NEW YORK -- ING Barings Group has entered into a strategic partnership with Pomona Capital to exploit anticipated growth in the secondary market for private equity investors seeking immediate liquidity. Pomona will be ING's private equity fund-of-funds investment manager, running both primary and secondary investment funds, which will be offered through ING Furman Selz Asset Management.
While the partnership is designed to create a large, global private equity fund-of-funds investment business, the growing interest in secondary private equity funds was an important factor in the deal. Secondary funds are those created to buy up interests from investors looking to sell their investments in venture capital and buyout funds. Pomona is one of a few firms focused on the secondary private equity business. The firm, based in New York, manages four secondary interest funds and two primary interest funds of funds with a total of $600 million under management. Edmund A. Hajim, chairman and chief executive officer at ING Furman Selz, New York, said the Pomona deal was attractive because ING does not now offer private equity funds of funds. In addition, he said, Pomona's capabilities in both the primary and secondary markets fit ING's overall "strategic efforts ... As an existing Pomona investor, we know and respect its management and believe in its strategy. "We looked at three or four other firms. There were very few fund-of-funds companies that fit our needs, especially in the secondary market, with a track record. "One thing we considered is what happens (in the private equity markets) in the future. We wanted to be in a position to grow the business and the secondary market will be an important part of that business," he said.
Uncertain market size
Although the exact size of the secondary private equity market only can be estimated because it is not a public market, Mr. Hajim and others say it could total as much as $100 billion. That could increase significantly as overall market conditions become less certain. Private equity and venture capital investments continued to grow at a rapid clip worldwide last year. In North America alone, more than $99 billion poured into the private equity and venture capital markets, according to a study released last month by 3i Group, Palo Alto, Calif., and PricewaterhouseCoopers LLC, New York. The study said the investment trend is expected to continue "sharply upward," at least for the foreseeable future. Strong growth in the primary private equity market should also hold true for the secondary market as well, said Michael D. Granoff, founder and chief executive officer of Pomona Capital, whose four secondary funds have returned 25% compounded since 1994.
"We were seeing more and more and bigger transactions that we needed to respond to quickly, and we needed more reach," he said. "We decided to seek the partnership option where we could run the business the way we wanted and gain access to the capital markets and have a global reach going forward. We needed a partner." Mr. Granoff said Pomona has no trouble finding investors willing to bail out of private equity partnerships early. Generally, private equity investors are locked into funds that don't expire for up to 10 years. He said factors that may prompt investors to want to cash out early include factors such as the slowdown in the technology market and the slumping public equity markets. He said that demand for liquidity among private equity investors is growing even as new, larger private equity funds hit the market. "We spend a lot of time looking for (secondary) deals from private equity investors. We solve their problem. We buy what they want to sell," said Mr. Granoff. However, he added, "We are not bottom-fishers ... We look for diversified securities of the best quality at reasonable prices. We pay what we think the assets are worth after analyzing the fund. Pricing is more driven by the quality of the assets and how they are valued by the general partner of the fund. Although interest in private equity has been strong for the last couple of years, secondary market activity appears to be on the rise as well as investors seek to lock in returns or cut back their private equity allocations.
"We've seen a tremendous increase in deal flow in the last 90 days," he said, noting many investors in primary funds may have overcommitted and are finding returns are slowing, making an early exit more appealing.
Hard to hit target
"In the past it was difficult for some institutions to reach their full allocation (to private equity) because past private equity investments were generating very large distributions. Many institutions were chasing their 5% allocation by making huge forward capital commitments that they planned to fund from distributions. Now we are seeing the reverse. Distributions are declining, but the large future capital commitments are still there, so some institutions may have to take profits from existing private equity holdings earlier than planned by selling to a secondary buyer in a sort of reverse wealth effect," he said.
He said Pomona is in contact with the major private equity and venture capital partnerships including such names as Sevin Rosen Funds, Dallas; Kleiner Perkins Caufield & Byers, Menlo Park, Calif.; and Warburg Pincus, New York.
