Private Equity Masters 1: John Toomey – HarbourVest Partners (Capital Allocators, EP.200)

Episode Summary

Executive Summary: John Toomey of HarborVest traces how private equity evolved from a relationship-driven niche into a global, data-rich industry spanning primaries, co-investments, and secondaries. He explains HarborVest’s disciplined, team-based underwriting, the growing importance of alignment and operational diligence, and how direct and secondary activity informs primary manager selection. He also discusses global expansion, ESG, pricing, and the future of private markets.

Main Topics: HarborVest’s origin and the early private equity market (Priority: 5/5): Toomey recounts joining HarborVest in 1997, when the firm was still newly branded and private equity was far less specialized, with only a few fund products and a much smaller universe of managers. How manager diligence has evolved (Priority: 5/5): He contrasts the late-1990s, relationship-heavy diligence process with today’s data-driven approach that incorporates secondaries, co-invests, ODD, ESG, and DNI to assess true manager skill and consistency. Co-investing as a distinct discipline (Priority: 5/5): Toomey describes co-investments as a mature sub-asset class requiring speed, deep manager alignment, dedicated teams, and selective ownership rights rather than a one-size-fits-all LP mindset. Secondaries and the rise of flexible access points (Priority: 4/5): He explains how secondaries have shifted from a distressed-seller market to a more strategic tool used by both LPs and GPs for portfolio management, liquidity, and continuation structures. Global growth outside the U.S. (Priority: 4/5): Toomey emphasizes that Europe, Asia, and especially China are developing in their own way, with local teams and offices essential for accessing opportunities and understanding market structure. Lessons from industry best practices and HarborVest culture (Priority: 4/5): He highlights ideas borrowed from top managers, including succession planning, stewardship ownership, and improved investment committee voting systems, all reflecting continuous improvement. Risks, pricing, and expectations for the future (Priority: 4/5): Toomey discusses full pricing, heightened competition, ESG inconsistency, regulatory complexity, and the challenge of meeting investor return hurdles in a more mature private markets ecosystem.

Key Arguments: Private equity diligence is now materially better because HarborVest can combine long-term data, direct/co-invest visibility, and secondary observations to verify whether managers actually delivered what they promised. The best managers create returns through repeatable operational improvement, not just multiple expansion; underwriters must understand what the manager specifically did to drive EBITDA and cash flow growth. Co-investing succeeds when the investor behaves as a true partner: fast feedback, alignment with the lead sponsor, and dedicated teams that do not let primary relationships bias the decision. Secondaries are not just about buying at a discount; the quality of the underlying asset and manager matters more than entry price, and some of HarborVest’s best returns came from par or above-par deals. The secondary market has expanded because GPs increasingly use it as a portfolio tool for liquidity, recapitalization, and continuation funds, not just because LPs want to sell. Global private equity is not simply a delayed version of the U.S. market; Asia and other regions are developing rapidly in their own right and require local presence and expertise. HarborVest’s culture is built around partnership, preparedness, accountability, and continuous improvement, which the firm believes are essential to serving both LPs and GPs. ESG adoption is uneven globally, but HarborVest’s data suggests strong ESG practices can correlate positively with performance rather than detract from returns.

Data Points: HarborVest AUM: over $75 billion - Toomey describes HarborVest’s current scale and global reach. HarborVest office footprint: 10 offices - He notes the firm’s international expansion across markets. First ex-U.S. office: 1990 - HarborVest’s early international presence. First Asia office: 1996 - Shows long-standing commitment to Asia. Time at HarborVest: 24-25 years - Toomey discusses joining in 1997 and reflecting back on the firm’s evolution. Top private equity managers’ product lines: Seven on average - He says top 25 managers now often run multiple product lines, up from fewer historically. Average product lines 10 years ago: Two - Comparison showing increased manager complexity and specialization. Average product lines 20 years ago: One - Illustrates industry growth and diversification. Co-investment team size: over 50 people - HarborVest’s dedicated co-investment capability. Annual co-investment opportunities seen: 800 - He uses this to explain the need for a tight screening process. Co-investment opportunities likely to happen: 780 - Most opportunities are not ultimately pursued, requiring selection of the best few. Best co-investments selected: 50 - HarborVest’s target number of top opportunities from the broader flow. Historical secondary commitments: $30 billion - Toomey cites HarborVest’s long-term secondary investing record. Capital allocation examples in co-invests: $200 million equity check / $100-$150 million call rights - Illustrates how HarborVest structures strategic co-invest relationships with GPs. CSN Stores co-invest round: $200 million - Example of a successful co-investment that later became Wayfair. HarborVest CSN/Wayfair investment: $50-$60 million - HarborVest’s participation in the private round. Global public equity market size: about $80-$90 trillion - Used to frame private markets’ relative size and growth potential. Global private equity market size: about $8-$9 trillion - Used to argue private equity still has substantial room to grow. Top private equity managers’ historical market breadth: 2-4 products/funds decades ago - Compared with today’s much broader platform model.

Pivotal Quotes: "We don't pay you to make copies, we pay you because we want to hear what you think." — John Toomey: A formative early-career lesson that shaped HarborVest’s culture of independent thinking. "A quick no is always better than an elongated no." — John Toomey: Explaining the co-investment team’s commitment to speed and GP partnership. "I don't just look in my rearview mirror when I drive, I look in the windshield, and where we're going is just still an incredible amount of opportunity and room to run from an industry standpoint." — John Toomey: On why private equity still has long-term growth potential despite capital overhang concerns.

Implications: Listeners should see private equity as an increasingly sophisticated, global, and relationship-dependent market where diligence, alignment, and access matter as much as returns. For investors, HarborVest’s model shows why data, specialization, and partnership are key to staying competitive.