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

Episode Summary

Executive Summary: John Toomey of HarbourVest traces the evolution of private equity from a small, relationship-driven niche to a global, data-intensive industry. He explains how the firm uses primaries, co-investments, and secondaries together to deepen diligence, improve manager selection, and capture opportunities across market cycles, while emphasizing alignment, speed, culture, and long-term partnership.

Main Topics: HarbourVest’s origin and the early private equity market (Priority: 5/5): Toomey describes joining a then-small firm that had not yet fully branded itself, and recalls an industry with few firms, simple product menus, and predominantly institutional LPs. How due diligence evolved in primaries (Priority: 5/5): He contrasts relationship-heavy underwriting in the late 1990s with today’s data-rich process, adding ODD, ESG, and D&I lenses and using historical performance to test manager claims. Co-investments as a distinct strategy (Priority: 5/5): Toomey explains why HarbourVest built a dedicated co-investment team, how they assess both the underlying company and the specific deal team, and why speed and alignment matter. Secondaries as a growth and portfolio tool (Priority: 5/5): He frames secondaries as useful for liquidity, early ramp-up, and diversification, and notes the market’s expansion from distressed sales to GP-led transactions and continuation funds. Cross-pollination across primary, secondary, and direct investing (Priority: 4/5): He argues that information from co-investments and secondaries improves primary manager evaluation by revealing how managers actually behave, not just how they market themselves. Global expansion and regional differences (Priority: 4/5): Toomey discusses international growth across Europe, Asia, and emerging markets, stressing that local presence, rule-of-law differences, and specialized teams are essential. Culture, stewardship, and lessons from managers (Priority: 4/5): He highlights HarbourVest’s partnership culture, continuous improvement mindset, and lessons borrowed from top managers on governance, voting, succession, and talent management.

Key Arguments: Private equity diligence has shifted from mostly relationship-based judgment to a data-driven process that can quantify how returns are actually generated. The best way to evaluate a manager is to verify whether they did what they said they would do one, two, or three years ago. Dedicated teams by strategy outperform a single relationship owner model because they prevent bias across primaries, co-invests, and secondaries. Co-investors must be fast and aligned; a quick no is better than a slow no, and speed is a core source of value to GPs. Secondaries are not just about buying at a discount; buying the right asset with the right manager can matter more than price. GP-led secondaries and continuation funds have transformed the market from a distressed-seller niche into a portfolio management tool for GPs. Primary, secondary, and co-invest channels together create a fuller picture of manager quality, leadership behavior, and true underwriting discipline. Global private equity requires local teams because market structure, financing, regulation, and maturity vary significantly by region. HarbourVest’s culture emphasizes stewardship, accountability, and continuous improvement rather than treating the firm as a financial transaction. High valuations do not eliminate opportunity because top managers underwrite conservatively and focus on operational improvement rather than multiple expansion alone.

Data Points: Years at HarbourVest: 24+ years - Toomey describes joining the firm in 1997 and reflects on more than two decades there. HarbourVest assets under oversight: over $75 billion - The introduction to the episode states the firm oversees more than $75 billion of assets. Number of HarbourVest employees dedicated to co-investing: over 50 people - Toomey cites this as necessary to evaluate and act quickly on opportunities. Co-investment opportunities seen annually: 800 opportunities - He says the dedicated team sees roughly this many co-invest ideas each year. Co-investment opportunities that actually happen: 780 of 800 - He notes that most opportunities do not close, which justifies a dedicated screen. Top managers’ product lines today: 7 on average - He says the top 25 managers now average seven product lines. Top managers’ product lines 10 years ago: 2 on average - Shows how product breadth has expanded over time. Top managers’ product lines 20 years ago: 1 on average - Illustrates the industry’s historical simplicity. HarbourVest secondaries commitments in history: $30 billion - Toomey uses this to explain secondary returns and market evolution. Global public equity market size: about $80–90 trillion - He compares public markets to private markets to argue private capital can still grow substantially. Global private equity market capitalization: about $8–9 trillion - Used to frame the room for further expansion in private markets. HarbourVest offices internationally: 10 offices - He references the firm’s global footprint. HarbourVest Asia presence: 4 offices and 60 people on the ground - He emphasizes the need for local presence in Asia. CSN Stores co-investment size: $200 million round - He cites this as a successful co-investment that became Wayfair. HarbourVest participation in CSN Stores: $50–60 million - Their commitment into the private round. Apollo fund size cited: over $20 billion - Used as an example of an oversubscribed manager despite enormous scale. Private equity market size for listener context: 8 or 9 trillion vs 80 or 90 trillion public equities - The comparison frames the relative size and growth potential of private markets.

Pivotal Quotes: "We don't pay you to make copies. We pay you because we want to hear what you think." — Ed Cain: A formative early-career moment for Toomey during his first investment committee presentation. "A quick no is always better than an elongated no." — John Toomey: Explaining how HarbourVest serves GP partners on co-investment opportunities. "It's not the will to win. It's the will to prepare to win." — John Toomey: Toomey describes a lesson learned after being overconfident in a pivotal meeting.

Implications: Private equity is becoming more segmented, data-driven, and global, so investors need deeper manager underwriting, faster decision-making, and stronger alignment. Firms that combine primaries, co-invests, and secondaries can better identify real skill and manage risk across cycles.