Robert Alderman, Head of Private Equity Business Development, Voya Investment Management and the Pomona Capital Investment Team discuss the potential benefits of allocating to the private equity secondaries market.
The private equity secondary market facilitates the sale of pre-existing investor commitments to private equity and other alternative investment funds. Private equity investments are typically very illiquid, which makes it difficult to buy and sell positions in private equity investments.
The private equity secondary market has developed to meet the demand for access to these investments. A buyer might want to acquire private equity interests for a few reasons: the duration of the investment is typically shorter than the duration of a private equity fund in the primary market, the price of the private equity fund’s interest is relatively less expensive, and the fund’s holdings are transparent and evaluable by the buyer before a decision is made to purchase interest in the fund.
Private equity secondaries consistently performed better during the eight worst drawdowns in the S&P 500 since 1999, than both the S&P 500 and private equity as a whole. “By adding secondaries, and more generally private equity, to a well-constructed portfolio, it creates balance for a client,” says Alderman.
The transactions in the private equity market originate from a range of different sellers of private equity. Sellers of private equity commonly include public pension plans, sovereign wealth funds, financial institutions, banks, insurance companies, and more.
“The catalyst to decide to sell can be driven by a number of factors. These can include first and foremost a need for liquidity, but also a desire to rebalance portfolio perhaps towards newer vintage funds. It could also be driven by a desire to exit non-core relationships, sectors, and geographies, and free up capital to deploy towards areas of focus going forward,” says Lile.
Pomona Capital, a private equity firm, is an established buyer that has an extensive number of limited partnerships (LPs), general partnerships (GPs), and intermediary relationships that they leverage across seller types and use to source proprietary transactions and offer liquidity solutions.
“We’re leveraging our data and relationships to actively track how GPs are valuing their portfolio companies, and we’re targeting those GPs that tend to exit at significant uplifts to their carrying values, because that’s how we as a secondary buyer generate value for our investors,” says Lile.
Pomona’s sourcing strategy has developed with the growing demand for secondary private equities in the past five years, as the growth in the market has developed from 25 million in 2012 to over 100 billion in 2021. Two factors have contributed to this market growth: increased deal volume and increased seller type diversification. Pomona has adapted to meet this increased demand via its use of data and providing widespread access to information to better inform sourcing decisions and opportunities.
The Pomona Investment Fund seeks to provide risk-adjusted returns by creating a secondaries-focused portfolio that leverages Pomona’s carefully-curated approach to private equity investing. “We’ve taken a secondaries-based private equity investment strategy, and we’ve put that into a structure that removes some of, if not all of, the operational burden. So this operates much more like a mutual fund than a limited partnership private equity fund,” says Konopolsky. It’s continuously offered, and there’s no capital call – meaning that the fund raises capital every single quarter on a perpetual basis – and investors fully fund their investment on day one.
Voya Investment Management is the asset management business of Voya Financial, a financial, retirement, investment, and insurance company. Pomona Investment Fund is Voya’s registered investment vehicle designed to make private equity investments more accessible, through the purchase of secondary interests in private equity funds.