Jonathan Forsgren:       00:06                In the wake of the COVID-19 pandemic, global economies have been hit with decade high inflation, aggressive rate hikes from central banks and unsettling volatility. As markets and investors search for a new normal, many of the paradigms held in the past have been called into question. Investors have become increasingly interested in alternative investments in private equity as a way to diversify their portfolios, to potentially add protection against volatility, and to search for better returns. Joining me to discuss trends in private equity and alternative investments is Michael Granoff, Chief Executive Officer and founder of Pomona Capital. A private equity firm focused on secondary's, primaries and co-investments. Michael has 35 years of private equity experience and is one of the early pioneers in the secondary's private equity space. He's also served in directorial roles in a number of private companies engaged in healthcare, manufacturing, and financial services. Michael, thank you for joining us.

Michael Granoff:           01:00                Jonathan. Happy to be with you.

Jonathan Forsgren:       01:02                We're in a market environment where the traditional 60/40 portfolio allocation has met some challenges. Can you first speak generally on how incorporating alternatives, particularly private equity can be complimentary to that traditional 60/40 portfolio?

Michael Granoff:           01:18                So the first thing to think about is that the dynamic of adding private equity to portfolios is not new. So this has been going on now for decades. And so before you look at today's volatility, you can look at why institutional investors in particular have been increasing their allocations to private equity over a long time. And the reason is that it gives them, obviously something that they don't get from a 60/40 allocation. So what is it that they don't get? So they get some protection from the volatility of public markets. They get control and upside in a different way than public companies because for example, if you are doing a buyout of a private company, you get to fire the CEO if you don't like them. Well, if you buy a share of IBM, you don't get to fire the CEO if you don't think they're doing such a great job.

                                    02:10                You get to control when you get liquidity. So if I don't like where the prices are for my company today, I can wait. And so that combination of risk control and control over the upside creates a situation where the asset class is not uncorrelated to the world. Not uncorrelated to the equity markets, but is not one to one correlated. So it brings something not just additional, but different to portfolios. And that's why institutional investors have not just committed capital to private equity, but have increased their commitments over time. And if you look at the largest institutional investors right now across the world, they're committing somewhere between five and probably 40% of their entire portfolios to private equity. Now, you fast forward to your question about what's happening today. And you're right, over the past year anyway, there's been a challenge to conventional thinking about allocations to stocks and bonds that we haven't seen in a very long time.

                                    03:17                So we're used to seeing volatility in equity markets. We may not like it, but we're kind of used to seeing it over time. We're not used to seeing that kind of volatility in bond markets. And so people who had a lot of money, a lot of capital tied up in fixed income which they thought was safe, which they thought was a protection against the volatility of equity markets, found out that this year especially that wasn't true. It didn't give them the protection they wanted. And so that has provided I think kind of to your question, a little bit greater challenge to the orthodoxy of thinking about it that way. And if you're even more concerned about the structure than you were before, it makes this question about whether private equity can bring something different to your portfolio. Probably it's more poignant today than it was years ago.

Jonathan Forsgren:       04:06                And you touched on it, the market volatility and the uncertainty has impacted all asset classes including private equity. Can you talk about the market and what should investors expect in terms of returns from private equity?

Michael Granoff:           04:21                So it's a very interesting question because people should understand that we don't live on an island somewhere. Private equity is not uncorrelated to the world. One of the things that you learn when we go through major economic cycles is that even people who don't think they're correlated, find out that they are. We all are connected by what's happening to the world. We're not equally connected, but we're connected. So people who would expect for example, private equity to be up 20% when the market is down 20% don't have the right appreciation or expectation for what people can do. It's not as if we are short the market and everybody else is long the market. So what should people expect? Well, people should expect that we can protect their capital. So we should certainly be down less in down markets and we should be up equally or more in good markets.

                                    05:16                And so when people think about what their return expectations are, if you look at what the largest investors think, what are the biggest state pension funds? What do they assume people like that when they invest in private equity, they assume not absolute returns but relative returns. So they think they should over time, let's say outperform public markets by four or 500 basis points, something like that. That's how they think about it. And it's important for investors to realize that we, private equity in general, Pomona specifically, we're not a provider of absolute returns. That is we're not going to be able to provide a certain return regardless of what the macroeconomic dynamics are at a time. But we should be able to provide a degree of protection for them in volatile and down markets, and we should be able to provide meaningful upside in positive markets.

Jonathan Forsgren:       06:12                And there are various types of private equity strategies, including secondaries. Pomona was one of the pioneers in that space. What are secondaries and how has that space evolved over the years?

Michael Granoff:           06:27                So there's an interesting genesis to it. So when I was a private equity investor, beginning in my career, I was doing standard private equity investing. And I wasn't doing secondaries. In fact, I didn't know what a secondary was. And I had somebody come to me who ran a big venture fund and said, "We have a limited partner in our fund who we think needs to sell their position because of something happening to them. But the assets in our fund are doing really well. In fact, I can tell you how the well they're doing." And I imagine if you could buy their interests, that would be pretty interesting. So imagine if you could have an approach to private equity where you could take advantage of the good things about it and you could mitigate some of the risk. So instead of being a blind pool where you don't know what you're buying, what the general partners are going to invest in, what if you could buy into a private equity fund that typically has a 10-year life?

                                    07:22                And instead of buying in at the beginning, what if you could buy in halfway into it. And you already knew which companies were in the fund and you could analyze the companies. And you could see what you thought about them. And then you could decide how much you wanted to pay for them. Obviously, when you're an investor in a initial private equity fund, you're not pricing anything. You're just giving the fund money to invest. So what if you could understand with granularity the assets that were in the portfolio? What if you could price them and buy it at a discount? And what if you didn't have to wait so long for liquidity? So one of the issues with private equity, a concern of investors has always been illiquidity. My money's locked up for a long time. I can't push a button and get liquidity very easily.

                                    08:07                But what if you had, because you were investing in funds well into their life the natural liquidity that companies were going to be sold and that money was coming back to you. And so we thought that if you could do that, that would be a pretty interesting investment hypothesis. Now, it wasn't so clear who would sell to you and what they would sell and how, but it was clear at the beginning that if you could do that and have more of a value approach to private equity, and you'd actually as opposed to other kind of risk conscious strategies you didn't have to trade risk against return, that was a pretty interesting idea, pretty unique idea. And so that was the jam, let's say, of the secondary's business. Which then obviously I didn't predict it but it obviously has grown to be quite a large market. And I think so far this year we've seen over $115 billion in deal flow. So it's pretty big.

Jonathan Forsgren:       09:01                And digging deeper into the secondaries. And why should investors consider or have an allocation to secondaries, whether they're relatively new to the space or already have exposure to private equity?

Michael Granoff:           09:16                So step back and you put yourself into the shoes of either a beginning institutional investor or individual investor, and who wants to have private equity in their portfolio. What do they need to have? What should they have? What's the prudent thing to have? Well, they need to have a seasoned portfolio that gives them adequate diversification, but adequate diversification across many different measures. So diversification by company, diversification by industry, diversification by stage of development and diversification by vintage year. That means going back in time and being able to not just be buying into deals that are being done this year. Getting that kind of diversification is not so easy to do. If I gave you a whole lot of money and told you, you had to start today and doing it, how long do I think it would take you to get there? Not with a secondary strategy, probably about a decade.

                                    10:13                In a way, what we provide is that on day one, so what is a dollar in one of our funds? Provide well instant diversification to in the end, over 1000 companies, over 100 funds. Funds that are on average five to seven years old, funds that were bought at an average discount of around 19% or some number like that. And so when you step back and you put yourself into the shoes of a beginning investor in private equity, we provide them potentially and secondaries provide them with a very prudent kind of way to start. And it's one of the reasons why large institutional investors that have wanted to get into private equity, have often started with a big core position in secondaries because it gets them to that seasoned state very quickly. And then they can build off of that and build the bigger portfolio that they need to kind of meet their allocations.

Jonathan Forsgren:       11:14                And is it a good time to invest in secondaries?

Michael Granoff:           11:19                So as humans, we can't help but think about the environment around us. So in some ways, I kind of answer your question in two ways. First is that it's very difficult to time markets, and I would not tell you that we're any better at it than anybody else. So history suggests that trying to time markets is not the best investment strategy. Private equity is particularly difficult to time because the funds get invested over time. So it's not like you're investing today because you think today is a good environment because your money may be invested three years from now and the circumstances may be different. And the companies are getting sold over a long time. And so if you think it's a good time to buy or a good time to sell today, it's very hard to translate that into private equity activity because everything takes longer. So it's probably not a great idea to try to time markets. And if you wanted to time markets, not so easy to do in private equity.

                                    12:17                As opposed to other asset classes where you could decide with the push of a button, I want to have everything I own in the S and P today, I want to have nothing I own in the S and P today. You can't do that with private equity. And we can't help but be affected by the circumstances around us. So there is a cyclical side to the secondary's business, for example, where if more people are troubled, more people are under some pressure because of macroeconomic dynamics, we're going to see more sellers. We're going to have more pricing power. So is it true that you can't time markets on the one hand, but is this an interesting time, an opportunity for us? I'd have to say yeah, it is. So I would caution people about trying to time markets, but are we excited about the timing right now? And are we beginning to see things that are kind of interesting that we didn't see over the last couple of years? Yeah, we are.

Jonathan Forsgren:       13:13                What will it take to be a successful secondary's investor today?

Michael Granoff:           13:19                So I think that in some ways the secondary's business is not so different from other businesses in the sense that generic approaches to things really rarely work. And you really need to have quite a differentiated strategy to be successful, I think whether you're a secondary player, whether you're a buyout fund, whether you're a hedge fund, whether you're a public equity manager, almost no matter who you are in this kind of way. Our strategy has been to try to really solve for two things. What we really wanted to do and what I think is important, if you want, to your question about being a successful secondary manager or a successful secondary fund, is in a sense you need to figure out a way to buy higher than market quality assets at a lower than market price. That is you need to solve for quality and price.

                                    14:08                If you solve for one or the other, you probably either don't have the downside protection that you need or you don't have the upside potential that you want. So I think that and our strategy is to try to solve for both quality and price in that way. The reason it's so important to solve for both is that one of the things about private equity that is a little different from public markets is that the dispersion of return between funds, between assets is much wider than it is in the public market. So the difference between being really good and just being okay is really big. The second part of it is that that dispersion gets a lot wider in volatile or difficult markets. So in some ways over the last few years, the dispersion hasn't been so great because the rising tide lifts everybody's boat, including ours.

                                    15:01                There are times when we all look a little smarter than we are. And even on your show, we look a little smarter than we are. And there are times when you don't. Well, at the times when you don't, when the rising tide is not lifting all of those boats at the same time together, what happens? Well, what happens is that you get a much greater dispersion of return. So what does it mean for a secondary player? It means that you have to be really careful about the assets that you buy. It means asset selection becomes really important. And so you really have to focus on the quality of the assets, because the good assets are going to be able to navigate this dynamic much better than of mediocre assets and you can really get hurt. And then the second aspect of it is, obviously in an environment like today, price really matters. If you're telling investors that you're going to provide them with a margin of safety, part of that margin of safety is the price that you pay.

                                    15:54                And so I think that while that's been Pomona's strategy for a long time, my guess is that... Kind of to your question about what's it going to take to be a successful secondary fund in today's environment, it probably means that the emphasis on quality and price throughout the industry needs to be even higher, let's say than it's been over the last few years.

Jonathan Forsgren:       16:17                And so for someone who's interested in getting into secondaries, whether they be a retail investor or an institutional investor, how can they access secondaries?

Michael Granoff:           16:29                So it's an interesting question because they're something that's changed over time. So our business and the secondary's business in general has largely been a series of institutional funds. Or funds designed more for institutional investors than individual investors, both in the qualifications you needed to have to invest, the minimum amounts you had to invest. And so even individuals historically that had wanted to invest in private equity were really not so much individuals like you and me. They were more like institutions than they were individuals for those reasons. And they were investing essentially in institutionally designed funds. And that was a real challenge for individuals because in general, individuals have not had access to private equity, have not had a lot of access to alternatives. And when you look at how for example, individually managed 401ks have done in comparison to institutionally managed pension funds, they haven't done as well.

                                    17:33                And one of the reasons they haven't done as well is that they haven't had access to private equity or alternatives. And the question is how can they get that kind of access? They should have it in their portfolio. If it's good enough for CalPERS, it should be good enough for you and me. But how are you going to do that structurally, not so simple to create a structure. And over the last few years, as you know we've worked on it and pioneered in a way a structure that would work for individual investors, to be able to invest in our investment strategy essentially on the retail side of things. And so, now if you're an individual you do have a choice. There's an institutional sleeve you can invest in that way. But you have an emerging retail sleeve, I think that will expand over time. So today, you can't push a button on your 401K and choose private equity or choose us in that way.

                                    18:29                My guess is that in the future you will. And so we're kind of on that transitional path and we're a decent amount of the way there so far. And now the growth of retail access I think will give opportunities for individuals to get access to private equity, which should be good for their portfolios and their returns. And remember, their interests are largely the same. That is why do institutions invest? Because ultimately... Let's take pension funds, they need to be able to pay the pensioners. Why do we invest in what we do with our retirement money? Well, because we hope that when we retire there's enough money to support us. So the goals or the fiduciary responsibility let's say, is largely the same. And so today we're in I would say a somewhat emerging market, let's say on the retail side, where investors who want access to private equity, who want access to secondaries, can now get it both in an institutional and a more retail individual way. And my guess is that the paths on the individual side will continue to grow and increase over the next few years.

Jonathan Forsgren:       19:38                Well, I'm certainly looking forward to having access to private equity and in my retirement solution. Michael, thank you so much for joining us today.

Michael Granoff:           19:47                Glad to do it, Jonathan. Thanks a lot.

Jonathan Forsgren:       19:49                And to our viewers, thank you for watching. For Asset TV, I'm Jonathan Forsgren. We'll see you next time.