP in Pomona's funds, and the company approached the secondaries buyer in 2000 to discuss a potential partnership. Now Pomona benefits from Voya's global reach while maintaining its independence in day-to-day business. The firm also manages a separate primary account for the insurer.
The firm has made primary investments in private equity funds, in addition to buying fund stakes, almost since inception.
It 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.”
TRUMP'S A WILDCARD
PEI caught up with Granoff for a follow-up conversation a few days after the presidential election in the US. Like most of the private equity world, he was surprised by Donald Trump's victory. The Republican candidate's lack of political track record makes the impact of his election hard to predict, says Granoff.
“It's too early to tell because Donald Trump wasn't a politician, so it's not like he comes to this and you know where his policies are,” he says. “Most people who have been elected have had long political histories and you kind of know the policies and legislation that they're going to pursue. In Trump's case, you don't really know and part of the reason he won is because he was an outsider.”
He notes that financial markets don't typically like such uncertainty. While the stock market experienced a bout of volatility in the 24 hours following the elections, it bounced back quickly. That's not to say markets couldn't become volatile again in the future.