“The fund-of-funds business is all about answering two questions: How do you figure out which are the best funds and then how do you get in.” At least that’s how Pomona Capital’s Michael Granoff sums up the fund-of-funds marketplace. But while most take a top down approach to investing, Pomona, as a secondary investor as well, can reverse that. It will buy its way into funds, and then as an actual investor in those funds, determine which groups are the best. And it’s this perspective from the bottom can prove invaluable to Pomona as a primary fund-of-funds investor.
At the end of June, Pomona raised its fourth primary fund of funds, Pomona Partnership Holdings IV, LP. Fifty million dollars over its target, the firm was able to corral $250 million, and has already made a number of commitments including investments in the latest vehicles from Providence Equity Partners, Bain Capital, Hellman & Friedman, BC Partners and Sevin Rosen, among others.
In addition to giving Pomona a closer look at potential primary commitments, the firm’s dual role as secondary investor also gives the firm an inside track into developing highly sought after GP relationships. A look at the commitments that the new fund has made proves that Granoff’s strategy works. Each of those funds mentioned was essentially raised in the pre-marketing process, with commitments sketched out before the official launch dates. In this era of the haves and the have nots for the GPs, the same sentiment can be turned around and applied to the limiteds: those that can access the haves, and those left mulling over the have nots.
While other fund of funds may invest in both secondaries and primary investments, Granoff noted that Pomona distinguishes itself by using separate vehicles to do so. To invest in both using the same fund, Granoff said, does not create the synergies he’s looking for. “Primary and secondary investments have different characteristics,” he noted. “On the secondary side you’re buying into assets that are already funded and well into their lifespan. You can actually see what you’re buying. On the primary side you don’t have the portfolio to look at, but you have more choices… Our answer is to have a foot in both camps and that gives us a view looking back and a view looking forward.”
He further explains that as a secondary buyer, Pomona has access to the GPs when the firms are not out fundraising. Normally, getting the attention of a general partner can prove difficult if there are 100 other LPs muscling in to gain the same attention.
Pomona’s strategy is also more malleable than some limiteds, such as the pension plans. The firm will invest in between 20 to 30 funds targeting either buyouts or venture groups, domestic or abroad. “We don’t want to force mediocrity,” Granoff said. “We want to be diversified across the spectrum of private equity, but we don’t have a targeted allocation. If you have a space to fill and there aren’t any A’ players left to fill it, then you have to move down to the B’ players.”
Moreover, even as Pomona exceeded its $200 million target, the firm was careful to keep its fund small, an important aspect that keeps it from stretching itself too thin. “People tend to get nervous about unlimited capital-especially in this environment. Our model is pretty modest. You won’t see us out there trying to raise billions of dollars… We see a lot of [GP] funds getting raised that make us wonder how could that happen. But if you have groups with a billion dollars to put to work, well, water flows downhill.”