Mario Giannini & John Toomey – Private Equity Panel (Capital Allocators EP.309)

Episode Summary

Executive Summary: Mario Giannini and John Toomey argue that private equity is in a stressed but far-from-crisis environment shaped by higher rates, slower exits, and cautious buyers. They see valuation declines as real but manageable, expect private credit and secondaries to lead the next wave of activity, and believe the biggest industry shift will be more selective LP capital allocation, increased governance diligence, and harder fundraising for newer managers.

Main Topics: Macro uncertainty and market stress (Priority: 5/5): Both guests describe the current environment as one of broad stress rather than imminent crisis, driven by higher rates, inflation uncertainty, and geopolitics. Mario is notably less bearish than consensus, while John emphasizes that stress creates both headwinds and opportunities. Valuations, marks, and performance in private equity (Priority: 5/5): They discuss how private equity valuations have held up better than public markets, especially in traditional buyouts, while venture/growth saw larger markdowns. They argue marks are largely legitimate and reflect real portfolio performance rather than fraud or simple lag. Exits, holding periods, and fundraising pressure (Priority: 5/5): Higher rates and weaker liquidity are lengthening holding periods, reducing realizations, and increasing pressure on IRRs and fundraising. This is expected to create a vintage-year reset and more difficult capital raising, especially for managers lacking track records. Price discovery, secondaries, and continuation funds (Priority: 4/5): Both see a market in price discovery, with secondaries and continuation funds acting as early indicators. There is lots of discussion but limited action because buyers and sellers have not converged on valuation. Dry powder, deal flow, and sector preferences (Priority: 4/5): Mario dismisses dry powder as a major concern, arguing it will be deployed over time. Activity remains strongest in technology and healthcare, though he notes there is no dominant thematic bargain across the market. Capital allocation, LP concentration, and new sources of capital (Priority: 5/5): A major theme is that LPs are becoming more selective due to constrained capacity. Both expect more concentration among top managers, more scrutiny of governance, and growing importance of Middle East and retail/high-net-worth capital, though not enough to fund everyone. Private credit, ESG, China, and geopolitical risk (Priority: 4/5): They view private credit as comparatively attractive and structurally supported, whereas ESG remains inconsistently defined and politicized. China and broader geopolitical fragmentation add meaningful portfolio-construction complexity and political risk.

Key Arguments: Private equity is under stress, but not in a systemic crisis; stress itself creates opportunities for disciplined investors. Traditional buyout valuations are holding up better than public markets because portfolio company earnings are stronger and public comparables were more inflated. Venture and growth valuations are falling more sharply because those segments experienced a 2021-22 melt-up and are more exposed to funding-market contractions. Longer hold periods and fewer exits will compress IRRs and slow fundraising, making recent vintages likely less attractive than current GP marketing implies. Secondary and continuation fund markets are key price-discovery mechanisms, but current bid-ask spreads remain too wide for robust activity. Dry powder is not a problem by itself; it is a sign of a healthy, growing market and will be deployed over time. The next LP decision cycle will be defined by portfolio construction: fewer managers, more concentration, and more governance diligence. Newer managers will struggle most in the coming years unless they have a unique edge or strong niche. Private credit looks relatively attractive because it is mostly floating-rate, structurally better protected, and supported by the shift away from bank lending. ESG has useful risk-management applications, but as a label it is inconsistently defined and often politicized. China exposure will increasingly diverge by investor base and geography, making portfolio construction more complex in a bipolar world. Political and geopolitical risk now matter more than in much of the speakers' careers, and may slow growth in private markets even if the asset class remains durable.

Data Points: Hamilton Lane assets under management/supervision: over $100 billion / another $700 billion in non-discretionary assets - Mario Giannini’s firm size, cited in the introduction HarborVest assets under management: in excess of $100 billion - John Toomey’s firm size, cited in the introduction Traditional buyout valuation change: low single-digit declines, plus or minus 5% - John’s estimate of broad buyout mark declines during 2022 Broad venture/growth valuation decline: 10% to 15% declines - John’s estimate for diversified venture portfolios in 2022 Crossover / mutual fund tech valuations: up to 25% declines - John’s estimate for managers that marked tech exposures very aggressively after the 2021 melt-up Interest coverage threshold: less than 2x - Mario’s comment that many companies below this level are cutting costs or seeking equity injections Holding period impact: 1.5x at four to five years - John’s example of managers preferring to hold longer when returns are not yet acceptable Top quartile buyout vintage returns for 2007-08: over 2x and almost 20% IRRs - John cites historical performance of stressed vintages Median buyout vintage returns for 2007-08: 1.8x and 19%? actually 14% IRRs - John cites historical performance of stressed vintages as a comparison point Top quartile buyout vintage returns for 2004-06: just below 2x (about 1.9x) and 12% to 13% IRRs - John’s point that the best stress-period opportunities were actually slightly earlier vintages AlphaSense source base: over 500 million premium sources - Marketing read for the sponsor AlphaSense expert calls: over 200,000 expert calls - Marketing read for the sponsor Alpha Summit 2025 dates: October 6th through 8th - Sponsor event announcement Private Equity Deals episode count: fifth episode of season two - Promotion for the related podcast series Private equity fundraising window discussed: next 2 to 4 years - Mario’s view on when LP capacity pressure will matter most

Pivotal Quotes: "This doesn't feel binary. This feels like we don't know what's going to happen to inflation. We don't know what's going to happen to interest rates. We don't know what's going to happen to the economy. We don't know geopolitically." — Mario Giannini: Mario describing the unusually uncertain macro backdrop "I would describe the market as being under stress. I don't quite see it in terms of the crisis level stress, but for all those reasons, there's stress in a lot of places." — John Toomey: John framing the environment as stressed but not crisis-like "I mean, the dry powder thing is so irrelevant to what's going on, I think, in the market." — Mario Giannini: Mario dismissing dry powder as a central concern "We have a saying here that it's very difficult to time private markets, but it's very easy for the markets to time you." — John Toomey: John explaining HarborVest's steady pacing and portfolio construction approach

Implications: Expect slower exits, tighter LP selection, and stronger relative demand for private credit and secondaries. Managers with durable governance and track records should win; newer or overly complex firms may struggle as capital becomes more selective.