HarbourVest CEO on private equity’s great jumble sale

Liz Hoffman: Private equity today is virtually unrecognizable from its roots. What’s going on?

John Toomey: We’re seeing the development of the private capital markets. Before, your option was to just be in the fund. Now there’s an opportunity to potentially buy in when any of those investors want to exit, and it isn’t just as one episodic exit, the way that it once was.

The cynical view is that there’s a lot of duct tape being put around the traditional 10-year private-equity fund to make it work — secondaries, NAV loans, continuation funds. Is the market saying that model should just go away?

The benefits of private markets over public markets is the ability to orient your investment horizon over the long run. And the 10-year closed-end fund — which is still the foundation of the industry and I think will be for a long time — actually aligns quite well with that. One manager may take a local champion and build it into a national champion, and then another manager will come and build it into a global champion. We’ve found investors who would be very happy to allow their net asset value to continue to compound, and now they have the ability to do it in the form of a continuation fund. Or they have the option to exit and monetize that. It’s moving the investment decisions away from the general partners exclusively, and into the hands of the investors, which I think is a positive thing.

What do you make of Trump’s move to allow alternative investments in 401(k) retirement accounts?

My parents were union workers. They benefited from being part of the New England Telephone and Boston Gas Company pension plans. If I were 30 years younger, their retirements would have been more limited. I see this as a very positive thing for investors and savers who contribute their own capital and are just looking for a secure future.

If trillions of dollars of regular people’s money come pouring in, aren’t the returns going to come down?

I remember when the [private investment] industry was at $1 trillion, everyone said, ‘Well, that’s it, returns are going to come down.’ And then when it was $5 trillion, same thing. But public markets are around $100 trillion and by the way, they are really skewed [toward a few big tech stocks]. Private markets are 10% of that. I don’t see why the private capital industry can’t be two, three times the size than it is today. The relative market size will allow, for the foreseeable future, capital to flow in a way that I think would still lead to attractive returns.

What happens to fees when retail is at the party?

Look at what the index fund did to the mutual fund industry. I think private markets, over time, will follow a similar trajectory.

You just launched a credit business, buying up secondary stakes in loan funds. It seems like that’s where all the blood is flowing these days. Are the pure-play private-equity buyout shops in trouble?

Not really. Tell me what’s so attractive about being in the public markets. I have to now focus on quarterly earnings. I get pushed around within the market. The venture industry figured this out in the last decade — more and more of those equity gains are actually taking place in private markets versus public markets.

Is this the year we finally see some manager consolidation?

There are certainly managers today that may have already raised their last fund and just don’t know it. So yes, I think the number will be smaller. It’ll be a very long time before you’re in the consolidation that people envision, partly because of the structure of the underlying capital.

But these are hard transactions. Obviously, people invest in a brand and a platform, but at the end of the day, the relationship element and the value-add with [portfolio] companies is all done by people. So I don’t know that I see a pivot point, but we are in the middle of more consolidation as people try to catch up with firms that already have diversified platforms.

What would it take for you to sell?

You’re not the first one to ask. But our lens is quite simple: How would any decision that we take make this a better business or allow us to do more or better for our clients? I do think there are some disadvantages to businesses that are part of larger asset managers. It is, at a minimum, a distraction. So when it happens to our competitors, you know, we don’t mind.

You said on Ted Seides’ podcast in 2021 that there’s no reason the market to invest in China shouldn’t be bigger than the US. How do you think about that now?

A lot has changed since I said that. China has limited access to certain industries. And geopolitical events over the last several years have really slowed that growth. Very little of what we do today is invested in China at the moment because of those macro headwinds and the geopolitical questions.

Is AI going to replace your junior employees?

AI provides an accelerant or supporting role to what is still ultimately human judgment. I anticipate it will not shrink the number of analysts or associates that we have. But I think it’ll place a premium on softer skills than maybe there had been.

What’s a resume line that might catch your eye now that wouldn’t before?

Have they started a business, showed leadership — can they achieve success through the efforts of others? Everybody starts as an individual contributor. Most leaders end their careers by convincing people to follow them.