Secondary investments are primarily purchases of funds that are three to seven years old with existing underlying portfolio companies. Sales are often driven by an investor’s need for liquidity or active approach in managing their private equity portfolio. They are typically acquired in private negotiated transactions as there is no established market for secondaries.
Why Focus on Secondaries?
Two ways in which investors can gain access to private equity is through secondary and primary investments. Investments in the primary market are made directly in newly formed private equity funds. In the secondary market, investors buy existing limited partner private equity interests available on the secondary market from other limited partners.
What is a Secondary?
- Secondaries are composed of existing assets, which means the underlying fund may have already deployed the majority of its capital to portfolio companies
- As a result, secondary private equity investments are viewed as more mature investments than primaries
- Secondary investments sometimes enjoy shorter investment periods and accelerated returns on invested capital
- Investment returns from secondary investments may not exhibit the pronounced cash flow and "J-curve" characteristics that are normally associated with primary investments
Mitigating the J-Curve
Generally, primary and secondary investors both enjoy positive returns in the later years of a fund, but secondary investors receive those returns within a shorter investment time frame. Pomona typically seeks to acquire funds whose commitments are 70-90% invested and three to seven years into their expected 10-year life cycle. Cash distributions typically occur earlier in the life cycle of secondary funds and are more evenly distributed.
The chart shown above is for illustrative purposes and does not represent past or projected performance of an actual product. There is no guarantee performance will match this illustration. These is no guarantee whether expressed or implied that actual cash flow will follow this pattern. Technically, a secondary can occur any time between time '0' and '12' in this illustration.
Secondary Investment Characteristics
|A Limited Partner interest is sold to another investor, considered to be the "second" purchaser of the LP interest|
|Traditional secondaries, secondary directs, and secondary co-investments; all private equity asset classes|
|Funded, mature underlying portfolio companies, with transparency into performance|
Age of Assets
|Average 3-7 years|
Cost of Investment
|Potential discount to Net Asset Value (NAV)|
Return of Capital
|By vintage year, type, size, sector and geography|
The information presented herein is for illustrative purposes. There is no guarantee that every secondary investment will have all of the foregoing characteristics. Investments in private equity involve a substantial degree of risk, there is no guarantee that any investment in a Pomona-sponsored fund will ultimately be profitable and an investor could lose some or all of its investment.
An investment in the Fund involves a considerable amount of risk. A Shareholder may lose money. Before making an investment decision, a prospective investor should (i) consider the suitability of this investment with respect to the investor’s investment objectives and personal situation and (ii) consider factors such as the investor’s personal net worth, income, age, risk tolerance, and liquidity needs. The Fund is an illiquid investment. Shareholders have no right to require the Fund to redeem their Shares in the Fund and, as discussed in the Fund’s prospectus, the Fund conducts tender offers subject to the discretion of the Board of Trustees. Therefore, before investing investors should carefully read the Fund’s prospectus and consider carefully the risks that they assume when they invest in the Fund’s common shares.
An investment in the Fund involves a high degree of risk, including the risk that the Shareholder’s entire investment may be lost. The Fund’s performance depends upon the Adviser’s selection of Investment Funds and direct investments in operating companies, the allocation of offering proceeds thereto, and the performance of the Investment Funds, direct investments, and other assets. The Investment Funds’ investment activities and investments in operating companies involve the risks associated with private equity investments generally. Unexpected volatility or lack of liquidity, such as the general market conditions that prevailed in 2008, could impair the Fund’s performance and result in its suffering losses.
The value of the Fund’s total net assets is expected to fluctuate. To the extent that the Fund’s portfolio is concentrated in securities of a single issuer or issuers in a single sector, the investment risk may be increased. The Fund’s or an Investment Fund’s use of leverage is likely to cause the Fund’s average net assets to appreciate or depreciate at a greater rate than if leverage were not used.
Closed-End Fund; Liquidity Risks. The Fund is a non-diversified closed-end management investment company designed principally for long-term investors and is not intended to be a trading vehicle. An investor should not invest in the Fund if the investor needs a liquid investment.
General Risks of Secondary Investments. There is no established market for secondaries and the Adviser does not currently expect a liquid market to develop. Moreover, the market for secondaries has been evolving and is likely to continue to evolve. It is possible that competition for appropriate investment opportunities may increase, thus reducing the number and attractiveness of investment opportunities available to the Fund and adversely affecting the terms upon which investments can be made. Accordingly, there can be no assurance that the Fund will be able to identify sufficient investment opportunities or that it will be able to acquire sufficient secondaries on attractive terms.
The Fund may also be subject to the following risks: Limited Operating History Risk, Nature of Portfolio Companies Risk, Co-Investment Risk, Leverage Utilized by the Fund Risk, Leverage Utilized by Investment Funds Risk, Investments in Non-Voting Stock/Inability to Vote Risk, Valuation of Fund’s Interests in Investment Funds Risk, Valuations Subject to Adjustment Risk, Illiquidity of Investment Fund Interests Risk, Repurchase Risk, Expedited Decision-Making Risk, Availability of Investment Opportunities Risk, Special Situations and Distressed Investments Risk, Mezzanine Investments Risk, Small- and Medium-Capitalization Companies Risk, Utilities Sector Risk,Infrastructure Sector Risk, Technology Sector Risk, Financial Sector Risk, Geographic Concentration Risk, Sector Concentration Risk, Currency Risk, Venture Capital Risk, Real Estate Investments Risk, Substantial Fees and Expenses Risk, Foreign Portfolio Companies Risk, Non-U.S. Securities Risk, Structured Finance Securities Risk, Capital Calls / Commitment Strategy Risk, ETF Risk, Unspecified Investments Dependence on the Adviser Risk, Indemnification of Investment Funds / Investment Managers and Others Risk, Termination of the Fund’s Interest in an Investment Fund Risk, Other Registered Investment Companies Risk, High Yield Securities and Distressed Securities Risk, Reverse Repurchase Agreements Risk, Other Instruments and Future Developments Risk, Dilution Risk, Incentive Allocation Arrangements Risk, Control Positions Risk, Inadequate Return Risk, Inside Information Risk, Possible Exclusion of a Shareholder Based on Certain Detrimental Effects Risk, Limitation on Transfer / Shares Not Listed / No Market for Shares Risk, Recourse to the Fund’s Assets Risk, Non-Diversified Status Risk, Special Tax Risk, Additional Tax Considerations / Distributions to Shareholders and Payment of Tax Liability Risk, Current Interest Rate Environment Risk and Regulatory Change Risk. For a complete listing of all the Fund’s risks, with their descriptions, please refer to the “Types of Investments and Related Risks” section of the Fund’s prospectus.
The Fund’s shares do not represent a deposit or obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not insured by the FDIC, the Federal Reserve Board or any other government agency. You may lose money by investing in common shares of the Fund.
Index DescriptionsThe Cambridge Associates U.S. Private Equity Index is based on quarterly performance data compiled from 1,334 US private equity funds (buyout, growth equity, private equity energy and mezzanine funds), including fully liquidated partnerships, formed between 1986 and 2016. The index has limitations (some of which are typical to other widely used indices) and cannot be used to predict performance of the Fund. These limitations include survivorship bias (the returns of the index may not be representative of all private equity funds in the universe because of the tendency of lower performing funds to not report returns to the index); heterogeneity (not all private equity funds are alike or comparable to one another, and the index may not accurately reflect the performance of a described style); and limited data (many funds do not report to indices, and the index may omit funds, the inclusion of which might significantly affect the performance shown). The index has not been selected to represent an appropriate benchmark to compare an investor’s performance, but rather is provided to allow for comparison to that of certain well-known and widely recognized indices. See Cambridge Associates for a complete explanation on IRR calculations and assumptions.
The S&P 500 Total Return Index measures the value of stocks of the 500 largest corporations by market capitalization listed on the New York Stock Exchange or Nasdaq Composite. The index is calculated on an annualized total return basis, with performance reflecting the reinvestment of dividends and other distributions.
The Barclays US Aggregate Bond Index measures the performance of the US investment-grade bond market, which includes the following types of securities and typically only includes securities that have $250 million or more of outstanding face value and at least one year remaining to maturity: investment-grade US Treasury bonds, government-related bonds, investment-grade corporate bonds, mortgage pass-through securities, commercial mortgage-backed securities and asset-backed securities that are publicly offered for sale in the US.
Past performance is no guarantee of future results.