Secondary Dispatch –

Pomona Goes on Fund-Raising Tear

Michael Granoff is hunting for private equity fund interests and opening up with both barrels. His strategy is still to be quiet and selective, but he has two different ways to be a limited partner in a top-tier private equity fund. The CEO of Pomona Capital said in June that the New York-based firm closed its fourth fund-of-funds and was preparing to hold a final close of its sixth secondary fund for more than $600 million.

Pomona Partnership Holdings IV, the firm’s fourth fund-of funds, closed with $250 million. The firm set out last fall to raise $200 million but raised its goal due to increased limited partner demand. Granoff says that the firm’s goal is to always keep its fund sizes modest. “There’s a limit to how much capital you can deploy in the highest quality funds,” he says. “We’re at a time in the private equity world where access to top-tier funds is limited.”

The firm’s new secondary fund, Pomona Capital VI, has already held a first close and was expected to hold a final close in July or August for more than $600 million. Pomona’s last secondary fund, Pomona Capital V, was a vintage 2001 fund that closed with $582 million. It is fully invested. Granoff declined to discuss Pomona VI, citing SEC regulatory concerns.

The new fund-of-funds has already made commitments to three venture funds and four buyout funds. Its venture commitments are for New Enterprise Associates’ $1.1 billion New Enterprise Associates 11 fund, North Bridge Venture Partners’ North Bridge VI and Sevin Rosen Funds’ Sevin Rosen IX.

On the buyout side, it has committed to Bain Capital’s $3.5 billion Bain Capital Fund VIII, BC Partners’ $6.8 billion BC European Capital VIII, Hellman & Friedman’s $3.5 billion Hellman & Friedman Capital Partners V, and Providence Equity Partners’ $4.25 billion Providence Equity Partners V.

Granoff says that the fund-of-funds does not have a concrete allocation as far as investing in buyout funds and venture. It’s last fund-of-fund, Pomona Partnership Holdings III that closed in 2000 with $135 million, ended up investing in more buyout funds than venture.

It is Pomona’s secondary business that feeds its fund-of-funds business, Granoff explains. The vast majority of funds that the firm’s funds-of-funds invest in are either funds of follow-on funds that the firm already has a stake in as a secondary investor. Pomona holds interests in more than 200 funds. Being a pre-existing investor gives Pomona and edge over other potential LPs to get into top-tier funds, Granoff says, which is very significant in the current fund raising climate.

According to Thomson Venture Economics (publisher of VCJ), limited partners in previous Pomona funds include BancBoston Investments, Blackstone Management Corp., Chase Capital Partners, Siguler Guff & Co., and South Ferry.

Willowridge Passes Target

While large players raising multi-billion dollar funds dominate the secondary market, there are plenty of smaller players with several funds under their belt happy to stay below the radar. New York-based Willowridge is one of them. The secondary firm closed its fourth fund, Amberbrook IV, with $135 million.

The fund, which had a target of $125 million, held a first close in March and a final close in late June. President Jerry Newman says that fund-raising took a little longer than the last time the firm went looking for money, but not by much. Willowridge raised its last fund in 2000 with $75 million.

Limited partners in the new fund are largely previous investors with some new LPs. Willowridge takes no pension money, which makes it rare among veteran secondary firms. Newman explains that taking pension money could expose the firm to the dangers of running afoul of ERISA regulations. Willowridge’s LPs are endowments, foundations and individual investors.

Newman also pointed out that some of the new investors are also investors in the fund-of-funds market. Funds-of-funds are calling down capital at a slow rate and some of the investors realized they could put money to work faster and get distributions sooner through the secondary market. Because the fund broke the $100 million mark, the firm reduced its management and carry fees, Newman notes. This fund has a longer, five-year investment period. Amberbrook III had a four-year investment period.

Willowridge has already made several purchases with its new fund. It bought some remaining assets from a large financial institution that sold most of its private equity assets in an auction, it purchased some private equity assets from a European institution that had acquired them as part of a large transaction and also purchased investments from individual investors.

“Initially in our last fund we had a little more venture and we realized venture wasn’t going to be a kind place so we switched to being between venture and buyouts,” says Newman, who says that the firm’s fourth fund will maintain an even mix between buyout and venture assets.

Willowridge was founded in 1995 and has purchased positions in more than 170 funds. The firm has three investment professionals and is looking to add a principal.

Coller Spinout Closes New Fund

With major secondary buyers getting larger with each successive fund, one group of specialists is honing in on transactions too small and complicated for the large players. One of those specialists is London-based Headway Capital Partners, which recently closed on $62 million for its inaugural fund, Headway Investment Partners.

The group of founding partners-Sebastian Junoy, Christiaan de Lint and Laura Shen-spun out of Coller Capital early last year. “We wanted to go after neglected parts of the secondary market,” says de Lint, who worked with Citibank’s alternative investment division before becoming a principal at Coller. “We are acting on the smaller end where speed is more important and things are more complex for the larger players.”

Shen, who served with Bain Capital and Goldman Sachs before joining Coller, says Headway is adapting to a changing secondary market that increasingly values more sophisticated deals. “For a secondaries firm to be successful, it can no longer be about buying on the cheap,” she says. De Lint also calls attention to the market’s fragmentation, with large players standing on one end and firms like Headway on the other.

Headway started raising its first fund in Q2 of this year, according to de Lint. It held a first close in April and a final close on June 20. The firm’s LPs are family offices and individual investors. Junoy, a veteran of J.P. Morgan and the International Finance Corp., says that an investor base of individuals places a high value on discretion and that the firm will derive extra value from being able to introduce its LPs to general partners.

The firm has already done several deals. It is interested in both buyout and venture LP interests as well as interests in direct portfolios and shares of individual portfolio companies. Headway expects the new fund to have an investment period of two to three years. The three partners have one assistant and are hunting for a chief financial officer.

Headway is the second such firm to be founded by former Coller Capital professionals. Greenpark Capital, launched in 2000 by former Coller executive Marleen Groen, closed its second fund last year with $444 million.

Manager for Hire

LPs that no longer want to manage their PE positions but also don’t want to sell them have yet another option: hire a third-party manager. One such firm is Semaphore of Methuen, Mass (near Boston). The private equity management and advisory firm in late June took over the management of two New York funds-the New York Community Investment Company (NYCIC) and the New York State Business Venture Fund (NYSBVF).

(Semaphore is managing the NYSBVF in collaboration with the New York City Investment Fund.)

“We are very, very different from the secondary market,” says Mark DiSalvo, Semaphore’s CEO. “We are literally handed the responsibility of the general partnership. We get to see all kinds of highly interesting, sometimes funky and generally fun things.”

Semaphore manages both equity and debt investments, typically during the end or “harvest period” of a fund’s life. While the firm declines to discuss the fee structure of its services, VCJ has learned that Semaphore’s fees are based party on the performance of the companies under management and it is paid management fees and carried interest close to the original terms of the fund.

NYCIC was created in 1995 to provide up to $1 million in venture capital funding and subordinated debt to New York-based small businesses. Its limited partners include large banks such as the Bank of New York, Citigroup, Deutsche Bank, Fleet Bank, HSBC, J.P. Morgan, Merrill Lynch and U.S. Trust. Its portfolio companies run the gamut from medical equipment manufacturers to Internet beauty product retailers.

NYSBVF is a certified capital company founded in 1998 that raised about $60 million in funding from the insurance industry to invest in small, early stage businesses. Its limited partners include American Family Life Assurance Co., John Hancock Life Mutual, Metropolitan Life Insurance, New York Life Insurance, Prudential Insurance, Teachers Insurance and Annuity Association and the Travelers Indemnity Co. Like the NYCIC, its portfolio companies are diverse and include a water taxi company and online career services portal.

In addition to its office in Massachusetts, Semaphore has a presence in London, New York and Zurich. Other funds under its management include the Midwest Economic Opportunity Fund, Northcoast Fund and WBCW Capital.