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Contents
Articles
History of private equity and venture capital 1
Early history of private equity 26
Private equity in the 1980s 35
Private equity in the 1990s 44
Private equity in the 2000s 51
Envy ratio 67
Leveraged buyout 68
Management buyout 76
References
Article Sources and Contributors 79
Image Sources, Licenses and Contributors 80
Article Licenses
License 81
History of private equity and venture capital 1
Pre-history
Investors have been acquiring businesses and making minority
investments in privately held companies since the dawn of the
industrial revolution. Merchant bankers in London and Paris financed
industrial concerns in the 1850s; most notably Credit Mobilier,
founded in 1854 by Jacob and Isaac Pereire, who together with New
York based Jay Cooke financed the United States Transcontinental
Railroad.
Later, J. Pierpont Morgan's J.P. Morgan & Co. would finance railroads
and other industrial companies throughout the United States. In certain
respects, J. Pierpont Morgan's 1901 acquisition of Carnegie Steel
Company from Andrew Carnegie and Henry Phipps for $480 million
represents the first true major buyout as they are thought of today.
Due to structural restrictions imposed on American banks under the
Glass-Steagall Act and other regulations in the 1930s, there was no
private merchant banking industry in the United States, a situation that
was quite exceptional in developed nations. As late as the 1980s,
Lester Thurow, a noted economist, decried the inability of the financial
regulation framework in the United States to support merchant banks.
US investment banks were confined primarily to advisory businesses,
handling mergers and acquisitions transactions and placements of
Andrew Carnegie sold his steel company to J.P. equity and debt securities. Investment banks would later enter the
Morgan in 1901 in arguably the first true modern
space, however long after independent firms had become well
buyout
established.
With few exceptions, private equity in the first half of the 20th century was the domain of wealthy individuals and
families. The Vanderbilts, Whitneys, Rockefellers and Warburgs were notable investors in private companies in the
first half of the century. In 1938, Laurance S. Rockefeller helped finance the creation of both Eastern Air Lines and
Douglas Aircraft and the Rockefeller family had vast holdings in a variety of companies. Eric M. Warburg founded
E.M. Warburg & Co. in 1938, which would ultimately become Warburg Pincus, with investments in both leveraged
buyouts and venture capital.
Early venture capital and the growth of Silicon Valley (1959 - 1981)
During the 1960s and 1970s, venture capital firms focused
their investment activity primarily on starting and expanding
companies. More often than not, these companies were
exploiting breakthroughs in electronic, medical or
data-processing technology. As a result, venture capital came
to be almost synonymous with technology finance.
It is commonly noted that the first venture-backed startup was
Fairchild Semiconductor (which produced the first
commercially practicable integrated circuit), funded in 1959
by what would later become Venrock Associates.[7] Venrock
was founded in 1969 by Laurance S. Rockefeller, the fourth of
John D. Rockefeller's six children as a way to allow other
Rockefeller children to develop exposure to venture capital
investments.
An early West Coast venture capital company was Draper and Johnson Investment Company, formed in 1962[8] by
William Henry Draper III and Franklin P. Johnson, Jr. In 1964 Bill Draper and Paul Wythes founded Sutter Hill
Ventures, and Pitch Johnson formed Asset Management Company [9].
History of private equity and venture capital 4
The growth of the venture capital industry was fueled by the emergence of the independent investment firms on Sand
Hill Road, beginning with Kleiner, Perkins, Caufield & Byers and Sequoia Capital in 1972. Located, in Menlo Park,
CA, Kleiner Perkins, Sequoia and later venture capital firms would have access to the burgeoning technology
industries in the area. By the early 1970s, there were many semiconductor companies based in the Santa Clara
Valley as well as early computer firms using their devices and programming and service companies.[10] Throughout
the 1970s, a group of private equity firms, focused primarily on venture capital investments, would be founded that
would become the model for later leveraged buyout and venture capital investment firms. In 1973, with the number
of new venture capital firms increasing, leading venture capitalists formed the National Venture Capital Association
(NVCA). The NVCA was to serve as the industry trade group for the venture capital industry.[11] Venture capital
firms suffered a temporary downturn in 1974, when the stock market crashed and investors were naturally wary of
this new kind of investment fund. It was not until 1978 that venture capital experienced its first major fundraising
year, as the industry raised approximately $750 million. During this period, the number of venture firms also
increased. Among the firms founded in this period, in addition to Kleiner Perkins and Sequoia, that continue to
invest actively are AEA Investors, TA Associates, Mayfield Fund, Apax Partners, New Enterprise Associates, Oak
Investment Partners and Sevin Rosen Funds.
Venture capital played an instrumental role in developing many of the major technology companies of the 1980s.
Some of the most notable venture capital investments were made in firms that include: Tandem Computers,
Genentech, Apple Inc., Electronic Arts, Compaq, Federal Express and LSI Corporation.
was a textile company, however, Buffett used Berkshire Hathaway as an investment vehicle to make acquisitions and
minority investments in dozens of the insurance and reinsurance industries (GEICO) and varied companies
including: American Express, The Buffalo News, the Coca-Cola Company, Fruit of the Loom, Nebraska Furniture
Mart and See's Candies. Buffett's value investing approach and focus on earnings and cash flows are characteristic of
later private equity investors. Buffett would distinguish himself relative to more traditional leveraged buyout
practitioners through his reluctance to use leverage and hostile techniques in his investments.
Because of the high leverage on many of the transactions of the 1980s, failed deals occurred regularly, however the
promise of attractive returns on successful investments attracted more capital. With the increased leveraged buyout
activity and investor interest, the mid-1980s saw a major proliferation of private equity firms. Among the major
firms founded in this period were:
Bain Capital, Chemical Venture Partners, Hellman & Friedman, Hicks & Haas, (later Hicks Muse Tate & Furst), The
Blackstone Group, Doughty Hanson, BC Partners, and The Carlyle Group.
Additionally, as the market developed, new niches within the private equity industry began to emerge. In 1982,
Venture Capital Fund of America, the first private equity firm focused on acquiring secondary market interests in
existing private equity funds was founded and then, two years later in 1984, First Reserve Corporation, the first
private equity firm focused on the energy sector, was founded.
In response to the changing conditions, corporations that had sponsored in-house venture investment arms, including
General Electric and Paine Webber either sold off or closed these venture capital units. Additionally, venture capital
units within Chemical Bank (today CCMP Capital) and Continental Illinois National Bank (today CIVC Partners),
among others, began shifting their focus from funding early stage companies toward investments in more mature
companies. Even industry founders J.H. Whitney & Company and Warburg Pincus began to transition toward
leveraged buyouts and growth capital investments.[28] [29] [30] Many of these venture capital firms attempted to stay
close to their areas of expertise in the technology industry by acquiring companies in the industry that had reached
certain levels of maturity. In 1989, Prime Computer was acquired in a $1.3 billion leveraged buyout by J.H. Whitney
& Company in what would prove to be a disastrous transaction. Whitney's investment in Prime proved to be nearly a
total loss with the bulk of the proceeds from the company's liquidation paid to the company's creditors.[31]
Although lower profile than their buyout counterparts, new leading venture capital firms were also formed including
Draper Fisher Jurvetson (originally Draper Associates) in 1985 and Canaan Partners in 1987 among others.
In 1985, Milken raised $750 million for a similar blind pool for Ronald Perelman which would ultimately prove
instrumental in acquiring his biggest target: The Revlon Corporation. In 1980, Ronald Perelman, the son of a
wealthy Philadelphia businessman, and future "corporate raider" having made several small but successful buyouts,
acquired MacAndrews & Forbes, a distributor of licorice extract and chocolate, that Perelman's father had tried and
failed to acquire it 10 years earlier.[37] Perelman would ultimately divest the company's core business and use
MacAndrews & Forbes as a holding company investment vehicle for subsequent leveraged buyouts including
Technicolor, Inc., Pantry Pride and Revlon. Using the Pantry Pride subsidiary of his holding company, MacAndrews
& Forbes Holdings, Perelman's overtures were rebuffed. Repeatedly rejected by the company's board and
management, Perelman continued to press forward with a hostile takeover raising his offer from an initial bid of
$47.50 per share until it reached $53.00 per share. After receiving a higher offer from a white knight, private equity
firm Forstmann Little & Company, Perelman's Pantry Pride finally was able to make a successful bid for Revlon,
valuing the company at $2.7 billion.[38] The buyout would prove troubling, burdened by a heavy debt load.[39] [40]
[41]
Under Perelman's control, Revlon sold four divisions: two were sold for $1 billion, its vision care division was
sold for $574 million and its National Health Laboratories division was spun out to the public market in 1988.
Revlon also made acquisitions including Max Factor in 1987 and Betrix in 1989 later selling them to Procter &
Gamble in 1991.[42] Perelman exited the bulk of his holdings in Revlon through an IPO in 1996 and subsequent sales
of stock. As of December 31, 2007, Perelman still retains a minority ownership interest in Revlon. The Revlon
takeover, because of its well-known brand, was profiled widely by the media and brought new attention to the
emerging boom in leveraged buyout activity.
In later years, Milken and Drexel would shy away from certain of the more "notorious" corporate raiders as Drexel
and the private equity industry attempted to move upscale.
Ross Johnson on the cover of their December 1988 issue along with the headline, "A Game of Greed: This man
could pocket $100 million from the largest corporate takeover in history. Has the buyout craze gone too far?".[43]
KKR's offer was welcomed by the board, and, to some observers, it appeared that their elevation of the reset issue as
a deal-breaker in KKR's favor was little more than an excuse to reject Ross Johnson's higher payout of $112 per
share. F. Ross Johnson received $53 million from the buyout.
At $31.1 billion of transaction value, RJR Nabisco was by far the largest leveraged buyouts in history. In 2006 and
2007, a number of leveraged buyout transactions were completed that for the first time surpassed the RJR Nabisco
leveraged buyout in terms of nominal purchase price. However, adjusted for inflation, none of the leveraged buyouts
of the 2006 – 2007 period would surpass RJR Nabisco. Unfortunately for KKR, size would not equate with success
as the high purchase price and debt load would burden the performance of the investment. It had to pump additional
equity into the company a year after the buyout closed and years later, when it sold the last of its investment, it had
chalked up a $700 million loss.[44]
Interestingly, two years earlier, in 1987, Jerome Kohlberg, Jr. resigned from Kohlberg Kravis Roberts & Co. over
differences in strategy. Kohlberg did not favor the larger buyouts (including Beatrice Companies (1985) and
Safeway (1986) and would later likely have included the 1989 takeover of RJR Nabisco), highly leveraged
transactions or hostile takeovers being pursued increasingly by KKR.[45] The split would ultimately prove
acrimonious as Kohlberg sued Kravis and Roberts for what he alleged were improper business tactics. The case was
later settled out of court.[46] Instead, Kohlberg chose to return to his roots, acquiring smaller, middle-market
companies and in 1987, he would found a new private equity firm Kohlberg & Company along with his son James
A. Kohlberg, at the time a KKR executive. Jerome Kohlberg would continue investing successfully for another seven
years before retiring from Kohlberg & Company in 1994 and turning his firm over to his son.[47]
As the market reached its peak in 1988 and 1989, new private equity firms were founded which would emerge as
major investors in the years to follow, including: ABRY Partners, Coller Capital, Landmark Partners, Leonard Green
& Partners and Providence Equity Partners.
department. Giuliani began seriously considering indicting Drexel under the powerful Racketeer Influenced and
Corrupt Organizations Act (RICO), under the doctrine that companies are responsible for an employee's crimes.[49]
The threat of a RICO indictment, which would have required the firm to put up a performance bond of as much as $1
billion in lieu of having its assets frozen, unnerved many at Drexel. Most of Drexel's capital was borrowed money, as
is common with most investment banks and it is difficult to receive credit for firms under a RICO indictment.[49]
Drexel's CEO, Fred Joseph said that he had been told that if Drexel were indicted under RICO, it would only survive
a month at most.[50]
With literally minutes to go before being indicted, Drexel reached an agreement with the government in which it
pleaded nolo contendere (no contest) to six felonies – three counts of stock parking and three counts of stock
manipulation.[49] It also agreed to pay a fine of $650 million – at the time, the largest fine ever levied under
securities laws. Milken left the firm after his own indictment in March 1989.[50] [51] Effectively, Drexel was now a
convicted felon.
In April 1989, Drexel settled with the SEC, agreeing to stricter safeguards on its oversight procedures. Later that
month, the firm eliminated 5,000 jobs by shuttering three departments – including the retail brokerage operation.
Meanwhile, the high-yield debt markets had begun to shut down in 1989, a slowdown that accelerated into 1990. On
February 13, 1990 after being advised by United States Secretary of the Treasury Nicholas F. Brady, the U.S.
Securities and Exchange Commission (SEC), the New York Stock Exchange (NYSE) and the Federal Reserve
System, Drexel Burnham Lambert officially filed for Chapter 11 bankruptcy protection.[50]
The second private equity boom and the origins of modern private equity
Beginning roughly in 1992, three years after the RJR Nabisco buyout, and continuing through the end of the decade
the private equity industry once again experienced a tremendous boom, both in venture capital (as will be discussed
below) and leveraged buyouts with the emergence of brand name firms managing multi-billion dollar sized funds.
After declining from 1990 through 1992, the private equity industry began to increase in size raising approximately
$20.8 billion of investor commitments in 1992 and reaching a high water mark in 2000 of $305.7 billion, outpacing
the growth of almost every other asset class.[24]
The venture capital boom and the Internet Bubble (1995 to 2000)
In the 1980s, FedEx and Apple Inc. were able to grow because of private equity or venture funding, as were Cisco,
Genentech, Microsoft and Avis.[57] However, by the end of the 1980s, venture capital returns were relatively low,
particularly in comparison with their emerging leveraged buyout cousins, due in part to the competition for hot
startups, excess supply of IPOs and the inexperience of many venture capital fund managers. Unlike the leveraged
buyout industry, after total capital raised increased to $3 billion in 1983, growth in the venture capital industry
remained limited through the 1980s and the first half of the 1990s increasing to just over $4 billion more than a
decade later in 1994.
After a shakeout of venture capital managers, the more successful firms retrenched, focusing increasingly on
improving operations at their portfolio companies rather than continuously making new investments. Results would
begin to turn very attractive, successful and would ultimately generate the venture capital boom of the 1990s. Former
Wharton Professor Andrew Metrick refers to these first 15 years of the modern venture capital industry beginning in
1980 as the "pre-boom period" in anticipation of the boom that would begin in 1995 and last through the bursting of
the Internet bubble in 2000.[58]
The late 1990s were a boom time for the venture capital, as firms on Sand Hill Road in Menlo Park and Silicon
Valley benefited from a huge surge of interest in the nascent Internet and other computer technologies. Initial public
offerings of stock for technology and other growth companies were in abundance and venture firms were reaping
large windfalls. Among the highest profile technology companies with venture capital backing were Amazon.com,
America Online, E-bay, Intuit, Macromedia, Netscape, Sun Microsystems and Yahoo!.
History of private equity and venture capital 14
The bursting of the Internet Bubble and the private equity crash (2000 to
2003)
The Nasdaq crash and technology slump that
started in March 2000 shook virtually the entire
venture capital industry as valuations for startup
technology companies collapsed. Over the next
two years, many venture firms had been forced
to write-off large proportions of their
investments and many funds were significantly
"under water" (the values of the fund's
investments were below the amount of capital
invested). Venture capital investors sought to
reduce size of commitments they had made to
venture capital funds and in numerous instances,
investors sought to unload existing commitments
for cents on the dollar in the secondary market.
The technology-heavy NASDAQ Composite index peaked at 5,048 in March
By mid-2003, the venture capital industry had 2000, reflecting the high point of the dot-com bubble.
shriveled to about half its 2001 capacity.
Nevertheless, PricewaterhouseCoopers' MoneyTree Survey [59] shows that total venture capital investments held
steady at 2003 levels through the second quarter of 2005.
Although the post-boom years represent just a small fraction of the peak levels of venture investment reached in
2000, they still represent an increase over the levels of investment from 1980 through 1995. As a percentage of GDP,
venture investment was 0.058% percent in 1994, peaked at 1.087% (nearly 19x the 1994 level) in 2000 and ranged
from 0.164% to 0.182 % in 2003 and 2004. The revival of an Internet-driven environment (thanks to deals such as
eBay's purchase of Skype, the News Corporation's purchase of MySpace.com, and the very successful Google.com
and Salesforce.com IPOs) have helped to revive the venture capital environment. However, as a percentage of the
overall private equity market, venture capital has still not reached its mid-1990s level, let alone its peak in 2000.
peak of the 1990s stock market bubble.[65] [66] [67] Similarly, Forstmann suffered major losses from investments in
McLeodUSA and XO Communications.[68] [69] Tom Hicks resigned from Hicks Muse at the end of 2004 and
Forstmann Little was unable to raise a new fund. The treasure of the State of Connecticut, sued Forstmann Little to
return the state's $96 million investment to that point and to cancel the commitment it made to take its total
investment to $200 million.[70] The humbling of these private equity titans could hardly have been predicted by their
investors in the 1990s and forced fund investors to conduct due diligence on fund managers more carefully and
include greater controls on investments in partnership agreements.
Deals completed during this period tended to be smaller and financed less with high yield debt than in other periods.
Private equity firms had to cobble together financing made up of bank loans and mezzanine debt, often with higher
equity contributions than had been seen. Private equity firms benefited from the lower valuation multiples. As a
result, despite the relatively limited activity, those funds that invested during the adverse market conditions delivered
attractive returns to investors. Meanwhile, in Europe LBO activity began to increase as the market continued to
mature. In 2001, for the first time, European buyout activity exceeded US activity with $44 billion of deals
completed in Europe as compared with just $10.7 billion of deals completed in the US. This was a function of the
fact that just six LBOs in excess of $500 million were completed in 2001, against 27 in 2000.[71]
As investors sought to reduce their exposure to the private equity asset class, an area of private equity that was
increasingly active in these years was the nascent secondary market for private equity interests. Secondary
transaction volume increased from historical levels of 2% or 3% of private equity commitments to 5% of the
addressable market in the early years of the new decade.[72] [73] Many of the largest financial institutions (e.g.,
Deutsche Bank, Abbey National, UBS AG) sold portfolios of direct investments and “pay-to-play” funds portfolios
that were typically used as a means to gain entry to lucrative leveraged finance and mergers and acquisitions
assignments but had created hundreds of millions of dollars of losses. Some of the most notable financial institutions
to complete publicly disclosed secondary transactions during this period include: Chase Capital Partners (2000),
National Westminster Bank (2000), UBS AG (2003), Deutsche Bank (MidOcean Partners) (2003) Abbey National
(2004) and Bank One (2004).
The third private equity boom and the Golden Age of Private Equity
(2003-2007)
As 2002 ended and 2003 began, the private equity sector, had spent the previous three two and a half years reeling
from major losses in telecommunications and technology companies and had been severely constrained by tight
credit markets. As 2003 got underway, private equity began a five year resurgence that would ultimately result in the
completion of 13 of the 15 largest leveraged buyout transactions in history, unprecedented levels of investment
activity and investor commitments and a major expansion and maturation of the leading private equity firms.
The combination of decreasing interest rates, loosening lending standards and regulatory changes for publicly traded
companies would set the stage for the largest boom private equity had seen. The Sarbanes Oxley legislation,
officially the Public Company Accounting Reform and Investor Protection Act, passed in 2002, in the wake of
corporate scandals at Enron, WorldCom, Tyco, Adelphia, Peregrine Systems and Global Crossing among others,
would create a new regime of rules and regulations for publicly traded corporations. In addition to the existing focus
on short term earnings rather than long term value creation, many public company executives lamented the extra cost
and bureaucracy associated with Sarbanes-Oxley compliance. For the first time, many large corporations saw private
equity ownership as potentially more attractive than remaining public. Sarbanes-Oxley would have the opposite
effect on the venture capital industry. The increased compliance costs would make it nearly impossible for venture
capitalists to bring young companies to the public markets and dramatically reduced the opportunities for exits via
IPO. Instead, venture capitalists have been forced increasingly to rely on sales to strategic buyers for an exit of their
investment.[74]
History of private equity and venture capital 16
Interest rates, which began a major series of decreases in 2002 would reduce the cost of borrowing and increase the
ability of private equity firms to finance large acquisitions. Lower interest rates would encourage investors to return
to relatively dormant high-yield debt and leveraged loan markets, making debt more readily available to finance
buyouts. Additionally, alternative investments also became increasingly important as investors focused on yields
despite increases in risk. This search for higher yielding investments would fuel larger funds and in turn larger deals,
never thought possible, became reality.
Certain buyouts were completed in 2001 and early 2002, particularly in Europe where financing was more readily
available. In 2001, for example, BT Group agreed to sell its international yellow pages directories business (Yell
Group) to Apax Partners and Hicks, Muse, Tate & Furst for £2.14 billion (approximately $3.5 billion at the time),[75]
making it then the largest non-corporate LBO in European history. Yell later bought US directories publisher
McLeodUSA for about $600 million, and floated on London's FTSE in 2003.
Among the largest buyouts of this period included: Georgia-Pacific Corp (2005), Albertson's (2006), Equity Office
Properties (2006 ), Freescale Semiconductor (2006), GMAC (2006), HCA (2006), Kinder Morgan (2006), Harrah's
Entertainment (2006), TDC A/S (2006), Sabre Holdings (2006), Travelport (2006), Alliance Boots (2007), Biomet
(2007), Chrysler (2007), First Data (2007) and TXU (2007).
trading volume was limited.[85] Initially, a handful of other private equity firms, including Blackstone, and hedge
funds had planned to follow KKR's lead but when KPE was increased to $5 billion, it soaked up all the demand.[86]
That together with the slump of KPE's shares caused the other firms shelved their plans. KPE's stock declined from
an IPO price of €25 per share to €18.16 (a 27% decline) at the end of 2007 and a low of €11.45 (a 54.2% decline)
per share in Q1 2008.[87] KPE disclosed in May 2008 that it had completed approximately $300 million of secondary
sales of selected limited partnership interests in and undrawn commitments to certain KKR-managed funds in order
to generate liquidity and repay borrowings.[88]
On March 22, 2007, after nine months of secret
preparations, the Blackstone Group filed with the
SEC[89] to raise $4 billion in an initial public
offering. On June 21, Blackstone sold a 12.3% stake
in its ownership to the public for $4.13 billion in the
largest U.S. IPO since 2002.[90] Traded on the New
York Stock Exchange under the ticker symbol BX,
Blackstone priced at $31 per share on June 22,
2007.[91] [92]
Meanwhile, other private equity investors were seeking to realize a portion of the value locked into their firms. In
September 2007, the Carlyle Group sold a 7.5% interest in its management company to Mubadala Development
Company, which is owned by the Abu Dhabi Investment Authority (ADIA) for $1.35 billion, which valued Carlyle
at approximately $20 billion.[95] Similarly, in January 2008, Silver Lake Partners sold a 9.9% stake in its
management company to the California Public Employees' Retirement System (CalPERS) for $275 million.[96]
Additionally, Apollo Management completed a private placement of shares in its management company in July
2007. By pursuing a private placement rather than a public offering, Apollo would be able to avoid much of the
public scrutiny applied to Blackstone and KKR.[97] [98] In April 2008, Apollo filed with the SEC[99] to permit some
holders of its privately traded stock to sell their shares on the New York Stock Exchange.[100] In April 2004, Apollo
raised $930 million for a listed business development company, Apollo Investment Corporation (NASDAQ: AINV),
to invest primarily in middle-market companies in the form of mezzanine debt and senior secured loans, as well as
by making direct equity investments in companies. The Company also invests in the securities of public
companies.[101]
Historically, in the United States, there had been a group of publicly traded private equity firms that were registered
as business development companies (BDCs) under the Investment Company Act of 1940.[102] Typically, BDCs are
structured similar to real estate investment trusts (REITs) in that the BDC structure reduces or eliminates corporate
income tax. In return, REITs are required to distribute 90% of their income, which may be taxable to its investors.
As of the end of 2007, among the largest BDCs (by market value, excluding Apollo Investment Corp, discussed
earlier) are: American Capital Strategies (NASDAQ: ACAS), Allied Capital Corp((NASDAQ:ALD), Ares Capital
Corporation (NASDAQ:ARCC), Gladstone Investment Corp (NASDAQ:GAIN) and Kohlberg Capital Corp
(NASDAQ:KCAP).
History of private equity and venture capital 19
Secondary market and the evolution of the private equity asset class
In the wake of the collapse of the equity markets in 2000, many investors in private equity sought an early exit from
their outstanding commitments.[103] The surge in activity in the secondary market, which had previously been a
relatively small niche of the private equity industry, prompted new entrants to the market, however the market was
still characterized by limited liquidity and distressed prices with private equity funds trading at significant discounts
to fair value.
Beginning in 2004 and extending through 2007, the secondary market transformed into a more efficient market in
which assets for the first time traded at or above their estimated fair values and liquidity increased dramatically.
During these years, the secondary market transitioned from a niche sub-category in which the majority of sellers
were distressed to an active market with ample supply of assets and numerous market participants.[104] By 2006
active portfolio management had become far more common in the increasingly developed secondary market and an
increasing number of investors had begun to pursue secondary sales to rebalance their private equity portfolios. The
continued evolution of the private equity secondary market reflected the maturation and evolution of the larger
private equity industry. Among the most notable publicly disclosed secondary transactions (it is estimated that over
two-thirds of secondary market activity is never disclosed publicly): CalPERS (2008), Ohio Bureau of Workers'
Compensation (2007), MetLife (2007), Bank of America (2006 and 2007), Mellon Financial Corporation (2006),
American Capital Strategies (2006), JPMorgan Chase, Temasek Holdings, Dresdner Bank and Dayton Power &
Light [105].
Schwarzman received a severe backlash from both critics of the private equity industry and fellow investors in
private equity. The lavish event which reminded many of the excesses of notorious executives including Bernie
Ebbers (WorldCom) and Dennis Kozlowski (Tyco International). David Bonderman, the founder of TPG Capital
remarked, "We have all wanted to be private – at least until now. When Steve Schwarzman's biography with all the
dollar signs is posted on the web site none of us will like the furor that results – and that's even if you like Rod
Stewart."[113] As the IPO drew closer, there were moves by a number of congressman and senators to block the stock
offering and to raise taxes on private equity firms and/or their partners -- proposals many attributed in part to the
extravagance of the party.[114]
Rubinstein's fears would be confirmed when in 2007, the Service Employees International Union launched a
campaign against private equity firms, specifically the largest buyout firms through public events, protests as well as
leafleting and web campaigns.[115] [116] [117] A number of leading private equity executives were targeted by the
union members[118] however the SEIU's campaign was non nearly as effective at slowing the buyout boom as the
credit crunch of 2007 and 2008 would ultimately prove to be.
In 2008, the SEIU would shift part of its focus from attacking private equity firms directly toward the highlighting
the role of sovereign wealth funds in private equity. The SEIU pushed legislation in California that would disallow
investments by state agencies (particularly CalPERS and CalSTRS) in firms with ties to certain sovereign wealth
funds.[119] Additionally, the SEIU has attempted to criticize the treatment of taxation of carried interest. The SEIU,
and other critics, point out that many wealthy private equity investors pay taxes at lower rates (because the majority
of their income is derived from carried interest, payments received from the profits on a private equity fund's
investments) than many of the rank and file employees of a private equity firm's portfolio companies.[120]
See also
• Private equity firms (category)
• Venture capital firms (category)
• Private equity and venture capital investors (category)
• Financial sponsor
• Private equity firm
• Private equity fund
• Private equity secondary market
• Mezzanine capital
• Private investment in public equity
• Taxation of Private Equity and Hedge Funds
• Investment banking
• Mergers and acquisitions
Notes
[1] Wilson, John. The New Ventures, Inside the High Stakes World of Venture Capital.
[2] WGBH Public Broadcasting Service, “Who made America?"-Georges Doriot” (http:/ / www. pbs. org/ wgbh/ theymadeamerica/ whomade/
doriot_hi. html/ )
[3] The New Kings of Capitalism, Survey on the Private Equity industry (http:/ / www. economist. com/ specialreports/ displayStory.
cfm?story_id=3398496/ ) The Economist, November 25, 2004
[4] Joseph W. Bartlett, "What Is Venture Capital?" (http:/ / vcexperts. com/ vce/ library/ encyclopedia/ documents_view. asp?document_id=15)
[5] Kirsner, Scott. "Venture capital's grandfather." The Boston Globe, April 6, 2008.
[6] Small Business Administration Investment Division (SBIC) (http:/ / www. sba. gov/ aboutsba/ sbaprograms/ inv/ index. html)
[7] The Future of Securities Regulation (http:/ / www. sec. gov/ news/ speech/ 2007/ spch102407bgc. htm) speech by Brian G. Cartwright,
General Counsel U.S. Securities and Exchange Commission. University of Pennsylvania Law School Institute for Law and Economics
Philadelphia, Pennsylvania. October 24, 2007.
[8] Draper Investment Company Histoy (http:/ / www. draperco. com/ history. html) Retrieved, July 2010
History of private equity and venture capital 22
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[55] Jimmy Lee's Global Chase (http:/ / www. businessweek. com/ archives/ 1997/ b3522103. arc. htm). New York Times, April 14, 1997
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[57] Private Equity: Past, Present, Future (http:/ / fusion. dalmatech. com/ ~admin24/ files/ private_equity_intro. pdf), by Sethi, Arjun May
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[79] Photographed at the World Economic Forum in Davos, Switzerland in January 2008.
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[83] Dow Jones Private Equity Analyst as referenced in Private equity fund raising up in 2007: report (http:/ / www. reuters. com/ article/
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[84] Timmons, Heather. " Opening Private Equity's Door, at Least a Crack, to Public Investors (http:/ / www. nytimes. com/ 2006/ 05/ 04/
business/ worldbusiness/ 04place. html)." New York Times, May 4, 2006.
[85] Timmons, Heather. " Private Equity Goes Public for $5 Billion. Its Investors Ask, ‘What’s Next?’ (http:/ / www. nytimes. com/ 2006/ 11/ 10/
business/ 10private. html)." New York Times, November 10, 2006.
[86] King of Capital, pp. 218-223
[87] Anderson, Jenny. " Where Private Equity Goes, Hedge Funds May Follow (http:/ / www. nytimes. com/ 2006/ 06/ 23/ business/ 23insider.
html)." New York Times, June 23, 2006.
[88] Press Release: KKR Private Equity Investors Reports Results for Quarter Ended March 31, 2008 (http:/ / www. kkrpei. com/ pdfs/
KKRPEI-PR_05_07_08. pdf), May 7, 2008
[89] The Blackstone Group L.P., FORM S-1 (http:/ / www. sec. gov/ Archives/ edgar/ data/ 1404912/ 000104746907005446/ a2178646zs-1.
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[90] King of Capital, pp. 255-277
[91] SORKIN, ANDREW ROSS and DE LA MERCED, MICHAEL J. " News Analysis Behind the Veil at Blackstone? Probably Another Veil
(http:/ / www. nytimes. com/ 2007/ 03/ 19/ business/ 19blackstone. html)." New York Times, March 19, 2007.
[92] Anderson, Jenny. " Blackstone Founders Prepare to Count Their Billions (http:/ / www. nytimes. com/ 2007/ 06/ 12/ business/ 12blackstone.
html)." New York Times, June 12, 2007.
[93] KKR & CO. L.P., FORM S-1 (http:/ / www. sec. gov/ Archives/ edgar/ data/ 1404912/ 000104746907005446/ a2178646zs-1. htm),
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[94] JENNY ANDERSON and MICHAEL J. de la MERCED. " Kohlberg Kravis Plans to Go Public (http:/ / www. nytimes. com/ 2007/ 07/ 04/
business/ 04kkr. html)." New York Times, July 4, 2007.
[95] Sorkin, Andrew Ross. " Carlyle to Sell Stake to a Mideast Government (http:/ / www. nytimes. com/ 2007/ 09/ 21/ business/ worldbusiness/
21carlyle. html)." New York Times, September 21, 2007.
[96] Sorkin, Andrew Ross. " California Pension Fund Expected to Take Big Stake in Silver Lake, at $275 Million (http:/ / www. nytimes. com/
2008/ 01/ 09/ business/ 09deal. html)." New York Times, January 9, 2008
[97] SORKIN, ANDREW ROSS and de la MERCED, MICHAEL J. " Buyout Firm Said to Seek a Private Market Offering (http:/ / www.
nytimes. com/ 2007/ 07/ 18/ business/ 18place. html)." New York Times, July 18, 2007.
[98] SORKIN, ANDREW ROSS. " Equity Firm Is Seen Ready to Sell a Stake to Investors (http:/ / www. nytimes. com/ 2007/ 04/ 05/ business/
05deal. html)." New York Times, April 5, 2007.
[99] APOLLO GLOBAL MANAGEMENT, LLC, FORM S-1 (http:/ / www. sec. gov/ Archives/ edgar/ data/ 1411494/ 000119312508077312/
ds1. htm), SECURITIES AND EXCHANGE COMMISSION, April 8, 2008
[100] de la MERCED, MICHAEL J. " Apollo Struggles to Keep Debt From Sinking Linens ’n Things (http:/ / www. nytimes. com/ 2008/ 04/ 14/
business/ 14apollo. html)." New York Times, April 14, 2008.
[101] FABRIKANT, GERALDINE. " Private Firms Use Closed-End Funds To Tap the Market (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9C03E4DD133BF934A25757C0A9629C8B63)." New York Times, April 17, 2004.
[102] Companies must elect to be treated as a "business development company" under the terms of the Investment Company Act of 1940 (
Investment Company Act of 1940: Section 54 -- Election to Be Regulated as Business Development Company (http:/ / www. law. uc. edu/
CCL/ InvCoAct/ sec54. html))
[103] Cortese, Amy. " Business; Private Traders See Gold in Venture Capital Ruins (http:/ / query. nytimes. com/ gst/ fullpage.
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[104] Private Equity Market Environment: Spring 2004 (http:/ / www. circlepeakcapital. com/ press/ probitas_market_overview. pdf), Probitas
Partners
[105] http:/ / www. dplinc. com
[106] SORKIN, ANDREW ROSS and de la MERCED, MICHAEL J. " Private Equity Investors Hint at Cool Down (http:/ / www. nytimes. com/
2007/ 06/ 26/ business/ 26place. html)." New York Times, June 26, 2007
History of private equity and venture capital 25
[107] SORKIN, ANDREW ROSS. " Sorting Through the Buyout Freezeout (http:/ / www. nytimes. com/ 2007/ 08/ 12/ business/ yourmoney/
12deal. html)." New York Times, August 12, 2007.
[108] Turmoil in the markets (http:/ / www. economist. com/ finance/ displaystory. cfm?story_id=9566005)The Economist July 27, 2007
[109] Opalesque (19 November 2009). "PE firms mull future as asset managers" (http:/ / www. opalesque. com/ 55931/ private equity/
Outlook_firms_mull356. html). .
[110] King of Capital, pp. 98-100
[111] Susan Faludi, "The Reckoning: Safeway LBO Yields Vast Profits but Exacts a Heavy Human Toll," Wall Street Journal, May 16, 1990, p.
A1
[112] Pratley, Nils. Fahrenheit 9/11 had no effect, says Carlyle chief (http:/ / www. guardian. co. uk/ print/ 0,3858,5127052-103676,00. html),
The Guardian, February 15, 2005.
[113] Sender, Henny and Langley, Monica. " Buyout Mogul: How Blackstone's Chief Became $7 Billion Man – Schwarzman Says He's Worth
Every Penny; $400 for Stone Crabs (http:/ / schwert. ssb. rochester. edu/ f423/ WSJ070613_Blackstone. pdf)." The Wall Street Journal, June
13, 2007.
[114] King of Capital, pp. 271-276
[115] Sorkin, Andrew Ross. " Sound and Fury Over Private Equity (http:/ / www. nytimes. com/ 2007/ 05/ 20/ business/ yourmoney/ 20deal.
html)." The New York Times, May 20, 2007.
[116] Heath, Thomas. " Ambushing Private Equity: As SEIU Harries New Absentee Owners, Buyout Firms Dispute the Union's Agenda (http:/ /
www. washingtonpost. com/ wp-dyn/ content/ article/ 2008/ 04/ 17/ AR2008041704239. html)" The Washington Post, April 18, 2008
[117] Service Employees International Union's " Behind the Buyouts (http:/ / www. behindthebuyouts. org/ )" website
[118] DiStefano, Joseph N. Hecklers delay speech; Carlyle CEO notes private-equity ‘purgatory’ (http:/ / www. philly. com/ inquirer/ business/
homepage/ 20080118_Union_hecklers_disrupt_Phila__conference. html) The Philadelphia Inquirer, Jan. 18, 2008.
[119] California's Stern Rebuke (http:/ / online. wsj. com/ article/ SB120873771821130001. html?mod=opinion_main_review_and_outlooks).
The Wall Street Journal, April 21, 2008; Page A16.
[120] Protesting a Private Equity Firm (With Piles of Money) (http:/ / dealbook. blogs. nytimes. com/ 2007/ 10/ 10/
protesting-private-equity-with-piles-of-money/ ) The New York Times, October 10, 2007.
References
• Anders, George. Merchants of Debt: KKR and the Mortgaging of American Business. Washington, D.C.: Beard
Books, 2002 (originally published by Basic Books in 1992)
• Ante, Spencer. Creative capital : Georges Doriot and the birth of venture capital. Boston: Harvard Business
School Press, 2008
• Bance, A. (2004). Why and how to invest in private equity (http://www.evca.com/pdf/Invest.pdf). European
Private Equity and Venture Capital Association (EVCA). Accessed May 22, 2008.
• Bruck, Connie. Predator's Ball. New York: Simon and Schuster, 1988.
• Burrill, G. Steven, and Craig T. Norback. The Arthur Young Guide to Raising Venture Capital. Billings, MT:
Liberty House, 1988.
• Burrough, Bryan. Barbarians at the Gate. New York : Harper & Row, 1990.
• Carey, David and Morris, John E. King of Capital: The Remarkable Rise, Fall and Rise Again of Steve
Schwarzman and Blackstone (http://www.randomhouse.com/catalog/display.pperl?isbn=9780307452993).
New York: Crown Business, 2010
• Craig. Valentine V. Merchant Banking: Past and Present (http://www.fdic.gov/bank/analytical/banking/
2001sep/br2001v14n1art2.pdf). FDIC Banking Review. 2000.
• Fenn, George W., Nellie Liang, and Stephen Prowse. December, 1995. The Economics of the Private Equity
Market. Staff Study 168, Board of Governors of the Federal Reserve System.
• Gibson, Paul. "The Art of Getting Funded." Electronic Business, March 1999.
• Gladstone, David J. Venture Capital Handbook. Rev. ed. Englewood Cliffs, NJ: Prentice Hall, 1988.
• Hsu, D., and Kinney, M (2004). Organizing venture capital: the rise and demise of American Research and
Development Corporation (http://brie.berkeley.edu/~briewww/publications/WP163.pdf), 1946-1973.
Working paper 163. Accessed May 22, 2008
• Littman, Jonathan. "The New Face of Venture Capital." Electronic Business, March 1998.
• Loewen, J. (2008). Money Magnet: Attract Investors to Your Business: John Wiley & Sons. ISBN
978-0-470-15575-2
History of private equity and venture capital 26
Pre-history
Investors have been acquiring businesses and making minority
investments in privately held companies since the dawn of the
industrial revolution. Merchant bankers in London and Paris financed
industrial concerns in the 1850s; most notably Credit Mobilier,
founded in 1854 by Jacob and Isaac Pereire, who together with New
York based Jay Cooke financed the United States Transcontinental
Railroad.
Later, J. Pierpont Morgan's J.P. Morgan & Co. would finance railroads
and other industrial companies throughout the United States. In certain
respects, J. Pierpont Morgan's 1901 acquisition of Carnegie Steel
Company from Andrew Carnegie and Henry Phipps for $480 million
represents the first true major buyout as they are thought of today.
Due to structural restrictions imposed on American banks under the
Glass-Steagall Act and other regulations in the 1930s, there was no
private merchant banking industry in the United States, a situation that
was quite exceptional in developed nations. As late as the 1980s,
Lester Thurow, a noted economist, decried the inability of the financial
regulation framework in the United States to support merchant banks.
US investment banks were confined primarily to advisory businesses,
handling mergers and acquisitions transactions and placements of
Andrew Carnegie sold his steel company to J.P. equity and debt securities. Investment banks would later enter the
Morgan in 1901 in arguably the first true modern
space, however long after independent firms had become well
buyout
established.
With few exceptions, private equity in the first half of the 20th century was the domain of wealthy individuals and
families. The Vanderbilts, Whitneys, Rockefellers and Warburgs were notable investors in private companies in the
first half of the century. In 1938, Laurance S. Rockefeller helped finance the creation of both Eastern Air Lines and
Douglas Aircraft and the Rockefeller family had vast holdings in a variety of companies. Eric M. Warburg founded
E.M. Warburg & Co. in 1938, which would ultimately become Warburg Pincus, with investments in both leveraged
buyouts and venture capital.
Early venture capital and the growth of Silicon Valley (1959 - 1981)
During the 1960s and 1970s, venture capital firms focused
their investment activity primarily on starting and expanding
companies. More often than not, these companies were
exploiting breakthroughs in electronic, medical or
data-processing technology. As a result, venture capital came
to be almost synonymous with technology finance.
It is commonly noted that the first venture-backed startup was
Fairchild Semiconductor (which produced the first
commercially practicable integrated circuit), funded in 1959
by what would later become Venrock Associates.[7] Venrock
was founded in 1969 by Laurance S. Rockefeller, the fourth of
John D. Rockefeller's six children as a way to allow other
Rockefeller children to develop exposure to venture capital
investments.
An early West Coast venture capital company was Draper and Johnson Investment Company, formed in 1962[8] by
William Henry Draper III and Franklin P. Johnson, Jr. In 1964 Bill Draper and Paul Wythes founded Sutter Hill
Ventures, and Pitch Johnson formed Asset Management Company [9].
Early history of private equity 29
The growth of the venture capital industry was fueled by the emergence of the independent investment firms on Sand
Hill Road, beginning with Kleiner, Perkins, Caufield & Byers and Sequoia Capital in 1972. Located, in Menlo Park,
CA, Kleiner Perkins, Sequoia and later venture capital firms would have access to the burgeoning technology
industries in the area. By the early 1970s, there were many semiconductor companies based in the Santa Clara
Valley as well as early computer firms using their devices and programming and service companies.[9] Throughout
the 1970s, a group of private equity firms, focused primarily on venture capital investments, would be founded that
would become the model for later leveraged buyout and venture capital investment firms. In 1973, with the number
of new venture capital firms increasing, leading venture capitalists formed the National Venture Capital Association
(NVCA). The NVCA was to serve as the industry trade group for the venture capital industry.[10] Venture capital
firms suffered a temporary downturn in 1974, when the stock market crashed and investors were naturally wary of
this new kind of investment fund. It was not until 1978 that venture capital experienced its first major fundraising
year, as the industry raised approximately $750 million. During this period, the number of venture firms also
increased. Among the firms founded in this period, in addition to Kleiner Perkins and Sequoia, that continue to
invest actively are:
• TA Associates, a venture capital firm (and later leveraged buyouts as well), originally part of the Tucker Anthony
brokerage firm, founded in 1968;
• Mayfield Fund, founded by early Silicon Valley venture capitalist Tommy Davis in 1969;
• Apax Partners, the firm's earliest predecessor, the venture capital firm Patricof & Co. was founded in 1969 and
subsequently merged with Multinational Management Group (founded 1972) and later with Saunders Karp &
Megrue (founded 1989);
• New Enterprise Associates founded by Chuck Newhall, Frank Bonsal and Dick Kramlich in 1978;
• Oak Investment Partners founded in 1978; and
• Sevin Rosen Funds founded by L.J. Sevin and Ben Rosen in 1980.
Venture capital played an instrumental role in developing many of the major technology companies of the 1980s.
Some of the most notable venture capital investments were made in firms that include:
• Tandem Computers, an early manufacturer of computer systems, founded in 1975 by Jimmy Treybig with funding
from Kleiner, Perkins, Caufield & Byers.[11]
• Genentech a biotechnology company, founded in 1976 with venture capital from Robert A. Swanson.[12] [13]
• Apple Inc., a designer and manufacturer of consumer electronics, including the Macintosh computer and in later
years the iPod, founded in 1978. In December 1980, Apple went public. Its offering of 4.6 million shares at $22
each sold out within minutes. A second offering of 2.6 million shares quickly sold out in May 1981.[14]
• Electronic Arts, a distributor of computer and video games found in May 1982 by Trip Hawkins with a personal
investment of an estimated $200,000. Seven months later in December 1982, Hawkins secured $2 million of
venture capital from Sequoia Capital, Kleiner, Perkins and Sevin Rosen Funds.[15]
• Compaq, 1982, Computer manufacturer. In 1982, venture capital firm Sevin Rosen Funds provided $2.5 million
to fund the startup of Compaq, which would ultimately grow into one of the largest personal computer
manufacturers before merging with Hewlett Packard in 2002.[16]
• Federal Express, Venture capitalists invested $80 million to help founder Frederick W. Smith purchase his first
Dassault Falcon 20 airplanes.[17] [18]
• LSI Corporation was funded in 1981 with $6 million from noted venture capitalists including Sequoia Capital. A
second round of financing for an additional $16 million was completed in March 1982. The firm went public on
May 13, 1983, netting $153 million, the largest technology IPO to that point.
Early history of private equity 30
of the high yield bonds (or junk bonds) that were necessary to complete leveraged buyout transactions.
• Economic Recovery Tax Act of 1981 (ERTA) - On August 15, 1981, Ronald Reagan signed the Kemp-Roth bill,
officially known as the Economic Recovery Tax Act of 1981, into law, lowering of the top capital gains tax rate
from 28 percent to 20 percent, and making high risk investments even more attractive.
In the years that would follow these events, private equity would experience its first major boom, acquiring some of
the famed brands and major industrial powers of American business.
See also
• History of private equity and venture capital
• Private equity in the 1980s
• Private equity in the 1990s
• Private equity in the 21st century
• Private equity firms (category)
• Venture capital firms (category)
• Private equity and venture capital investors (category)
• Financial sponsor
• Private equity firm
• Private equity fund
• Private equity secondary market
• Mezzanine capital
• Private investment in public equity
• Taxation of Private Equity and Hedge Funds
• Investment banking
• Mergers and acquisitions
Notes
[1] Wilson, John. The New Ventures, Inside the High Stakes World of Venture Capital.
[2] WGBH Public Broadcasting Service, “Who made America?"-Georges Doriot” (http:/ / www. pbs. org/ wgbh/ theymadeamerica/ whomade/
doriot_hi. html/ )
[3] The New Kings of Capitalism, Survey on the Private Equity industry (http:/ / www. economist. com/ specialreports/ displayStory.
cfm?story_id=3398496/ ) The Economist, November 25, 2004
[4] Joseph W. Bartlett, "What Is Venture Capital?" (http:/ / vcexperts. com/ vce/ library/ encyclopedia/ documents_view. asp?document_id=15)
[5] Kirsner, Scott. "Venture capital's grandfather." The Boston Globe, April 6, 2008.
[6] Small Business Administration Investment Division (SBIC) (http:/ / www. sba. gov/ aboutsba/ sbaprograms/ inv/ index. html)
[7] The Future of Securities Regulation (http:/ / www. sec. gov/ news/ speech/ 2007/ spch102407bgc. htm) speech by Brian G. Cartwright,
General Counsel U.S. Securities and Exchange Commission. University of Pennsylvania Law School Institute for Law and Economics
Philadelphia, Pennsylvania. October 24, 2007.
[8] http:/ / www. draperco. com/ history. html Web site history
Early history of private equity 33
[9] In 1971, a series of articles entitled "Silicon Valley USA" were published in the Electronic News, a weekly trade publication, giving rise to
the use of the term Silicon Valley.
[10] Official website of the National Venture Capital Association (http:/ / www. nvca. org/ ), the largest trade association for the venture capital
industry.
[11] Tandem Computers (http:/ / www. fundinguniverse. com/ company-histories/ TANDEM-COMPUTERS-INC-Company-History. html)
FundingUniverse.com
[12] Eugene Russo (2003-01-23). "Special Report: The birth of biotechnology" (http:/ / www. nature. com/ nature/ journal/ v421/ n6921/ full/
nj6921-456a. html). Nature. .
[13] "Genentech was founded by venture capitalist Robert A. Swanson and biochemist Dr. Herbert W. Boyer. After a meeting in 1976, the two
decided to start the first biotechnology company, Genentech." Genentech. "Corporate Overview" (http:/ / www. gene. com/ gene/ about/
corporate/ index. jsp?hl=en& q=genentech). .
[14] Apple Computer, Inc. (http:/ / www. fundinguniverse. com/ company-histories/ Apple-Computer-Inc-Company-History. html)
FundingUniverse.com
[15] Electronic Arts Inc. (http:/ / www. fundinguniverse. com/ company-histories/ Electronic-Arts-Inc-Company-History. html)
FundingUniverse.com
[16] Compaq Computer Corporation (http:/ / www. fundinguniverse. com/ company-histories/
Compaq-Computer-Corporation-Company-History. html) FundingUniverse.com
[17] Smith, Fred. How I Delivered the Goods (http:/ / www. fedex. com/ us/ about/ news/ ontherecord/ speaker/ fredsmith. pdf?link=4), Fortune
(magazine) small business, October 2002.
[18] FedEx Corporation (http:/ / www. fundinguniverse. com/ company-histories/ FedEx-Corporation-Company-History. html)
FundingUniverse.com
[19] On January 21, 1955, McLean Industries, Inc. purchased the capital stock of Pan Atlantic Steamship Corporation and Gulf Florida Terminal
Company, Inc. from Waterman Steamship Corporation. In May, McLean Industries, Inc. completed the acquisition of the common stock of
Waterman Steamship Corporation from its founders and other stockholders.
[20] Marc Levinson, The Box, How the Shipping Container Made the World Smaller and the World Economy Bigger, pp. 44-47 (Princeton Univ.
Press 2006). The details of this transaction are set out in ICC Case No. MC-F-5976, McLean Trucking Company and Pan-Atlantic American
Steamship Corporation--Investigation of Control, July 8, 1957.
[21] Trehan, R. (2006). The History Of Leveraged Buyouts (http:/ / www. 4hoteliers. com/ 4hots_fshw. php?mwi=1757). December 4, 2006.
Accessed May 22, 2008
[22] The History of Private Equity (http:/ / www. investmentu. com/ research/ private-equity-history. html) (Investment U, The Oxford Club
[23] Barbarians at the Gate, p. 133-136
[24] In 1976, Kravis was forced to serve as interim CEO of a failing direct mail company Advo.
[25] Refers to Henry Hillman and the Hillman Company. The Hillman Company (http:/ / www. answers. com/ topic/
the-hillman-company?cat=biz-fin) (Answers.com profile)
[26] Barbarians at the Gate, p. 136-140
[27] " Private Equity Pioneer Golder Dies (http:/ / www. buyoutsnews. com/ story. asp?storycode=23408)." Buyouts, January 24, 2000. A cached
version of the article can be found here. (http:/ / 66. 102. 9. 104/ search?q=cache:5BirPt3LPWgJ:www. buyoutsnews. com/ story.
asp?storycode=23408+ "gtcr+ golder+ rauner"+ "thoma+ cressey"& hl=en& ct=clnk& cd=17& gl=us)
[28] Saunders, Laura. How The Government Subsidizes Leveraged Takeovers (http:/ / www. forbes. com/ forbes/ 1988/ 1128/ 192_print. html).
Forbes, November 28, 1988.
[29] The “prudent man rule” is a fiduciary responsibility of investment managers under ERISA. Under the original application, each investment
was expected to adhere to risk standards on its own merits, limiting the ability of investment managers to make any investments deemed
potentially risky. Under the revised 1978 interpretation, the concept of portfolio diversification of risk, measuring risk at the aggregate
portfolio level rather than the investment level to satisfy fiduciary standards would also be accepted.
[30] Taylor, Alexander L. " Boom Time in Venture Capital (http:/ / www. time. com/ time/ magazine/ article/ 0,9171,954903-3,00. html)". TIME
magazine, Aug. 10, 1981.
[31] Source: Thomson Financial's VentureXpert (http:/ / vx. thomsonib. com/ ) database for Commitments. Searching "All Private Equity Funds"
(Venture Capital, Buyout and Mezzanine).
Early history of private equity 34
References
• Ante, Spencer. Creative capital : Georges Doriot and the birth of venture capital. Boston: Harvard Business
School Press, 2008
• Bance, A. (2004). Why and how to invest in private equity (http://www.evca.com/pdf/Invest.pdf). European
Private Equity and Venture Capital Association (EVCA). Accessed May 22, 2008.
• Bruck, Connie. The Predators' Ball. New York: Simon and Schuster, 1988.
• Burrill, G. Steven, and Craig T. Norback. The Arthur Young Guide to Raising Venture Capital. Billings, MT:
Liberty House, 1988.
• Burrough, Bryan. Barbarians at the Gate. New York : Harper & Row, 1990.
• Craig. Valentine V. Merchant Banking: Past and Present (http://www.fdic.gov/bank/analytical/banking/
2001sep/br2001v14n1art2.pdf). FDIC Banking Review. 2000.
• Fenn, George W., Nellie Liang, and Stephen Prowse. December, 1995. The Economics of the Private Equity
Market. Staff Study 168, Board of Governors of the Federal Reserve System.
• Gibson, Paul. "The Art of Getting Funded." Electronic Business, March 1999.
• Gladstone, David J. Venture Capital Handbook. Rev. ed. Englewood Cliffs, NJ: Prentice Hall, 1988.
• Hsu, D., and Kinney, M (2004). Organizing venture capital: the rise and demise of American Research and
Development Corporation (http://brie.berkeley.edu/~briewww/publications/WP163.pdf), 1946-1973.
Working paper 163. Accessed May 22, 2008
• Littman, Jonathan. "The New Face of Venture Capital." Electronic Business, March 1998.
• Loos, Nicolaus. Value Creation in Leveraged Buyouts (http://www.unisg.ch/www/edis.nsf/
wwwDisplayIdentifier/3052/$FILE/dis3052.pdf). Dissertation of the University of St. Gallen. Lichtenstein:
Guttenberg AG, 2005. Accessed May 22, 2008.
• National Venture Capital Association, 2005, The 2005 NVCA Yearbook.
• Schell, James M. Private Equity Funds: Business Structure and Operations. New York: Law Journal Press, 1999.
• Sharabura, S. (2002). Private Equity: past, present, and future (http://media.www.chibus.com/media/storage/
paper408/news/2002/02/18/GsbBusiness/Equity.Past.Present.And.Future-187504.shtml). GE Capital
Speaker Discusses New Trends in Asset Class. Speech to GSB 2/13/2002. Accessed May 22, 2008.
• Trehan, R. (2006). The History Of Leveraged Buyouts (http://www.4hoteliers.com/4hots_fshw.
php?mwi=1757). December 4, 2006. Accessed May 22, 2008.
• Cheffins, Brian. " THE ECLIPSE OF PRIVATE EQUITY (http://www.cbr.cam.ac.uk/pdf/wp339.pdf)".
Centre for Business Research, University Of Cambridge, 2007.
Private equity in the 1980s 35
One of Thomas H. Lee's early successes was the acquisition of Akron, Ohio-based Sterling Jewelers for $28
million. Lee reported put in less than $3 million and when the company was sold two years later for $210
million walked away with over $180 million in profits. The combined company was an early predecessor to
what is now Signet Group, one of Europe's largest jewelry retail chains.[7]
• Revco Drug Stores , 1986
The drug store chain was taken private in a management buyout transaction. However, within two years the
company was unable to support its debt load and filed for bankruptcy protection.[8] Bondholders in the Revco
buyout ultimately contended that the buyout was so poorly constructed that the transaction should have been
unwound.[9]
• Safeway, 1986
KKR completed a friendly $5.5 billion buyout of supermarket operator, Safeway, to help management avoid
hostile overtures from Herbert and Robert Haft of Dart Drug.[10] Safeway was taken public again in 1990.
• Southland Corporation, 1987
John Thompson, the founder of convenience store operator 7-Eleven, completed a $5.2 billion management
buyout of the company he founded.[11] The buyout suffered from the 1987 stock market crash and after failing
initially raise high yield debt financing, the company was required to offer a portion of the company's stock as
an inducement to invest in the company's bonds.[12] [13]
• Jim Walter Corp (later Walter Industries, Inc.), 1987
KKR acquired the company for $3.3 billion in early 1988 but faced issues with the buyout almost
immediately. Most notably, a subsidiary of Jim Walter Corp (Celotex) faced a large asbestos lawsuit and
incurred liabilities that the courts ruled would need to be satisfied by the parent company.[14] In 1989, the
holding company that KKR used for the Jim Walter buyout filed for Chapter 11 bankruptcy protection.[15]
• Blackrock, 1988
Blackstone Group began the leveraged buildup of BlackRock, which is an asset manager. Blackstone sold its
interest in 1994 and today Blackrock is listed on the New York Stock Exchange.
• Federated Department Stores, 1988
Robert Campeau's Campeau Corporation completed a $6.6 billion merger with Federated, owner of the
Bloomingdale's, Filene's and Abraham & Straus department stores.[16]
• Marvel Entertainment, 1988
Ronald Perelman acquired the company and oversaw a major expansion of its titles in the early 1990s before
taking the company public on the New York Stock Exchange in 1991.[17] [18] The company would later suffer
as a result of its massive debt load and ultimately the bondholders, led by Carl Icahn would take control of the
company.[19]
• Uniroyal Goodrich Tire Company, 1988
Clayton & Dubilier acquired Uniroyal Goodrich Tire Company from B.F. Goodrich and other investors for
$225 million.[20] [21] Two years later, in October 1990, Uniroyal Goodrich Tire Company was sold to Michelin
for $1.5 billion.[22]
• Hospital Corporation of America, 1989
The hospital operator was acquired for $5.3 billion in a management buyout led by Chairman Thomas J.
Frist[23] and completed a successful initial public offering in the 1990s. The company would be taken private
again 17 years later in 2006 by KKR, Bain Capital and Merrill Lynch.
Because of the high leverage on many of the transactions of the 1980s, failed deals occurred regularly, however the
promise of attractive returns on successful investments attracted more capital. With the increased leveraged buyout
Private equity in the 1980s 37
activity and investor interest, the mid-1980s saw a major proliferation of private equity firms. Among the major
firms founded in this period were:
• Bain Capital founded in 1984 by Mitt Romney, T. Coleman Andrews III and Eric Kriss out of the management
consulting firm Bain & Company;
• Chemical Venture Partners, later Chase Capital Partners and JPMorgan Partners, and today CCMP Capital,
founded in 1984, as a captive investment group within Chemical Bank;
• Hellman & Friedman founded in 1984;
• Hicks & Haas, later Hicks Muse Tate & Furst, and today HM Capital (and its European spinoff Lion Capital), as
well as the predecessor of Haas, Wheat & Partners, founded in 1984;
• Blackstone Group, one of the largest private equity firms, founded in 1985 by Peter G. Peterson and Stephen A.
Schwarzman;
• Doughty Hanson, a European focused firm, founded in 1985;
• BC Partners, a European focused firm, founded in 1986; and
• Carlyle Group founded in 1987 by Stephen L. Norris and David M. Rubenstein.
Additionally, as the market developed, new niches within the private equity industry began to emerge. In 1982,
Venture Capital Fund of America, the first private equity firm focused on acquiring secondary market interests in
existing private equity funds was founded and then, two years later in 1984, First Reserve Corporation, the first
private equity firm focused on the energy sector, was founded.
In later years, Milken and Drexel would shy away from certain of the more "notorious" corporate raiders as Drexel
and the private equity industry attempted to move upscale.
As the market reached its peak in 1988 and 1989, new private equity firms were founded which would emerge as
major investors in the years to follow, including:
• ABRY Partners, a media-focused firm, founded in 1989;
• Code Hennessy & Simmons, a middle market private equity firm, founded in 1988;
• Coller Capital, the first European secondaries firm specializing in the purchase of existing private equity
interests, founded in 1989;
• Landmark Partners, an early secondaries firm specializing in the purchase of existing private equity interests,
founded in 1989;
• Leonard Green & Partners founded in 1989 a successor to Gibbons, Green van Amerongen (founded 1969), a
merchant banking firm that completed several early management buyout transactions;[41] [42] [43] and
• Providence Equity Partners, a media-focused firm, founded in 1989.
See also
• History of private equity and venture capital
• Early history of private equity
• Private equity in the 1990s
• Private equity in the 21st century
• Private equity firms (category)
• Venture capital firms (category)
• Private equity and venture capital investors (category)
• Financial sponsor
• Private equity firm
• Private equity fund
• Private equity secondary market
• Mezzanine capital
• Private investment in public equity
• Taxation of Private Equity and Hedge Funds
• Investment banking
• Mergers and acquisitions
Notes
[1] Taylor, Alexander L. " Buyout Binge (http:/ / www. time. com/ time/ magazine/ article/ 0,9171,951242,00. html)". TIME magazine, Jul. 16,
1984.
[2] Opler, T. and Titman, S. "The determinants of leveraged buyout activity: Free cash flow vs. financial distress costs." Journal of Finance,
1993.
[3] Malone & Hyde Accepts Bid (http:/ / query. nytimes. com/ gst/ fullpage. html?res=9902E3DA133BF931A25755C0A962948260) New York
Times, June 12, 1984
[4] Wayne, Leslie. Wometco Agrees To Buyout (http:/ / select. nytimes. com/ gst/ abstract.
html?res=F30614FC355C0C718EDDA00894DB484D81) New York Times, September 22, 1983.
[5] Dodson, Steve. BEATRICE DEAL IS BIGGEST BUYOUT YET (http:/ / select. nytimes. com/ gst/ abstract.
html?res=F50E17F6385C0C748DDDA80994DD484D81). The New York Times, November 17, 1985.
[6] STERNGOLD, JAMES. Drexel's Role on Beatrice Examined (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=940DE1DC1038F93BA15757C0A96E948260). The New York Times, April 28, 1988.
[7] Berman, Phyllis. " Tom Lee is on a roll (http:/ / www. forbes. com/ forbes/ 1997/ 1117/ 6011126a. html)." Forbes, November 17, 1997.
[8] HOLUSHA, JOHN. Revco Drugstore Chain In Bankruptcy Filing (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=940DEFD7103FF93AA15754C0A96E948260) New York Times, July 29, 1988.
[9] Feder, Barnaby. Bankruptcy Court to Assess Validity of Revco Takeover (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9C0CE4DF1639F930A25755C0A966958260). New York Times, June 13, 1990.
[10] FISHER, LAWRENCE M. Safeway Buyout: A Success Story (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=940DE0D8163BF932A15753C1A96E948260). The New York Times, October 21, 1988.
[11] COMPANY NEWS; Southland Holders Approve Buyout (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9B0DE3DA113DF93AA35751C1A961948260). Associated Press, December 9, 1987.
[12] Frank, Peter H. Southland Buyout Hits Snag (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9B0DEED7123DF932A25752C1A961948260). The New York Times, November 11, 1987
[13] WAYNE, LESLIE . " Takeovers Revert to the Old Mode (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=940DE0D7163CF937A35752C0A96E948260)." New York Times, January 4, 1988
[14] Feder, Barnaby. Asbestos: The Saga Drags On (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=950DE5DF133FF931A35757C0A96F948260). New York Times, April 2, 1989.
[15] Chapter 11 For Kohlberg, Kravis Unit (http:/ / query. nytimes. com/ gst/ fullpage. html?res=950DE0D7143AF93BA15751C1A96F948260).
Associated Press, December 28, 1989.
[16] BARMASH, ISADORE. Canadian Bidder Beats Macy In Fight for Federated Stores (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=940DE4D61630F931A35757C0A96E948260). New York Times, April 2, 1988.
[17] HICKS, JONATHAN P. THE MEDIA BUSINESS; Marvel Comic Book Unit Being Sold for $82.5 Million (http:/ / query. nytimes. com/
gst/ fullpage. html?res=940DE1DD1038F93BA35752C1A96E948260). New York Times, November 8, 1988.
Private equity in the 1980s 42
[18] Norris, Floyd. Market Place; Boom in Comic Books Lifts New Marvel Stock Offering (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9D0CE1D6143DF936A25754C0A967958260). New York Times, July 15, 1991.
[19] Norris, Floyd. " Icahn-Led Bondholders Take Control of Marvel From Perelman (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9F02E3D6133EF932A15755C0A961958260)." New York Times, June 21, 1997.
[20] Company News; Goodrich Outlook (http:/ / query. nytimes. com/ gst/ fullpage. html?res=940DE3DC1F3AF937A15755C0A96E948260),
REUTERS, The New York Times, Published: June 24, 1988
[21] Uniroyal Goodrich Tire Co reports earnings for Qtr to Sept 30 (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9C04EFD71630F937A25753C1A96E948260), The New York Times, Published: October 14, 1988
[22] INSIDE (http:/ / query. nytimes. com/ gst/ fullpage. html?res=950DE4DD1E30F930A1575AC0A96F948260), The New York Times,
Published: September 23, 1989
[23] Freudenheim, Milt. Buyout Set For Chain Of Hospitals (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=940DE2D81039F931A15752C1A96E948260). The New York Times, November 22, 1988.
[24] POLLACK, ANDREW. " Venture Capital Loses Its Vigor (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=950DE0D61E3CF93BA35753C1A96F948260)." New York Times, October 8, 1989.
[25] Kurtzman, Joel. " PROSPECTS; Venture Capital (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=940DE0DB1E3EF934A15750C0A96E948260)." New York Times, March 27, 1988.
[26] LUECK, THOMAS J. " HIGH TECH'S GLAMOUR FADES FOR SOME VENTURE CAPITALISTS (http:/ / query. nytimes. com/ gst/
fullpage. html?res=9B0DE4DD113EF935A35751C0A961948260)." New York Times, February 6, 1987.
[27] Norris, Floyd " Market Place; Buyout of Prime Computer Limps Toward Completion (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9E0CEED71E3FF931A2575BC0A964958260)." New York Times, August 12, 1992
[28] 10 Questions for Carl Icahn (http:/ / www. time. com/ time/ magazine/ article/ 0,9171,1590446,00. html) by Barbara Kiviat, TIME
magazine, Feb. 15, 2007
[29] TWA - Death Of A Legend (http:/ / www. stlmag. com/ media/ St-Louis-Magazine/ October-2005/ TWA-Death-Of-A-Legend/ ) by Elaine
X. Grant, St Louis Magazine, Oct 2005
[30] Bruck, Connie. The Predators' Ball. New York: Simon and Schuster, 1988. p.117 - 118
[31] Hack, Richard (1996). When Money Is King. Beverly Hills, CA: Dove Books. pp. 13. ISBN 0-7871-1033-7.
[32] Stevenson, Richard (1985-11-05). "Pantry Pride Control of Revlon Board Seen Near". New York Times. p. D5.
[33] Hagedom, Ann (1987-03-09). "Possible Revlon Buyout May Be Sign Of a Bigger Perelman Move in Works". Wall Street Journal. p. 1.
[34] Gale Group (2005). "Revlon Reports First Profitable Quarter in Six Years" (http:/ / www. webcitation. org/ 5OlTv7US7). Business Wire. .
Retrieved 2007-02-07.
[35] Cotten Timberlake and Shobhana Chandra (2005). "Revlon profit first in more than 6 years" (http:/ / www. webcitation. org/ 5OlTv7USQ).
Bloomberg Publishing. . Retrieved 2007-03-20.
[36] "MacAndrews & Forbes Holdings Inc." (http:/ / www. fundinguniverse. com/ company-histories/
MacAndrews-amp;-Forbes-Holdings-Inc-Company-History. html). Funding Universe. . Retrieved 2008-05-16.
[37] Game of Greed (http:/ / www. time. com/ time/ magazine/ 0,9263,7601881205,00. html) (TIME magazine, 1988)
[38] STERNGOLD, JAMES. " BUYOUT PIONEER QUITTING FRAY (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9B0DE7DF1F3CF93AA25755C0A961948260)." New York Times, June 19, 1987.
[39] BARTLETT, SARAH. " Kohlberg In Dispute Over Firm (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=950DE2D8153CF933A0575BC0A96F948260)." New York Times, August 30, 1989
[40] ANTILLA, SUSAN. " Wall Street; A Scion of the L.B.O. Reflects (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9D00E4DC1031F937A15757C0A962958260)." New York Times, April 24, 1994
[41] Bartlett, Sarah. " Wall Street's Treacherous Side (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=950DE0D7163DF935A35752C1A96F948260)." New York Times, November 6, 1989.
[42] Bartlett, Sarah. " Filing Discloses Dispute Over Sale of Sheller-Globe (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=950DEEDE1339F930A25753C1A96F948260)." New York Times, October 13, 1989.
[43] " Gibbons, Green Separation (http:/ / query. nytimes. com/ gst/ fullpage. html?res=950DE3DA133FF936A35756C0A96F948260)." New
York Times, May 5, 1989.
[44] Wallace, Anise C. " Nabisco Refinance Plan Set (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9C0CE2D91E31F935A25754C0A966958260)." The New York Times, July 16, 1990.
Private equity in the 1980s 43
References
• Ante, Spencer. Creative capital : Georges Doriot and the birth of venture capital. Boston: Harvard Business
School Press, 2008
• Bance, A. (2004). Why and how to invest in private equity (http://www.evca.com/pdf/Invest.pdf). European
Private Equity and Venture Capital Association (EVCA). Accessed May 22, 2008.
• Bruck, Connie. Predator's Ball. New York: Simon and Schuster, 1988.
• Burrill, G. Steven, and Craig T. Norback. The Arthur Young Guide to Raising Venture Capital. Billings, MT:
Liberty House, 1988.
• Burrough, Bryan. Barbarians at the Gate. New York : Harper & Row, 1990.
• Craig. Valentine V. Merchant Banking: Past and Present (http://www.fdic.gov/bank/analytical/banking/
2001sep/br2001v14n1art2.pdf). FDIC Banking Review. 2000.
• Fenn, George W., Nellie Liang, and Stephen Prowse. December, 1995. The Economics of the Private Equity
Market. Staff Study 168, Board of Governors of the Federal Reserve System.
• Gibson, Paul. "The Art of Getting Funded." Electronic Business, March 1999.
• Gladstone, David J. Venture Capital Handbook. Rev. ed. Englewood Cliffs, NJ: Prentice Hall, 1988.
• Hsu, D., and Kinney, M (2004). Organizing venture capital: the rise and demise of American Research and
Development Corporation (http://brie.berkeley.edu/~briewww/publications/WP163.pdf), 1946-1973.
Working paper 163. Accessed May 22, 2008
• Littman, Jonathan. "The New Face of Venture Capital." Electronic Business, March 1998.
• Loos, Nicolaus. Value Creation in Leveraged Buyouts (http://www.unisg.ch/www/edis.nsf/
wwwDisplayIdentifier/3052/$FILE/dis3052.pdf). Dissertation of the University of St. Gallen. Lichtenstein:
Guttenberg AG, 2005. Accessed May 22, 2008.
• National Venture Capital Association, 2005, The 2005 NVCA Yearbook.
• Schell, James M. Private Equity Funds: Business Structure and Operations. New York: Law Journal Press, 1999.
• Sharabura, S. (2002). Private Equity: past, present, and future (http://media.www.chibus.com/media/storage/
paper408/news/2002/02/18/GsbBusiness/Equity.Past.Present.And.Future-187504.shtml). GE Capital
Speaker Discusses New Trends in Asset Class. Speech to GSB 2/13/2002. Accessed May 22, 2008.
• Trehan, R. (2006). The History Of Leveraged Buyouts (http://www.4hoteliers.com/4hots_fshw.
php?mwi=1757). December 4, 2006. Accessed May 22, 2008.
• Cheffins, Brian. " THE ECLIPSE OF PRIVATE EQUITY (http://www.cbr.cam.ac.uk/pdf/wp339.pdf)".
Centre for Business Research, University Of Cambridge, 2007.
Private equity in the 1990s 44
In April 1989, Drexel settled with the SEC, agreeing to stricter safeguards on its oversight procedures. Later that
month, the firm eliminated 5,000 jobs by shuttering three departments – including the retail brokerage operation.
Meanwhile, the high-yield debt markets had begun to shut down in 1989, a slowdown that accelerated into 1990. On
February 13, 1990 after being advised by United States Secretary of the Treasury Nicholas F. Brady, the U.S.
Securities and Exchange Commission (SEC), the New York Stock Exchange (NYSE) and the Federal Reserve
System, Drexel Burnham Lambert officially filed for Chapter 11 bankruptcy protection.[3]
The second private equity boom and the origins of modern private equity
Beginning roughly in 1992, three years after the RJR Nabisco buyout, and continuing through the end of the decade
the private equity industry once again experienced a tremendous boom, both in venture capital (as will be discussed
below) and leveraged buyouts with the emergence of brand name firms managing multi-billion dollar sized funds.
After declining from 1990 through 1992, the private equity industry began to increase in size raising approximately
$20.8 billion of investor commitments in 1992 and reaching a high water mark in 2000 of $305.7 billion, outpacing
the growth of almost every other asset class.[8]
Private equity in the 1990s 46
Bain Capital and a team of Sealy's senior executives acquired the mattress company through a management
buyout[15]
• KinderCare Learning Centers, 1997
Kohlberg Kravis Roberts and Hicks, Muse, Tate & Furst
• J. Crew, 1997
Texas Pacific Group acquired an 88% stake in the retailer for approximately $500 million,[16] however the
investment struggled due to the relatively high purchase price paid relative to the company's earnings.[17] The
company was able to complete a turnaround beginning in 2002 and complete an initial public offering in
2006[18]
• Domino's Pizza, 1998
Bain Capital acquired a 49% interest in the second-largest pizza-chain in the US from its founder[19] and
would successfully take the company public on the New York Stock Exchange (NYSE:DPZ) in 2004.[20]
• Regal Entertainment Group, 1998
Kohlberg Kravis Roberts and Hicks, Muse, Tate & Furst acquired the largest chain of movie theaters for $1.49
billion, including assumed debt.[21] The buyers originally announced plans to acquire Regal, then merge it
with United Artists (owned by Merrill Lynch at the time) and Act III (controlled by KKR), however the
acquisition of United Artists fell through due to issues around the price of the deal and the projected
performance of the company.[22] Regal, along with the rest of the industry would encounter significant issues
due to overbuilding of new multiplex theaters[23] and would declare bankruptcy in 2001. Billionaire Philip
Anschutz would take control of the company and later take the company public.[24]
• Oxford Health Plans, 1998
An investor group led by Texas Pacific Group invested $350 million in a convertible preferred stock that can
be converted into 22.1% of Oxford.[25] The company completed a buyback of the TPG's PIPE convertible in
2000 and would ultimately be acquired by UnitedHealth Group in 2004.[26]
• Petco, 2000
TPG Capital and Leonard Green & Partners invested $200 million to acquire the pet supplies retailer as part of
a $600 million buyout.[27] Within two years they sold most of it in a public offering that valued the company at
$1 billion. Petco’s market value more than doubled by the end of 2004 and the firms would ultimately realize a
gain of $1.2 billion. Then, in 2006, the private equity firms took Petco private again for $1.68 billion.[28]
As the market for private equity matured, so too did its investor base. The Institutional Limited Partner Association
was initially founded as an informal networking group for limited partner investors in private equity funds in the
early 1990s. However the organization would evolve into an advocacy organization for private equity investors with
more than 200 member organizations from 10 countries. As of the end of 2007, ILPA members had total assets under
management in excess of $5 trillion with more than $850 billion of capital commitments to private equity
investments.
The venture capital boom and the Internet Bubble (1995 to 2000)
In the 1980s, FedEx and Apple Inc. were able to grow because of private equity or venture funding, as were Cisco,
Genentech, Microsoft and Avis.[29] However, by the end of the 1980s, venture capital returns were relatively low,
particularly in comparison with their emerging leveraged buyout cousins, due in part to the competition for hot
startups, excess supply of IPOs and the inexperience of many venture capital fund managers. Unlike the leveraged
buyout industry, after total capital raised increased to $3 billion in 1983, growth in the venture capital industry
remained limited through the 1980s and the first half of the 1990s increasing to just over $4 billion more than a
decade later in 1994.
Private equity in the 1990s 48
After a shakeout of venture capital mangers, the more successful firms retrenched, focusing increasingly on
improving operations at their portfolio companies rather than continuously making new investments. Results would
begin to turn very attractive, successful and would ultimately generate the venture capital boom of the 1990s. Former
Wharton Professor Andrew Metrick refers to these first 15 years of the modern venture capital industry beginning in
1980 as the "pre-boom period" in anticipation of the boom that would begin in 1995 and last through the bursting of
the Internet bubble in 2000.[30]
The late 1990s were a boom time for the venture capital, as firms on Sand Hill Road in Menlo Park and Silicon
Valley benefited from a huge surge of interest in the nascent Internet and other computer technologies. Initial public
offerings of stock for technology and other growth companies were in abundance and venture firms were reaping
large windfalls.
• Amazon.com
• America Online
• E-bay
• Intuit
• Macromedia
• Netscape
• Sun Microsystems
• Yahoo! - On April 5, 1995, Sequoia Capital provided Yahoo with two rounds of venture capital.[31] On 12 April
1996, Yahoo had its initial public offering, raising $33.8 billion dollars, by selling 2.6 million shares at $13 each.
The bursting of the Internet Bubble and the private equity crash (2000 to 2003)
The Nasdaq crash and technology slump that
started in March 2000 shook virtually the entire
venture capital industry as valuations for startup
technology companies collapsed. Over the next
two years, many venture firms had been forced
to write-off their large proportions of their
investments and many funds were significantly
"under water" (the values of the fund's
investments were below the amount of capital
invested). Venture capital investors sought to
reduce size of commitments they had made to
venture capital funds and in numerous instances,
investors sought to unload existing commitments
for cents on the dollar in the secondary market.
The technology-heavy NASDAQ Composite index peaked at 5,048 in March
By mid-2003, the venture capital industry had 2000, reflecting the high point of the dot-com bubble.
shriveled to about half its 2001 capacity.
Nevertheless, PricewaterhouseCoopers' MoneyTree Survey [59] shows that total venture capital investments held
steady at 2003 levels through the second quarter of 2005.
Although the post-boom years represent just a small fraction of the peak levels of venture investment reached in
2000, they still represent an increase over the levels of investment from 1980 through 1995. As a percentage of GDP,
venture investment was 0.058% percent in 1994, peaked at 1.087% (nearly 19x the 1994 level) in 2000 and ranged
from 0.164% to 0.182 % in 2003 and 2004. The revival of an Internet-driven environment (thanks to deals such as
eBay's purchase of Skype, the News Corporation's purchase of MySpace.com, and the very successful Google.com
and Salesforce.com IPOs) have helped to revive the venture capital environment. However, as a percentage of the
overall private equity market, venture capital has still not reached its mid-1990s level, let alone its peak in 2000.
Private equity in the 1990s 49
See also
• History of private equity and venture capital
• Early history of private equity
• Private equity in the 1980s
• Private equity in the 21st century
• Private equity firms (category)
• Venture capital firms (category)
• Private equity and venture capital investors (category)
• Financial sponsor
• Private equity firm
• Private equity fund
• Private equity secondary market
• Mezzanine capital
• Private investment in public equity
• Taxation of Private Equity and Hedge Funds
• Investment banking
• Mergers and acquisitions
Notes
[1] Wallace, Anise C. " Nabisco Refinance Plan Set (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9C0CE2D91E31F935A25754C0A966958260)." The New York Times, July 16, 1990.
[2] Stone, Dan G. (1990). April Fools: An Insider's Account of the Rise and Collapse of Drexel Burnham. New York City: Donald I. Fine.
ISBN 1556112289.
[3] Den of Thieves. Stewart, J. B. New York: Simon & Schuster, 1991. ISBN 0-671-63802-5.
[4] New Street Capital Inc. (http:/ / www. referenceforbusiness. com/ history2/ 5/ New-Street-Capital-Inc. html) - Company Profile, Information,
Business Description, History, Background Information on New Street Capital Inc at ReferenceForBusiness.com
[5] Altman, Edward I. " THE HIGH YIELD BOND MARKET: A DECADE OF ASSESSMENT, COMPARING 1990 WITH 2000 (http:/ /
pages. stern. nyu. edu/ ~ealtman/ report. pdf)." NYU Stern School of Business, 2000
[6] HYLTON, RICHARD D. Corporate Bond Defaults Up Sharply in '89 (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9C0CEFD91231F932A25752C0A966958260) New York Times, January 11, 1990.
[7] COMPANY NEWS; Fund Venture Begun in Chicago (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9E0CE5D8103CF934A35752C0A964958260& scp=4& sq=madison+ dearborn& st=nyt) New York Times, January 7, 1992
[8] Source: Thomson Financial's VentureXpert (http:/ / vx. thomsonib. com/ ) database for Commitments. Searching "All Private Equity Funds"
(Venture Capital, Buyout and Mezzanine).
[9] The New Kings of Capitalism, Survey on the Private Equity industry (http:/ / www. economist. com/ specialreports/ displayStory.
cfm?story_id=3398496/ ) The Economist, November 25, 2004
[10] Thomas H. Lee In Snapple Deal (http:/ / query. nytimes. com/ gst/ fullpage. html?res=9E0CE2D71F3CF930A35757C0A964958260) (The
New York Times, 1992)
[11] Jimmy Lee's Global Chase (http:/ / www. businessweek. com/ archives/ 1997/ b3522103. arc. htm). New York Times, April 14, 1997
[12] Kingpin of the Big-Time Loan (http:/ / www. nytimes. com/ 1995/ 08/ 11/ business/ kingpin-of-the-big-time-loan. html). New York Times,
August 11, 1995
[13] 10 Questions for Carl Icahn (http:/ / www. time. com/ time/ magazine/ article/ 0,9171,1590446,00. html) by Barbara Kiviat, Time Magazine,
Feb. 15, 2007
[14] The Mystery of Duane Reade (http:/ / nymag. com/ nymetro/ shopping/ features/ 11908/ ) nymag.com. Retrieved July 3, 2007.
[15] " COMPANY NEWS; SEALY TO BE SOLD TO MANAGEMENT AND AN INVESTOR GROUP (http:/ / query. nytimes. com/ gst/
fullpage. html?res=9D0CE0D91330F937A35752C1A961958260)." New York Times, November 4, 1997
[16] STEINHAUER, JENNIFER. " J. Crew Caught in Messy World of Finance as It Sells Majority Stake (http:/ / query. nytimes. com/ gst/
fullpage. html?res=9A06E3DE113FF93BA25753C1A961958260)." New York Times, October 18, 1997
[17] KAUFMAN, LESLIE and ATLAS, RIVA D. " In a Race to the Mall, J. Crew Has Lost Its Way (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=980DE6DE103EF93BA15757C0A9649C8B63)." New York Times, April 28, 2002.
[18] ROZHON, TRACIE. " New Life for a Stalwart Preppy: J. Crew's Sales Are Back (http:/ / www. nytimes. com/ 2004/ 12/ 09/ business/
09retail. html)." New York Times, December 9, 2004.
Private equity in the 1990s 50
[19] " COMPANY NEWS; DOMINO'S PIZZA FOUNDER TO RETIRE AND SELL A STAKE (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9C06E7DD1239F935A1575AC0A96E958260)." New York Times, September 26, 1998
[20] " Domino's Pizza Plans Stock Sale (http:/ / query. nytimes. com/ gst/ fullpage. html?res=9F01E4DC163BF937A25757C0A9629C8B63)."
New York Times, April 14, 2004.
[21] MYERSON, ALLEN R. and FABRIKANT, GERALDINE. " 2 Buyout Firms Make Deal To Acquire Regal Cinemas (http:/ / query.
nytimes. com/ gst/ fullpage. html?res=9C0CE6DF1E38F932A15752C0A96E958260)." New York Times, January 21, 1998.
[22] " COMPANY NEWS; HICKS, MUSE DROPS DEAL TO BUY UNITED ARTISTS (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9A0CE1D61E3FF932A15751C0A96E958260)." New York Times, February 21, 1998.
[23] PRISTIN, TERRY. " Movie Theaters Build Themselves Into a Corner (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9F02E0DF1E30F937A3575AC0A9669C8B63)." New York Times, September 4, 2000
[24] " COMPANY NEWS; REGAL CINEMAS, THEATER OPERATOR, FILES FOR BANKRUPTCY (http:/ / query. nytimes. com/ gst/
fullpage. html?res=9C02E3D9133FF930A25753C1A9679C8B63)." New York Times, October 13, 2001.
[25] Norris, Floyd. " SHAKE-UP AT A HEALTH GIANT: THE RESCUERS; Oxford Investors Build In Some Insurance, in Case Things Don't
Work Out (http:/ / query. nytimes. com/ gst/ fullpage. html?res=9805E6D9153EF936A15751C0A96E958260)." New York Times, February
25, 1998.
[26] " COMPANY NEWS; PROFITS TRIPLE AT OXFORD; TEXAS PACIFIC BUYBACK SET (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9A01EED91031F935A15753C1A9669C8B63)." New York Times, October 26, 2000.
[27] " COMPANY NEWS; MANAGEMENT-LED GROUP TO BUY PETCO FOR $505 MILLION (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9C03E2D8173AF93BA25756C0A9669C8B63)." New York Times, May 18, 2000
[28] " 2 Equity Firms to Acquire Petco (http:/ / www. nytimes. com/ 2006/ 07/ 15/ business/ 15petco. html)." Bloomberg L.P., July 15, 2006.
[29] Private Equity: Past, Present, Future (http:/ / fusion. dalmatech. com/ ~admin24/ files/ private_equity_intro. pdf), by Sethi, Arjun May
2007, accessed October 20, 2007.
[30] Metrick, Andrew. Venture Capital and the Finance of Innovation. John Wiley & Sons, 2007. p.12
[31] "Yahoo Company Timeline" (http:/ / yhoo. client. shareholder. com/ press/ timeline. cfm). . Retrieved 2007-11-13.
References
• Ante, Spencer. Creative capital : Georges Doriot and the birth of venture capital. Boston: Harvard Business
School Press, 2008
• Bance, A. (2004). Why and how to invest in private equity (http://www.evca.com/pdf/Invest.pdf). European
Private Equity and Venture Capital Association (EVCA). Accessed May 22, 2008.
• Bruck, Connie. The Predators' Ball. New York: Simon and Schuster, 1988.
• Burrill, G. Steven, and Craig T. Norback. The Arthur Young Guide to Raising Venture Capital. Billings, MT:
Liberty House, 1988.
• Burrough, Bryan. Barbarians at the Gate. New York : Harper & Row, 1990.
• Craig. Valentine V. Merchant Banking: Past and Present (http://www.fdic.gov/bank/analytical/banking/
2001sep/br2001v14n1art2.pdf). FDIC Banking Review. 2000.
• Fenn, George W., Nellie Liang, and Stephen Prowse. December, 1995. The Economics of the Private Equity
Market. Staff Study 168, Board of Governors of the Federal Reserve System.
• Gibson, Paul. "The Art of Getting Funded." Electronic Business, March 1999.
• Gladstone, David J. Venture Capital Handbook. Rev. ed. Englewood Cliffs, NJ: Prentice Hall, 1988.
• Hsu, D., and Kinney, M (2004). Organizing venture capital: the rise and demise of American Research and
Development Corporation (http://brie.berkeley.edu/~briewww/publications/WP163.pdf), 1946-1973.
Working paper 163. Accessed May 22, 2008
• Littman, Jonathan. "The New Face of Venture Capital." Electronic Business, March 1998.
• Loos, Nicolaus. Value Creation in Leveraged Buyouts (http://www.unisg.ch/www/edis.nsf/
wwwDisplayIdentifier/3052/$FILE/dis3052.pdf). Dissertation of the University of St. Gallen. Lichtenstein:
Guttenberg AG, 2005. Accessed May 22, 2008.
• National Venture Capital Association, 2005, The 2005 NVCA Yearbook.
• Schell, James M. Private Equity Funds: Business Structure and Operations. New York: Law Journal Press, 1999.
• Sharabura, S. (2002). Private Equity: past, present, and future (http://media.www.chibus.com/media/storage/
paper408/news/2002/02/18/GsbBusiness/Equity.Past.Present.And.Future-187504.shtml). GE Capital
Speaker Discusses New Trends in Asset Class. Speech to GSB 2/13/2002. Accessed May 22, 2008.
Private equity in the 1990s 51
Bursting the Internet Bubble and the private equity crash (2000–2003)
The Nasdaq crash and technology slump that
started in March 2000 shook virtually the entire
venture capital industry as valuations for startup
technology companies collapsed. Over the next
two years, many venture firms had been forced
to write-off large proportions of their
investments and many funds were significantly
"under water" (the values of the fund's
investments were below the amount of capital
invested). Venture capital investors sought to
reduce size of commitments they had made to
venture capital funds and in numerous instances,
investors sought to unload existing commitments
for cents on the dollar in the secondary market.
The technology-heavy NASDAQ Composite index peaked at 5,048 in March
By mid-2003, the venture capital industry had 2000, reflecting the high point of the dot-com bubble.
shriveled to about half its 2001 capacity.
Nevertheless, PricewaterhouseCoopers' MoneyTree Survey [59] shows that total venture capital investments held
steady at 2003 levels through the second quarter of 2005.
Although the post-boom years represent just a small fraction of the peak levels of venture investment reached in
2000, they still represent an increase over the levels of investment from 1980 through 1995. As a percentage of GDP,
venture investment was 0.058% percent in 1994, peaked at 1.087% (nearly 19x the 1994 level) in 2000 and ranged
from 0.164% to 0.182 % in 2003 and 2004. The revival of an Internet-driven environment (thanks to deals such as
eBay's purchase of Skype, the News Corporation's purchase of MySpace.com, and the very successful Google.com
and Salesforce.com IPOs) have helped to revive the venture capital environment. However, as a percentage of the
overall private equity market, venture capital has still not reached its mid-1990s level, let alone its peak in 2000.
Private equity in the 2000s 52
• Abbey National completed the sale of £748 million ($1.33 billion) of LP interests in 41 private equity funds and
16 interests in private European companies in early 2004.[17]
• Bank One sold a $1 billion portfolio of private equity fund interests in 2004.
The third private equity boom and the Golden Age of Private Equity
(2003–2007)
As 2002 ended and 2003 began, the private equity sector, had spent the previous two and a half years reeling from
major losses in telecommunications and technology companies and had been severely constrained by tight credit
markets. As 2003 got underway, private equity began a five year resurgence that would ultimately result in the
completion of 13 of the 15 largest leveraged buyout transactions in history, unprecedented levels of investment
activity and investor commitments and a major expansion and maturation of the leading private equity firms.
The combination of decreasing interest rates, loosening lending standards and regulatory changes for publicly traded
companies would set the stage for the largest boom private equity had seen. The Sarbanes Oxley legislation,
officially the Public Company Accounting Reform and Investor Protection Act, passed in 2002, in the wake of
corporate scandals at Enron, WorldCom, Tyco, Adelphia, Peregrine Systems and Global Crossing among others,
would create a new regime of rules and regulations for publicly traded corporations. In addition to the existing focus
on short term earnings rather than long term value creation, many public company executives lamented the extra cost
and bureaucracy associated with Sarbanes-Oxley compliance. For the first time, many large corporations saw private
equity ownership as potentially more attractive than remaining public. Sarbanes-Oxley would have the opposite
effect on the venture capital industry. The increased compliance costs would make it nearly impossible for venture
capitalists to bring young companies to the public markets and dramatically reduced the opportunities for exits via
IPO. Instead, venture capitalists have been forced increasingly to rely on sales to strategic buyers for an exit of their
investment.[18]
Interest rates, which began a major series of decreases in 2002 would reduce the cost of borrowing and increase the
ability of private equity firms to finance large acquisitions. Lower interest rates would encourage investors to return
to relatively dormant high-yield debt and leveraged loan markets, making debt more readily available to finance
buyouts. Additionally, alternative investments also became increasingly important as investors sough yield despite
increases in risk. This search for higher yielding investments would fuel larger funds and in turn larger deals, never
thought possible, became reality.
Certain buyouts were completed in 2001 and early 2002, particularly in Europe where financing was more readily
available. In 2001, for example, BT Group agreed to sell its international yellow pages directories business (Yell
Group) to Apax Partners and Hicks, Muse, Tate & Furst for £2.14 billion (approximately $3.5 billion at the time),[19]
making it then the largest non-corporate LBO in European history. Yell later bought US directories publisher
McLeodUSA for about $600 million, and floated on London's FTSE in 2003.
$1.5 billion deal. In June 2008, GMAC completed a $60 billion refinancing aimed at improving the liquidity
of its struggling mortgage subsidiary, Residential Capital (ResCap) including $1.4 billion of additional equity
contributions from the parent and Cerberus.[40] [41]
• HCA, 2006
Kohlberg Kravis Roberts and Bain Capital, together with Merrill Lynch and the Frist family (which had
founded the company) completed a $31.6 billion acquisition of the hospital company, 17 years after it was
taken private for the first time in a management buyout. At the time of its announcement, the HCA buyout
would be the first of several to set new records for the largest buyout, eclipsing the 1989 buyout of RJR
Nabisco. It would later be surpassed by the buyouts of Equity Office Properties, TXU and BCE (announced
but as of the end of the first quarter of 2008 not yet completed).[42]
• Kinder Morgan, 2006
A consortium of private equity firms including Goldman Sachs Capital Partners , Carlyle Group and
Riverstone Holdings completed a $27.5 billion (including assumed debt) acquisition of one of the largest
pipeline operators in the US. The buyout was backed by Richard Kinder, the company's co-founder and a
former president of Enron who was ousted after a dispute with Enron’s founder, Kenneth L. Lay.[43]
• Harrah's Entertainment, 2006
Apollo Management and TPG Capital completed the $27.39 billion[37] (including purchase of the outstanding
equity for $16.7 billion and assumption of $10.7 billion of outstanding debt) acquisition of the gaming
company.[44]
• TDC A/S, 2006
The Danish phone company was acquired by Kohlberg Kravis Roberts, Apax Partners, Providence Equity
Partners and Permira for €12.2 billion ($15.3 billion), which at the time made it the second largest European
buyout in history.[45] [46]
• Sabre Holdings, 2006
TPG Capital and Silver Lake Partners announced a deal to buy Sabre Holdings, which operates Travelocity,
Sabre Travel Network and Sabre Airline Solutions, for approximately $4.3 billion in cash, plus the assumption
of $550 million in debt.[47] Earlier in the year, Blackstone acquired Sabre's chief competitor Travelport.
• Travelport, 2006
Travelport, which owns Worldspan and Galileo as well as approximately 48% of Orbitz Worldwide was
acquired from Cendant by The Blackstone Group, One Equity Partners and Technology Crossover Ventures in
a deal valued at $4.3 billion. The sale of Travelport followed the spin-offs of Cendant's real estate and
hospitality businesses, Realogy Corporation and Wyndham Worldwide Corporation, respectively, in July
2006.[48] [49] Later in the year, TPG and Silver Lake would acquire Travelport's chief competitor Sabre
Holdings.
• Alliance Boots, 2007
Kohlberg Kravis Roberts and Stefano Pessina, the company’s deputy chairman and largest shareholder,
acquired the UK drug store retailer for £12.4 billion ($24.8 billion) including assumed debt, after increasing
their bid more than 40% amidst intense competition from Terra Firma Capital Partners and Wellcome Trust.
The buyout came only a year after the merger of Boots Group plc (Boots the Chemist), and Alliance UniChem
plc.[50]
• Biomet, 2007
The Blackstone Group, Kohlberg Kravis Roberts, TPG Capital and Goldman Sachs Capital Partners acquired
the medical devices company for $11.6 billion.[51]
• Chrysler, 2007
Private equity in the 2000s 57
Cerberus Capital Management completed the $7.5 billion acquisition of 80.1% of the U.S. car manufacturer.
Only $1.45 billion of proceeds were expected to be paid to Daimler and does not include nearly $600 million
of cash Daimler agreed to invest in Chrysler.[52] With the company struggling, Cerberus brought in former
Home Depot CEO, Robert Nardelli as the new chief executive of Chrysler to execute a turnaround of the
company.[53]
• First Data, 2007
Kohlberg Kravis Roberts and TPG Capital completed the $29 billion buyout of the credit and debit card
payment processor and former parent of Western Union[54] Michael Capellas, previously the CEO of MCI
Communications and Compaq was named CEO of the privately held company.
• TXU, 2007
An investor group led by KKR and TPG Capital and together with Goldman Sachs Capital Partners completed
the $44.37 billion[37] buyout of the regulated utility and power producer. The investor group had to work
closely with ERCOT regulators to gain approval of the transaction but had significant experience with the
regulators from their earlier buyout of Texas Genco.[55]
• BCE
On July 4, 2008, BCE announced that a final agreement had been reached on the terms of the purchase, with
all financing in place, and Michael Sabia left BCE, with George Cope assuming the position of CEO on July
11. The deal's final closing date was scheduled for December 11, 2008. With a value of $51.7 billion
(Canadian). The company failed a solvency test by KPMG that was required for the merger to take place. The
deal was canceled when the results of the test were released.
54.2% decline) per share in Q1 2008.[58] KPE disclosed in May 2008 that it had completed approximately
$300 million of secondary sales of selected limited partnership interests in and undrawn commitments to certain
KKR-managed funds in order to generate liquidity and repay borrowings.[59]
On March 22, 2007, the Blackstone Group filed with
the SEC[60] to raise $4 billion in an initial public
offering. On June 21, Blackstone swapped a 12.3%
stake in its ownership for $4.13 billion in the largest
U.S. IPO since 2002. Traded on the New York Stock
Exchange under the ticker symbol BX, Blackstone
priced at $31 per share on June 22, 2007.[61] [62]
Meanwhile, other private equity investors were seeking to realize a portion of the value locked into their firms. In
September 2007, the Carlyle Group sold a 7.5% interest in its management company to Mubadala Development
Company, which is owned by the Abu Dhabi Investment Authority (ADIA) for $1.35 billion, which valued Carlyle
at approximately $20 billion.[65] Similarly, in January 2008, Silver Lake Partners sold a 9.9% stake in its
management company to the California Public Employees' Retirement System (CalPERS) for $275 million.[66]
Additionally, Apollo Management completed a private placement of shares in its management company in July
2007. By pursuing a private placement rather than a public offering, Apollo would be able to avoid much of the
public scrutiny applied to Blackstone and KKR.[67] [68] In April 2008, Apollo filed with the SEC[69] to permit some
holders of its privately traded stock to sell their shares on the New York Stock Exchange.[70] In April 2004, Apollo
raised $930 million for a listed business development company, Apollo Investment Corporation (NASDAQ: AINV),
to invest primarily in middle-market companies in the form of mezzanine debt and senior secured loans, as well as
by making direct equity investments in companies. The Company also invests in the securities of public
companies.[71]
Historically, in the United States, there had been a group of publicly traded private equity firms that were registered
as business development companies (BDCs) under the Investment Company Act of 1940.[72] Typically, BDCs are
structured similar to real estate investment trusts (REITs) in that the BDC structure reduces or eliminates corporate
income tax. In return, REITs are required to distribute 90% of their income, which may be taxable to its investors.
As of the end of 2007, among the largest BDCs (by market value, excluding Apollo Investment Corp, discussed
earlier) are: American Capital Strategies (NASDAQ: ACAS), Allied Capital Corp((NASDAQ:ALD), Ares Capital
Corporation (NASDAQ:ARCC), Gladstone Investment Corp (NASDAQ:GAIN) and Kohlberg Capital Corp
(NASDAQ:KCAP).
Private equity in the 2000s 59
Secondary market and the evolution of the private equity asset class
In the wake of the collapse of the equity markets in 2000, many investors in private equity sought an early exit from
their outstanding commitments.[73] The surge in activity in the secondary market, which had previously been a
relatively small niche of the private equity industry, prompted new entrants to the market, however the market was
still characterized by limited liquidity and distressed prices with private equity funds trading at significant discounts
to fair value.
Beginning in 2004 and extending through 2007, the secondary market transformed into a more efficient market in
which assets for the first time traded at or above their estimated fair values and liquidity increased dramatically.
During these years, the secondary market transitioned from a niche sub-category in which the majority of sellers
were distressed to an active market with ample supply of assets and numerous market participants.[74] By 2006
active portfolio management had become far more common in the increasingly developed secondary market and an
increasing number of investors had begun to pursue secondary sales to rebalance their private equity portfolios. The
continued evolution of the private equity secondary market reflected the maturation and evolution of the larger
private equity industry. Among the most notable publicly disclosed secondary transactions (it is estimated that over
two-thirds of secondary market activity is never disclosed publicly):
• CalPERS, in 2008, agrees to the sale of a portfolio of a $2 billion portfolio of legacy private equity funds to a
consortium of secondary market investors.[75]
• Ohio Bureau of Workers' Compensation, in 2007, reportedly agreed to sell a $400 million portfolio of private
equity fund interests[76]
• MetLife, in 2007, agreed to sell a $400 million portfolio of over 100 private equity fund interests.[77]
• Bank of America, in 2007, completed the spin-out of BA Venture Partners to form Scale Venture Partners, which
was funded by an undisclosed consortium of secondary investors.
• Mellon Financial Corporation, following the announcement of its merger with Bank of New York in 2006, sold a
$1.4 billion portfolio of private equity fund and direct interests.[78]
• American Capital Strategies, in 2006, sold a $1 billion portfolio of investments to a consortium of secondary
buyers.[79] [80] [81]
• Bank of America, in 2006, completes the spin-out of BA Capital Europe to form Argan Capital, which was funded
by an undisclosed consortium of secondary investors.
• JPMorgan Chase, in 2006, completed the sale of a $925 million interest in JPMP Global Fund to a consortium of
secondary investors.
• Temasek Holdings, in 2006, completes $810 million securitization of a portfolio of 46 private equity funds.[82]
• Dresdner Bank, in 2005, sells a $1.4 billion private equity funds portfolio.
• Dayton Power & Light [105], an Ohio-based electric utility, in 2005, sold a $1.2 billion portfolio of private equity
fund interests[83] [84] [85]
from pricing. By the end of September, the full extent of the credit situation became obvious as major lenders
including Citigroup and UBS AG announced major writedowns due to credit losses. The leveraged finance markets
came to a near standstill.[88] As a result of the sudden change in the market, buyers would begin to withdraw from or
renegotiate the deals completed at the top of the market:
• Harman International, 2007 (announced and withdrawn)
Kohlberg Kravis Roberts and Goldman Sachs Capital Partners announced the $8 billion takeover of Harman,
the maker of JBL speakers and Harman Kardon, in April 2008. In a novel part of the deal, the buyers offered
Harman shareholders a chance to retain up to a 27% stake in the newly private company and share in any
profit made if the company is later sold or taken public as a concession to shareholders. However, in
September 2007 the buyers withdrew from the deal, saying that the company’s financial health had suffered
from a material adverse change.[89] [90]
• Sallie Mae, (announced 2007 but withdrawn 2008)
SLM Corporation (NYSE: SLM), commonly known as Sallie Mae, announced plans to be acquired by a
consortium of private equity firms and large investment banks including JC Flowers, Friedman Fleischer &
Lowe [91], Bank of America and JPMorgan Chase[92] [93] With the onset of the credit crunch in July 2007, the
buyout of Sallie Mae encountered difficulty.[94]
• Clear Channel Communications, 2007
After pursuing the company for over six months Bain Capital and Thomas H. Lee Partners finally won the
support of shareholders to complete a $26.7 billion[37] (including assumed debt) buyout of the radio station
operator. The buyout had the support of the founding Mays family but the buyers were required initially to
push for a proxy vote before raising their offer several times.[95] As a result of the credit crunch, the banks
sought to pull their commitments to finance the acquisition of Clear Channel. The buyers filed suit against the
bank group (including Citigroup, Morgan Stanley, Deutsche Bank, Credit Suisse, the Royal Bank of Scotland
and Wachovia) to force them to fund the transaction. Ultimately, the buyers and the banks were able to
renegotiate the transaction, reducing the purchase price paid to the shareholders and increasing the interest rate
on the loans.[96]
• BCE, 2007
The Ontario Teachers' Pension Plan, Providence Equity Partners and Madison Dearborn announced a
C$51.7 billion (including debt) buyout of BCE in July 2007, which would constitute the largest leveraged
buyout in history, exceeding the record set previously by the buyout of TXU.[97] [98] Since its announcement,
the buyout has faced a number of challenges including issues with lenders[99] and courts[100] in Canada.
Additionally, the credit crunch has prompted buyout firms to pursue a new group of transactions in order to deploy
their massive investment funds. These transactions have included Private Investment in Public Equity (or PIPE)
transactions as well as purchases of debt in existing leveraged buyout transactions. Some of the most notable of these
transactions completed in the depths of the credit crunch include:
• Citigroup Loan Portfolio, 2008
As the credit crunch reached its peak in the first quarter of 2008, Apollo Management, TPG Capital and the
Blackstone Group completed the acquisition of $12.5 billion of bank loans from Citigroup. The portfolio was
comprised primarily of senior secured leveraged loans that had been made to finance leveraged buyout
transactions at the peak of the market. Citigroup had been unable to syndicate the loans before the onset of the
credit crunch. The loans were believed to have been sold in the "mid-80 cents on the dollar" relative to face
value.[101]
• Washington Mutual, 2008
An investment group led by TPG Capital invested $7 billion—of which TPG committed $1.5 billion—in new
capital in the struggling savings and loan to shore up the company's finances.[102] [103]
Private equity in the 2000s 61
See also
• History of private equity and venture capital
• Early history of private equity
• Private equity in the 1980s
• Private equity in the 1990s
• Private equity firms (category)
• Venture capital firms (category)
• Private equity and venture capital investors (category)
• Financial sponsor
• Private equity firm
• Private equity fund
• Private equity secondary market
• Mezzanine capital
• Private investment in public equity
• Taxation of Private Equity and Hedge Funds
• Investment banking
• Mergers and acquisitions
Notes
[1] BERENSON, ALEX. " Markets & Investing; Junk Bonds Still Have Fans Despite a Dismal Showing in 2001 (http:/ / query. nytimes. com/
gst/ fullpage. html?res=9C03E3D81530F931A35752C0A9649C8B63)." New York Times, January 2, 2002.
[2] SMITH, ELIZABETH REED. " Investing; Time to Jump Back Into Junk Bonds? (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9E03E0DD123FF932A3575AC0A9649C8B63)." New York Times, September 1, 2002.
[3] Berry, Kate. " Converging Forces Have Kept Junk Bonds in a Slump (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9F0CE3DF1738F93AA35754C0A9669C8B63)." New York Times, July 9, 2000.
[4] Romero, Simon. " Technology & Media; Telecommunications Industry Too Devastated Even for Vultures (http:/ / query. nytimes. com/ gst/
fullpage. html?res=9802EEDC163EF934A25751C1A9679C8B63)." New York Times, December 17, 2001.
[5] Atlas, Riva D. " Even the Smartest Money Can Slip Up (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9F00E5D61E31F933A05751C1A9679C8B63)." New York Times, December 30, 2001
[6] Will He Star Again In a Buyout Revival (http:/ / query. nytimes. com/ gst/ fullpage. html?res=9402EFDE1739F935A15752C0A9659C8B63)
(New York Times, 2003)
[7] Forbes Faces: Thomas O. Hicks (http:/ / www. forbes. com/ 2001/ 04/ 23/ 0423faceshicks. html) (Forbes, 2001)
[8] An LBO Giant Goes "Back to Basics" (http:/ / www. businessweek. com/ bwdaily/ dnflash/ nov2002/ nf20021113_4262. htm)
(BusinessWeek, 2002)
[9] Sorkin, Andrew Ross. " Business; Will He Be K.O.'d by XO? Forstmann Enters the Ring, Again (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9905E4D9103EF937A15751C0A9649C8B63)." New York Times, February 24, 2002.
[10] Sorkin, Andrew Ross. " Defending a Colossal Flop, in His Own Way (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9B02E5D71331F935A35755C0A9629C8B63)." New York Times, June 6, 2004.
[11] " Connecticut Sues Forstmann Little Over Investments (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9504E3D81631F935A15751C0A9649C8B63)." New York Times, February 26, 2002.
[12] Almond, Siobhan. " European LBOs: Breakin' away (http:/ / www. thedeal. com/ servlet/ ContentServer?pagename=TheDeal/ TDDArticle/
TDStandardArticle& bn=NULL& c=TDDArticle& cid=1011110631623)." TheDeal.com, January 24, 2002
[13] Vaughn, Hope and Barrett, Ross. "Secondary Private Equity Funds: The Perfect Storm: An Opportunity in Adversity". Columbia Strategy,
2003.
[14] Rossa, Jennifer and White, Chad. Dow Jones Private Equity Analyst Guide to the Secondary Market (2007 Edition).
[15] Press Release: The Royal Bank of Scotland: asset sale (http:/ / www. collercapital. com/ assets/ html/ pressrelease. html?ID=2)
[16] HarbourVest transactions (http:/ / www. harbourvest. com/ Investment_strategy/ secondary. htm)
[17] Press Release: Abbey sells private equity portfolio to Coller Capital (http:/ / www. collercapital. com/ assets/ html/ pressrelease.
html?ID=10)
[18] Anderson, Jenny. " Sharply Divided Reactions to Report on U.S. Markets (http:/ / www. nytimes. com/ 2006/ 12/ 01/ business/ 01regs.
html)." New York Times, December 1, 2006.
[19] "Yell.com History - 2000+" (http:/ / www. yellgroup. com/ english/ aboutyell-yelluk-yellukhistory-2000). Yell.com. . Retrieved 2008-01-11.
Private equity in the 2000s 63
[20] SUZANNE KAPNER AND ANDREW ROSS SORKIN. " Market Place; Vivendi Is Said To Be Near Sale Of Houghton (http:/ / query.
nytimes. com/ gst/ fullpage. html?res=9B01E2D6103FF932A05753C1A9649C8B63)." New York Times, October 31, 2002
[21] " COMPANY NEWS; VIVENDI FINISHES SALE OF HOUGHTON MIFFLIN TO INVESTORS (http:/ / query. nytimes. com/ gst/
fullpage. html?res=9504E2DC133FF932A35752C0A9659C8B63)." New York Times, January 1, 2003.
[22] Krantz, Matt. Private equity firms spin off cash (http:/ / www. usatoday. com/ money/ companies/ 2006-03-16-private-equity-usat_x. htm)
USA Today, March 16, 2006.
[23] "Dollarama undergoes major transformation" (http:/ / www. canada. com/ nationalpost/ financialpost/ story.
html?id=7dcebed2-ab61-413f-bf93-19b08cd945d9). National Post. June 1, 2006. .
[24] SORKIN, ANDREW ROSS and ROZHON, TRACIE. " Three Firms Are Said to Buy Toys 'R' Us for $6 Billion (http:/ / www. nytimes.
com/ 2005/ 03/ 17/ business/ 17toys. html)." New York Times, March 17, 2005.
[25] ANDREW ROSS SORKIN and DANNY HAKIM. " Ford Said to Be Ready to Pursue a Hertz Sale (http:/ / www. nytimes. com/ 2005/ 09/
08/ business/ 08ford. html)." New York Times, September 8, 2005
[26] PETERS, JEREMY W. " Ford Completes Sale of Hertz to 3 Firms (http:/ / www. nytimes. com/ 2005/ 09/ 13/ business/ 13hertz. html)."
New York Times, September 13, 2005
[27] SORKIN, ANDREW ROSS. " Sony-Led Group Makes a Late Bid to Wrest MGM From Time Warner (http:/ / www. nytimes. com/ 2004/
09/ 14/ business/ media/ 14studio. html)." New York Times, September 14, 2004
[28] " Capital Firms Agree to Buy SunGard Data in Cash Deal (http:/ / www. nytimes. com/ 2005/ 03/ 29/ business/ 29sungard. html)."
Bloomberg L.P., March 29, 2005
[29] Photographed at the World Economic Forum in Davos, Switzerland in January 2008.
[30] Samuelson, Robert J. " The Private Equity Boom (http:/ / www. washingtonpost. com/ wp-dyn/ content/ article/ 2007/ 03/ 14/
AR2007031402177. html)". The Washington Post, March 15, 2007.
[31] Dow Jones Private Equity Analyst as referenced in U.S. private-equity funds break record (http:/ / www. boston. com/ business/ articles/
2007/ 01/ 11/ us_private_equity_funds_break_record/ ) Associated Press, January 11, 2007.
[32] Dow Jones Private Equity Analyst as referenced in Taub, Stephen. Record Year for Private Equity Fundraising (http:/ / www. cfo. com/
article. cfm/ 8537972/ c_8519925?f=home_todayinfinance). CFO.com, January 11, 2007.
[33] Dow Jones Private Equity Analyst as referenced in Private equity fund raising up in 2007: report (http:/ / www. reuters. com/ article/
idUSBNG14655120080108), Reuters, January 8, 2008.
[34] Wayne, Leslie. " Koch Industries and Georgia-Pacific May Be a Perfect Fit (http:/ / www. nytimes. com/ 2005/ 11/ 15/ business/ 15place.
html)." New York Times, November 15, 2005.
[35] America's Largest Private Companies (http:/ / www. forbes. com/ lists/ 2007/ 21/
biz_privates07_Americas-Largest-Private-Companies_Rank. html) Forbes, November 8, 2007.
[36] " Albertson's Buyout by SuperValu Approved (http:/ / www. nytimes. com/ 2006/ 05/ 31/ business/ 31grocer. html)." New York Times, May
31, 2006.
[37] Source: Thomson Financial
[38] SORKIN, ANDREW ROSS and FLYNN, LAURIE J. " Blackstone Alliance to Buy Chip Maker for $17.6 Billion (http:/ / www. nytimes.
com/ 2006/ 09/ 16/ business/ 16freescale. html)." New York Times, September 16, 2006
[39] SORKIN, ANDREW ROSS and MAYNARD, MICHELINE " G.M. to Sell Majority Stake in Finance Unit (http:/ / www. nytimes. com/
2006/ 04/ 03/ business/ 03auto. html)." New York Times, April 3, 2006
[40] " $60 Billion Refinance Package for GMAC’s Mortgage Lender (http:/ / www. nytimes. com/ 2008/ 06/ 05/ business/ 05gmac. html)."
Associated Press, June 5, 2008
[41] " Lender Gets $1.4 Billion Cash Infusion (http:/ / www. nytimes. com/ 2008/ 06/ 04/ business/ 04lend. html)." Reuters, June 4, 2008
[42] SORKIN, ANDREW ROSS. " HCA Buyout Highlights Era of Going Private (http:/ / www. nytimes. com/ 2006/ 07/ 25/ business/ 25buyout.
html)." New York Times, July 25, 2006.
[43] MOUAWAD, JAD. " Kinder Morgan Agrees to an Improved Buyout Offer Led by Its Chairman (http:/ / www. nytimes. com/ 2006/ 08/ 29/
business/ 29kinder. html)." New York Times, August 29, 2006.
[44] Sorkin, Andrew Ross. " Harrah’s Is Said to Be in Talks to Accept $16.7 Billion Buyout (http:/ / www. nytimes. com/ 2006/ 12/ 18/ business/
18casino. html)." New York Times, December 18, 2006.
[45] " Takeover firms will pay $15.3b to buy Danish phone giant TDC (http:/ / www. boston. com/ business/ technology/ articles/ 2005/ 12/ 01/
takeover_firms_will_pay_153b_to_buy_danish_phone_giant_tdc/ )." Bloomberg L.P., December 1, 2005
[46] " TDC-One year on (http:/ / www. penews. com/ today/ supplements/ casestudies/ content/ 1047758801/ container/ 2449030860/ )." Dow
Jones Private Equity News, January 22, 2007.
[47] Sorkin, Andrew Ross. " 2 Firms Pay $4.3 Billion for Sabre (http:/ / travel. nytimes. com/ 2006/ 12/ 12/ business/ 12deal. html)." New York
Times, December 12, 2006.
[48] Sachdev, Ameet. " Orbitz travels to 4th owner: Blackstone Group to buy from Cendant." (http:/ / www. highbeam. com/ doc/
1G1-147699028. html), Chicago Tribune, July 1, 2006. Accessed September 15, 2007.
[49] Fineman, Josh. "Cendant to sell Orbitz to Blackstone for $4.3 Bln" (http:/ / www. bloomberg. com/ apps/ news?pid=20601087&
sid=a5zd1iiOoP5g& refer=home), Bloomberg.com, June 30, 2006. Accessed September 15, 2007.
[50] WERDIGIER, JULIA. " Equity Firm Wins Bidding for a Retailer, Alliance Boots (http:/ / www. nytimes. com/ 2007/ 04/ 25/ business/
worldbusiness/ 25boots. html)." New York Times, April 25, 2007
Private equity in the 2000s 64
[51] de la MERCED, MICHAEL J. " Biomet Accepts Sweetened Takeover Offer (http:/ / www. nytimes. com/ 2007/ 06/ 08/ business/ 08biomet.
html)." New York Times, June 8, 2007.
[52] MAYNARD, MICHELINE and LANDLER, MARK. " Chrysler Group to Be Sold for $7.4 Billion (http:/ / query. nytimes. com/ gst/
fullpage. html?res=990CE5DD1331F937A25756C0A9619C8B63)." The New York Times, May 14, 2007.
[53] Maynard, Michelle. " Will Nardelli Be Chrysler’s Mr. Fix-It? (http:/ / www. nytimes. com/ 2008/ 01/ 13/ business/ 13bob. html)." New York
Times, January 13, 2008.
[54] " K.K.R. Offer of $26 Billion Is Accepted by First Data (http:/ / www. nytimes. com/ 2007/ 04/ 03/ business/ 03data. html)." Reuters, April
3, 2007.
[55] Lonkevich, Dan and Klump, Edward. KKR, Texas Pacific Will Acquire TXU for $45 Billion (http:/ / www. bloomberg. com/ apps/
news?pid=20601087& sid=ardubKH_t2ic& refer=home) Bloomberg, February 26, 2007.
[56] Timmons, Heather. " Opening Private Equity's Door, at Least a Crack, to Public Investors (http:/ / www. nytimes. com/ 2006/ 05/ 04/
business/ worldbusiness/ 04place. html)." New York Times, May 4, 2006.
[57] Timmons, Heather. " Private Equity Goes Public for $5 Billion. Its Investors Ask, ‘What’s Next?’ (http:/ / www. nytimes. com/ 2006/ 11/ 10/
business/ 10private. html)." New York Times, November 10, 2006.
[58] Anderson, Jenny. " Where Private Equity Goes, Hedge Funds May Follow (http:/ / www. nytimes. com/ 2006/ 06/ 23/ business/ 23insider.
html)." New York Times, June 23, 2006.
[59] Press Release: KKR Private Equity Investors Reports Results for Quarter Ended March 31, 2008 (http:/ / www. kkrpei. com/ pdfs/
KKRPEI-PR_05_07_08. pdf), May 7, 2008
[60] The Blackstone Group L.P., FORM S-1 (http:/ / www. sec. gov/ Archives/ edgar/ data/ 1404912/ 000104746907005446/ a2178646zs-1.
htm), SECURITIES AND EXCHANGE COMMISSION, March 22, 2007
[61] SORKIN, ANDREW ROSS and DE LA MERCED, MICHAEL J. " News Analysis Behind the Veil at Blackstone? Probably Another Veil
(http:/ / www. nytimes. com/ 2007/ 03/ 19/ business/ 19blackstone. html)." New York Times, March 19, 2007.
[62] Anderson, Jenny. " Blackstone Founders Prepare to Count Their Billions (http:/ / www. nytimes. com/ 2007/ 06/ 12/ business/ 12blackstone.
html)." New York Times, June 12, 2007.
[63] KKR & CO. L.P., FORM S-1 (http:/ / www. sec. gov/ Archives/ edgar/ data/ 1404912/ 000104746907005446/ a2178646zs-1. htm),
SECURITIES AND EXCHANGE COMMISSION, July 3, 2007
[64] JENNY ANDERSON and MICHAEL J. de la MERCED. " Kohlberg Kravis Plans to Go Public (http:/ / www. nytimes. com/ 2007/ 07/ 04/
business/ 04kkr. html)." New York Times, July 4, 2007.
[65] Sorkin, Andrew Ross. " Carlyle to Sell Stake to a Mideast Government (http:/ / www. nytimes. com/ 2007/ 09/ 21/ business/ worldbusiness/
21carlyle. html)." New York Times, September 21, 2007.
[66] Sorkin, Andrew Ross. " California Pension Fund Expected to Take Big Stake in Silver Lake, at $275 Million (http:/ / www. nytimes. com/
2008/ 01/ 09/ business/ 09deal. html)." New York Times, January 9, 2008
[67] SORKIN, ANDREW ROSS and de la MERCED, MICHAEL J. " Buyout Firm Said to Seek a Private Market Offering (http:/ / www.
nytimes. com/ 2007/ 07/ 18/ business/ 18place. html)." New York Times, July 18, 2007.
[68] SORKIN, ANDREW ROSS. " Equity Firm Is Seen Ready to Sell a Stake to Investors (http:/ / www. nytimes. com/ 2007/ 04/ 05/ business/
05deal. html)." New York Times, April 5, 2007.
[69] APOLLO GLOBAL MANAGEMENT, LLC, FORM S-1 (http:/ / www. sec. gov/ Archives/ edgar/ data/ 1411494/ 000119312508077312/
ds1. htm), SECURITIES AND EXCHANGE COMMISSION, April 8, 2008
[70] de la MERCED, MICHAEL J. " Apollo Struggles to Keep Debt From Sinking Linens ’n Things (http:/ / www. nytimes. com/ 2008/ 04/ 14/
business/ 14apollo. html)." New York Times, April 14, 2008.
[71] FABRIKANT, GERALDINE. " Private Firms Use Closed-End Funds To Tap the Market (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9C03E4DD133BF934A25757C0A9629C8B63)." New York Times, April 17, 2004.
[72] Companies must elect to be treated as a "business development company" under the terms of the Investment Company Act of 1940 (
Investment Company Act of 1940: Section 54 -- Election to Be Regulated as Business Development Company (http:/ / www. law. uc. edu/
CCL/ InvCoAct/ sec54. html))
[73] Cortese, Amy. " Business; Private Traders See Gold in Venture Capital Ruins (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9406E7D81231F936A25757C0A9679C8B63)." New York Times, April 15, 2001.
[74] Private Equity Market Environment: Spring 2004 (http:/ / www. circlepeakcapital. com/ press/ probitas_market_overview. pdf), Probitas
Partners
[75] CalPERS and where private equity funds go to die (http:/ / blogs. wsj. com/ deals/ 2007/ 11/ 05/
calpers-and-where-private-equity-funds-go-to-die/ ?mod=WSJBlog) (WSJ.com, 2007)
[76] OBWC Portfolio Sale Nears End (http:/ / www. pehub. com/ wordpress/ ?p=803)
[77] Secondaries join the mainstream (http:/ / www. financialnews-us. com/ ?page=ushome& contentid=2347723491)
[78] Dow Jones Financial News: Goldman picks up Mellon portfolio (http:/ / www. efinancialnews. com/ content/ 1046889374/ )
[79] "American Capital Raises $1 Billion Equity Fund; Expands Its Asset Management Business; Will Host 9 am Conference Call" (http:/ /
www2. prnewswire. com/ cgi-bin/ stories. pl?ACCT=104& STORY=/ www/ story/ 10-04-2006/ 0004444957& EDATE=). PR Newswire.
American Capital Strategies. 2006-10-04. .
[80] American Capital raises $1bn fund (http:/ / www. altassets. com/ news/ arc/ 2006/ nz9445. php)
Private equity in the 2000s 65
[81] " ACS spins off stakes into $1B fund (http:/ / www. thedeal. com/ servlet/ ContentServer?pagename=TheDeal/ TDDArticle/
TDStandardArticle& bn=NULL& c=TDDArticle& cid=1159926373249)." TheDeal.com
[82] Singapore’s Temasek Hits Hard Going (http:/ / www. asiasentinel. com/ index. php?Itemid=32& id=613& option=com_content&
task=view) (Asia Sentinel, 2007)
[83] AlpInvest and Lexington Partners buy $1.2bn secondary portfolio from DPL (http:/ / www. altassets. com/ news/ arc/ 2005/ nz6329. php)
[84] M&A legal guru urges more diligence (http:/ / www. marketwatch. com/ News/ Story/ Story.
aspx?guid={33A29CE8-13FE-499F-AECE-D34A77532D54}& siteid=google& dist=google)
[85] " DPL to sell PE stakes for $850M (http:/ / www. thedeal. com/ servlet/ ContentServer?pagename=TheDeal/ TDDArticle/
TDStandardArticle& bn=NULL& c=TDDArticle& cid=1107993038709)." TheDeal.com
[86] SORKIN, ANDREW ROSS and de la MERCED, MICHAEL J. " Private Equity Investors Hint at Cool Down (http:/ / www. nytimes. com/
2007/ 06/ 26/ business/ 26place. html)." New York Times, June 26, 2007
[87] SORKIN, ANDREW ROSS. " Sorting Through the Buyout Freezeout (http:/ / www. nytimes. com/ 2007/ 08/ 12/ business/ yourmoney/
12deal. html)." New York Times, August 12, 2007.
[88] Turmoil in the markets (http:/ / www. economist. com/ finance/ displaystory. cfm?story_id=9566005)The Economist July 27, 2007
[89] de la MERCED, MICHAEL J. " Wary Buyers May Scuttle Two Deals (http:/ / www. nytimes. com/ 2007/ 09/ 22/ business/ 22deal. html)."
New York Times, September 22, 2007
[90] de la MERCED, MICHAEL J. " Canceling Harman Deal, Suitors Buy Bonds Instead (http:/ / www. nytimes. com/ 2007/ 10/ 23/ business/
23buyout. html)." New York Times, October 23, 2007
[91] http:/ / www. fflpartners. com
[92] Dash, Eric. " Deal to Make Sallie Mae a Big Debtor (http:/ / www. nytimes. com/ 2007/ 04/ 17/ business/ 17sallie. html)." New York Times,
April 17, 2007.
[93] de la MERCED, MICHAEL J. and EDMONSTON, PETER. " Builder of Sallie Mae Deal Has a Daring History (http:/ / www. nytimes.
com/ 2007/ 04/ 18/ business/ 18flowers. html)." New York Times, April 18, 2007.
[94] Dash, Eric. " Sallie Mae’s Suitors Say the Deal Is at Risk (http:/ / www. nytimes. com/ 2007/ 07/ 12/ business/ 12sallie. html)." New York
Times, July 12, 2007.
[95] de la Merced, Michael J. " On Third Time Around, Clear Channel Accepts Takeover Bid (http:/ / www. nytimes. com/ 2007/ 05/ 19/
business/ media/ 19radio. html)." New York Times, May 19, 2007.
[96] Sorkin, Andrew Ross, ed. " Early Win for Buyout Firms in Clear Channel Suit (http:/ / dealbook. blogs. nytimes. com/ 2008/ 03/ 27/
clear-channel-deal-lands-in-court/ )." New York Times DealBook, March 27, 2008.
[97] Bell Canada Agrees to Ontario Teachers-Led Buyout (http:/ / dealbook. blogs. nytimes. com/ 2007/ 06/ 30/
bell-canada-is-said-to-agree-to-providence-led-buyout/ ). The New York Times, June 30, 2007.
[98] Pasternak, Sean B. and Tomesco, Frederic. Toronto-Dominion to Provide $3.64 Billion in BCE Takeover (http:/ / www. bloomberg. com/
apps/ news?pid=20601082& sid=aKitL3aBA1VQ& refer=canada). Bloomberg, July 18, 2007.
[99] SORKIN, ANDREW ROSS and de la MERCED, MICHAEL J. Banks’ Terms Imperil Deal to Buy Out Bell Canada (http:/ / www. nytimes.
com/ 2008/ 05/ 19/ business/ worldbusiness/ 19deal. html). The New York Times, May 19, 2008.
[100] More Static Hits Bell Canada Deal (http:/ / dealbook. blogs. nytimes. com/ 2008/ 05/ 22/ after-ruling-whats-next-for-bell-canada/
?scp=16& sq=bce providence madison dearborn& st=cse) The New York Times, May 22, 2008.
[101] de la MERCED, MICHAEL J. and DASH, ERIC " Citi Is Said to Be Near Deal to Sell $12.5 Billion of Loans (http:/ / www. nytimes. com/
2008/ 04/ 09/ business/ 09citi. html)." New York Times, April 9, 2008
[102] " Big Investment Made in Lender (http:/ / www. nytimes. com/ 2008/ 04/ 09/ business/ 09bank. html)." Associated Press, April 9, 2008.
[103] Dash, Eric. " Bank Is in Line for a $5 Billion Infusion (http:/ / www. nytimes. com/ 2008/ 04/ 08/ business/ 08bank. html)." New York
Times, April 8, 2008
[104] Pratley, Nils. Fahrenheit 9/11 had no effect, says Carlyle chief (http:/ / www. guardian. co. uk/ print/ 0,3858,5127052-103676,00. html),
The Guardian, February 15, 2005.
[105] Sender, Henny and Langley, Monica. " Buyout Mogul: How Blackstone's Chief Became $7 Billion Man – Schwarzman Says He's Worth
Every Penny; $400 for Stone Crabs (http:/ / schwert. ssb. rochester. edu/ f423/ WSJ070613_Blackstone. pdf)." The Wall Street Journal, June
13, 2007.
[106] Sorkin, Andrew Ross. " Sound and Fury Over Private Equity (http:/ / www. nytimes. com/ 2007/ 05/ 20/ business/ yourmoney/ 20deal.
html)." The New York Times, May 20, 2007.
[107] Heath, Thomas. " Ambushing Private Equity: As SEIU Harries New Absentee Owners, Buyout Firms Dispute the Union's Agenda (http:/ /
www. washingtonpost. com/ wp-dyn/ content/ article/ 2008/ 04/ 17/ AR2008041704239. html)" The Washington Post, April 18, 2008
[108] Service Employees International Union's " Behind the Buyouts (http:/ / www. behindthebuyouts. org/ )" website
[109] DiStefano, Joseph N. Hecklers delay speech; Carlyle CEO notes private-equity ‘purgatory’ (http:/ / www. philly. com/ inquirer/ business/
homepage/ 20080118_Union_hecklers_disrupt_Phila__conference. html) The Philadelphia Inquirer, Jan. 18, 2008.
[110] California's Stern Rebuke (http:/ / online. wsj. com/ article/ SB120873771821130001. html?mod=opinion_main_review_and_outlooks).
The Wall Street Journal, April 21, 2008; Page A16.
[111] Protesting a Private Equity Firm (With Piles of Money) (http:/ / dealbook. blogs. nytimes. com/ 2007/ 10/ 10/
protesting-private-equity-with-piles-of-money/ ) The New York Times, October 10, 2007.
[112] Other ways to get yield (http:/ / www. financialpost. com/ story. html?id=3086357#ixzz0pQIzMHaM) Financial Post, May 29, 2010.
Private equity in the 2000s 66
References
• Ante, Spencer. Creative capital : Georges Doriot and the birth of venture capital. Boston: Harvard Business
School Press, 2008
• Bance, A. (2004). Why and how to invest in private equity (http://www.evca.com/pdf/Invest.pdf). European
Private Equity and Venture Capital Association (EVCA). Accessed May 22, 2008.
• Bruck, Connie. Predator's Ball. New York: Simon and Schuster, 1988.
• Burrill, G. Steven, and Craig T. Norback. The Arthur Young Guide to Raising Venture Capital. Billings, MT:
Liberty House, 1988.
• Burrough, Bryan. Barbarians at the Gate. New York : Harper & Row, 1990.
• Craig. Valentine V. Merchant Banking: Past and Present (http://www.fdic.gov/bank/analytical/banking/
2001sep/br2001v14n1art2.pdf). FDIC Banking Review. 2000.
• Fenn, George W., Nellie Liang, and Stephen Prowse. December, 1995. The Economics of the Private Equity
Market. Staff Study 168, Board of Governors of the Federal Reserve System.
• Gibson, Paul. "The Art of Getting Funded." Electronic Business, March 1999.
• Gladstone, David J. Venture Capital Handbook. Rev. ed. Englewood Cliffs, NJ: Prentice Hall, 1988.
• Hsu, D., and Kinney, M (2004). Organizing venture capital: the rise and demise of American Research and
Development Corporation (http://brie.berkeley.edu/~briewww/publications/WP163.pdf), 1946-1973.
Working paper 163. Accessed May 22, 2008
• Littman, Jonathan. "The New Face of Venture Capital." Electronic Business, March 1998.
• Loos, Nicolaus. Value Creation in Leveraged Buyouts (http://www.unisg.ch/www/edis.nsf/
wwwDisplayIdentifier/3052/$FILE/dis3052.pdf). Dissertation of the University of St. Gallen. Lichtenstein:
Guttenberg AG, 2005. Accessed May 22, 2008.
• National Venture Capital Association, 2005, The 2005 NVCA Yearbook.
• Schell, James M. Private Equity Funds: Business Structure and Operations. New York: Law Journal Press, 1999.
• Sharabura, S. (2002). Private Equity: past, present, and future (http://media.www.chibus.com/media/storage/
paper408/news/2002/02/18/GsbBusiness/Equity.Past.Present.And.Future-187504.shtml). GE Capital
Speaker Discusses New Trends in Asset Class. Speech to GSB 2/13/2002. Accessed May 22, 2008.
• Trehan, R. (2006). The History Of Leveraged Buyouts (http://www.4hoteliers.com/4hots_fshw.
php?mwi=1757). December 4, 2006. Accessed May 22, 2008.
• Cheffins, Brian. " THE ECLIPSE OF PRIVATE EQUITY (http://www.cbr.cam.ac.uk/pdf/wp339.pdf)".
Centre for Business Research, University Of Cambridge, 2007.
Envy ratio 67
Envy ratio
Envy ratio in finance is the ratio of the price paid by investors to that paid by the management team for their
respective shares of the equity. This metric is used when considering an opportunity for a management buyout.
Managers are often allowed to invest at lower valuation to make their ownership possible and to create a personal
financial incentive for them to approve the buyout and to work diligently towards the success of the investment. The
envy ratio is somewhat similar to the concept of financial leverage, for managers can increase returns on their
investments by using other investors's money.
Basic formula
ER = (investment by investors / % of equity) / (investment by management / % of equity)[1]
Example
If private equity investors paid $500M for 80% of a company's equity, and a management team paid $60M for 20%,
then ER=(500/80)/(60/20)=2.08x. This means that managers paid for a share 2.08 times less than did the investors.
The ratio demonstrates how generous institutional investors are to a management team—the higher the ratio is, the
better is the deal for management.[2]
As a rule of thumb, management should be expected to invest anywhere from six months to one year’s gross salary to
demonstrate commitment and have some "skin in the game".[3]
See also
• Management buy-in
• LBO
• Takeover
• Financial ratio
References
[1] M&A Academy Dealing with underwater management equity arrangements (http:/ / www. pwcblogs. be/ transactions/ wp-content/ uploads/
2009/ 11/ MA_Delaling-with-underwater_1911_Presentation. pdf)
[2] Structuring a venture capital deal (http:/ / www. tomorrowsleaders. com/ A5569D/ icaew/ content. nsf/ DocumentLookup/ ICAEWFIN0112/
$file/ FM12+ Finance. pdf)
[3] MBOs & MBIs - MBO Guide (http:/ / www. iconcorpfin. co. uk/ WhatWeDo/ MBOsMBIs/ WhatWeDo/ MBOGuide. htm)
External links
• Envy Ratio (http://www.carriedinterest.com/2006/11/envy_ratio.html)
• Envy ratio in EVCA.com (http://www.evca.com/html/PE_industry/glossary.asp?action=search&letter=yes&
AZ=ef)
• citation from Double-Tongued Dictionary (http://www.doubletongued.org/index.php/citations/9558)
Leveraged buyout 68
Leveraged buyout
A leveraged buyout (or LBO, or highly-leveraged transaction (HLT), or "bootstrap" transaction) occurs when an
investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant
percentage of the purchase price is financed through leverage (borrowing). The assets of the acquired company are
used as collateral for the borrowed capital, sometimes with assets of the acquiring company. Typically, leveraged
buyout uses a combination of various debt instruments from bank and debt capital markets. The bonds or other paper
issued for leveraged buyouts are commonly considered not to be investment grade because of the significant risks
involved.[1]
Companies of all sizes and industries have been the target of leveraged buyout transactions, although because of the
importance of debt and the ability of the acquired firm to make regular loan payments after the completion of a
leveraged buyout, some features of potential target firms make for more attractive leverage buyout candidates,
including:
• Low existing debt loads;
• A multi-year history of stable and recurring cash flows;
• Hard assets (property, plant and equipment, inventory, receivables) that may be used as collateral for lower cost
secured debt;
• The potential for new management to make operational or other improvements to the firm to boost cash flows;
• Market conditions and perceptions that depress the valuation or stock price.
Characteristics
Leveraged buyouts involve an investor,
financial sponsors or private equity
firms making large acquisitions
without committing all the capital
required for the acquisition. To do this,
a financial sponsor will raise
acquisition debt which is ultimately
secured upon the acquisition target and
also looks to the cash flows of the
acquisition target to make interest and
principal payments. Acquisition debt in
an LBO is therefore usually
non-recourse to the financial sponsor
and to the equity fund that the financial Diagram of the basic structure of a generic leveraged buyout transaction
sponsor manages. Furthermore, unlike
in a hedge fund, where debt raised to purchase certain securities is also collateralized by the fund's other securities,
the acquisition debt in an LBO is recourse only to the company purchased in a particular LBO transaction.
Therefore, an LBO transaction's financial structure is particularly attractive to a fund's limited partners, allowing
them the benefits of leverage but greatly limiting the degree of recourse of that leverage.
This kind of acquisition brings leverage benefits to an LBO's financial sponsor in two ways: (1) the investor itself
only needs to provide a fraction of the capital for the acquisition, and (2) assuming the economic internal rate of
return on the investment (taking into account expected exit proceeds) exceeds the weighted average interest rate on
the acquisition debt, returns to the financial sponsor will be significantly enhanced.
Leveraged buyout 69
As transaction sizes grow, the equity component of the purchase price can be provided by multiple financial
sponsors "co-investing" to come up with the needed equity for a purchase. Likewise, multiple lenders may band
together in a "syndicate" to jointly provide the debt required to fund the transaction. Today, larger transactions are
dominated by dedicated private equity firms and a limited number of large banks with "financial sponsors" groups.
As a percentage of the purchase price for a leverage buyout target, the amount of debt used to finance a transaction
varies according to the financial condition and history of the acquisition target, market conditions, the willingness of
lenders to extend credit (both to the LBO's financial sponsors and the company to be acquired) as well as the interest
costs and the ability of the company to cover those costs. Typically the debt portion of a LBO ranges from 50%-85%
of the purchase price, but in some cases debt may represent upwards of 95% of purchase price. Between 2000-2005
debt averaged between 59.4% and 67.9% of total purchase price for LBOs in the United States.[2]
To finance LBO's, private-equity firms usually issue some combination of syndicated loans and high-yield bonds.
Smaller transactions may also be financed with mezzanine debt from insurance companies or specialty lenders.
Syndicated loans are typically arranged by investment banks and financed by commercial banks and loan fund
managers, such as mutual funds, hedge funds, credit opportunity investors and structured finance vehicles. The
commercial banks typically provide revolving credits that provide issuers with liquidity and cash flow while fund
managers generally provided funded term loans that are used to finance the LBO. These loans tend to be senior
secured, floating-rate instruments pegged to the London Interbank Offered Rate (LIBOR). They are typically
pre-payable at the option of the issuer, though in some cases modest prepayment fees apply.[3] High-yield bonds,
meanwhile, are also underwritten by investment banks but are financed by a combination of retail and institutional
credit investors, including high-yield mutual funds, hedge funds, credit opportunities and other institutional accounts.
High-yield bonds tend to be fixed-rate instruments. Most are unsecured, though in some cases issuers will sell senior
secured notes. The bonds usually have no-call periods of 3–5 years and then high prepayment fees thereafter.
Issuers, however, will in many cases have a "claw-back option" that allows them to repay some percentage during
the no-call period (usually 35%) with equity proceeds.
Another source of financing for LBO's is seller's notes, which are provided in some cases by the entity as a way to
facilitate the transaction.
History
acquisition of Orkin Exterminating Company in 1964 is among the first significant leveraged buyout transactions.[7] .
In the following years the three Bear Stearns bankers would complete a series of buyouts including Stern Metals
(1965), Incom (a division of Rockwood International, 1971), Cobblers Industries (1971), and Boren Clay (1973) as
well as Thompson Wire, Eagle Motors and Barrows through their investment in Stern Metals.[8] By 1976, tensions
had built up between Bear Stearns and Kohlberg, Kravis and Roberts leading to their departure and the formation of
Kohlberg Kravis Roberts in that year.
Drexel Burnham Lambert was the investment bank most responsible for the boom in private equity during the 1980s
due to its leadership in the issuance of high-yield debt.
Drexel reached an agreement with the government in which it pleaded nolo contendere (no contest) to six
felonies—three counts of stock parking and three counts of stock manipulation.[15] It also agreed to pay a fine of
$650 million—at the time, the largest fine ever levied under securities laws. Milken left the firm after his own
indictment in March 1989.[16] On February 13, 1990 after being advised by United States Secretary of the Treasury
Nicholas F. Brady, the U.S. Securities and Exchange Commission (SEC), the New York Stock Exchange, and the
Federal Reserve, Drexel Burnham Lambert officially filed for Chapter 11 bankruptcy protection.[16]
Rationale
The purposes of debt financing for leveraged buyouts are two-fold:
1. The use of debt increases (leverages) the financial return to the private equity sponsor. Under the
Modigliani-Miller theorem,[31] the total return of an asset to its owners, all else being equal and within strict
restrictive assumptions, is unaffected by the structure of its financing. As the debt in an LBO has a relatively
fixed, albeit high, cost of capital, any returns in excess of this cost of capital flow through to the equity.
2. The tax shield of the acquisition debt, according to the Modigliani-Miller theorem with taxes, increases the value
of the firm. This enables the private equity sponsor to pay a higher price than would otherwise be possible.
Because income flowing through to equity is taxed, while interest payments to debt are not, the capitalized value
of cash flowing to debt is greater than the same cash stream flowing to equity.
Germany currently introduces new tax laws, taxing parts of the cash flow before debt interest deduction. The
motivation for the change is to discourage leveraged buyouts by reducing the tax shield effectiveness.
Historically, many LBOs in the 1980s and 1990s focused on reducing wasteful expenditures by corporate managers
whose interests were not aligned with shareholders. After a major corporate restructuring, which may involve selling
off portions of the company and severe staff reductions, the entity would likely be producing a higher income
stream. Because this type of management arbitrage and easy restructuring has largely been accomplished, LBOs
today focus more on growth and complicated financial engineering to achieve their returns. Most leveraged buyout
firms look to achieve an internal rate of return in excess of 20%.
Management buyouts
A special case of a leveraged acquisition is a management buyout (MBO), which occurs when a company's managers
buy or acquire a large part of the company. The goal of an MBO may be to strengthen the managers' interest in the
success of the company. In most cases when the company is initially listed, the management will then make it
private. MBOs have assumed an important role in corporate restructurings beside mergers and acquisitions. Key
considerations in an MBO are fairness to shareholders, price, the future business plan, and legal and tax issues. One
recent criticism of MBOs is that they create a conflict of interest—an incentive is created for managers to
mismanage (or not manage as efficiently) a company, thereby depressing its stock price, and profiting handsomely
by implementing effective management after the successful MBO, as Paul Newman's character attempted in the
Coen brothers' film The Hudsucker Proxy.
Of course, the incentive to artificially reduce share price extends beyond management buyouts.
It is fairly easy for a top executive to reduce the price of his/her company's stock - due to information asymmetry.
The executive can accelerate accounting of expected expenses, delay accounting of expected revenue, engage in off
balance sheet transactions to make the company's profitability appear temporarily poorer, or simply promote and
report severely conservative (e.g. pessimistic) estimates of future earnings. Such seemingly adverse earnings news
will be likely to (at least temporarily) reduce share price. (This is again due to information asymmetries since it is
more common for top executives to do everything they can to window dress their company's earnings forecasts).
A reduced share price makes a company an easier takeover target. When the company gets bought out (or taken
private) - at a dramatically lower price - the takeover artist gains a windfall from the former top executive's actions to
surreptitiously reduce share price. This can represent 10s of billions of dollars (questionably) transferred from
previous shareholders to the takeover artist. The former top executive is then rewarded with a golden parachute for
presiding over the firesale that can sometimes be in the 100s of millions of dollars for one or two years of work.
(This is nevertheless an excellent bargain for the takeover artist, who will tend to benefit from developing a
reputation of being very generous to parting top executives).
Similar issues occur when a publicly held asset or non-profit organization undergoes privatization. Top executives
often reap tremendous monetary benefits when a government owned or non-profit entity is sold to private hands. Just
Leveraged buyout 73
as in the example above, they can facilitate this process by making the entity appear to be in financial crisis - this
reduces the sale price (to the profit of the purchaser), and makes non-profits and governments more likely to sell.
Ironically, it can also contribute to a public perception that private entities are more efficiently run reinforcing the
political will to sell of public assets.
Again, due to asymmetric information, policy makers and the general public see a government owned firm that was a
financial 'disaster' - miraculously turned around by the private sector (and typically resold) within a few years.
Nevertheless, the incentive to artificially reduce the share price of a firm is higher for management buyouts, than for
other forms of takeovers or LBOs.
Failures
Some LBOs in the 1980s and 1990s resulted in corporate bankruptcy, such as Robert Campeau's 1988 buyout of
Federated Department Stores and the 1986 buyout of the Revco drug stores. The failure of the Federated buyout was
a result of excessive debt financing, comprising about 97% of the total consideration, which led to large interest
payments that exceeded the company's operating cash flow. In response to the threat of LBOs, certain companies
adopted a number of techniques, such as the poison pill, to protect them against hostile takeovers by effectively
self-destructing the company if it were to be taken over.
The inability to repay debt in an LBO can be caused by initial overpricing of the target firm and/or its assets.
Because LBO funds often attempt to increase the value of an acquired company by liquidating certain assets or
selling underperforming business units, the bought-out firm may face insolvency as depleted operating revenues
become insufficient to repay the debt. Over-optimistic forecasts of the revenues of the target company may also lead
to financial distress after acquisition. Some courts have found that LBO debt constitutes a fraudulent transfer under
U.S. insolvency law if it is determined to be the cause of the acquired firm's failure. [32] However, the Bankruptcy
Code includes a so-called "safe harbor" provision, preventing bankruptcy trustees from recovering settlement
payments to the bought-out shareholders.[33] In 2009, the U.S. Court of Appeals for the Sixth Circuit held that such
settlement payments could not be avoided, irrespective of whether they occurred in an LBO of a public or private
company.[34]
Secondary buyouts
A secondary buyout is a form of leveraged buyout where both the buyer and the seller are private equity firms or
financial sponsors (i.e. a leveraged buyout of a company that was acquired through a leveraged buyout). A secondary
buyout will often provide a clean break for the selling private equity firms and its limited partner investors.
Historically, however, secondary buyouts were perceived as distressed sales by both seller and buyer, were
considered unattractive by limited partner investors and were largely avoided.
The increase in secondary buyout activity in 2000's was driven in large part by an increase in capital in the leveraged
buyout space. Often, selling private equity firms will pursue a secondary buyout for a number of reasons:
• Sales to strategic buyers and IPOs may not be possible for niche or undersized businesses
• Secondary buyouts may generate liquidity more quickly than other routes (i.e., IPOs)
Often, secondary buyouts have been successful if the investment has reached an age where it is necessary or
desirable to sell rather than hold the investment further or where the investment had already generated significant
value for the selling firm.
Secondary buyouts differ from secondaries or secondary market purchases which typically involve the acquisition of
portfolios of private equity assets including limited partnership stakes and direct investments in corporate securities.
Leveraged buyout 74
LBO Analysis
An LBO analysis is designed to estimate the current value of a company to a financial buyer, based on the company's
forecasted financial performance. LBO analysis typically builds upon a medium-term forecast (typical investment
horizon for financial sponsors is 3–7 years) to project future operating results.
The analysis works similarly, in many respects, to a discounted cash flow. The analysis will project the debt repaid
by the company during the forecast period and make assumptions about the multiple of earnings at which the
business will be sold after a period of time. By targeting returns consistent with historical targets for private equity
firms, the LBO analysis will provide an estimate of what purchase price a buyer would be willing to pay to achieve
those returns.
In Art
LBOs form the basis of several cultural works. In addition to the aforementioned Barbarians at the Gate: The Fall of
RJR Nabisco and the film adaptation, based on actual events, a fictional LBO is the basis of the 1963 Japanese film
High and Low.
See also
• Private equity
• Bootstrap funding
• Divisional buyout
• Management buyout
• Private equity firm
• History of private equity and venture capital
• List of private equity firms
• Envy ratio
Notes
[1] http:/ / www. lbo-advisers. com/ LBO. asp
[2] Trenwith Group "M&A Review," (Second Quarter, 2006)
[3] https:/ / www. lcdcomps. com/ d/ pdf/ LoanMarketguide. pdf
[4] On January 21, 1955, McLean Industries, Inc. purchased the capital stock of Pan Atlantic Steamship Corporation and Gulf Florida Terminal
Company, Inc. from Waterman Steamship Corporation. In May McLean Industries, Inc. completed the acquisition of the common stock of
Waterman Steamship Corporation from its founders and other stockholders.
[5] Marc Levinson, The Box, How the Shipping Container Made the World Smaller and the World Economy Bigger, pp. 44-47 (Princeton Univ.
Press 2006). The details of this transaction are set out in ICC Case No. MC-F-5976, McLean Trucking Company and Pan-Atlantic American
Steamship Corporation--Investigation of Control, July 8, 1957.
[6] Trehan, R. (2006). The History Of Leveraged Buyouts (http:/ / www. 4hoteliers. com/ 4hots_fshw. php?mwi=1757). December 4, 2006.
Accessed May 22, 2008
[7] The History of Private Equity (http:/ / www. investmentu. com/ research/ private-equity-history. html) Investment U
[8] Burrough, Bryan. Barbarians at the Gate. New York : Harper & Row, 1990, p. 133-136
[9] Taylor, Alexander L. " Buyout Binge (http:/ / www. time. com/ time/ magazine/ article/ 0,9171,951242,00. html)". TIME magazine, Jul. 16,
1984.
[10] Opler, T. and Titman, S. "The determinants of leveraged buyout activity: Free cash flow vs. financial distress costs." Journal of Finance,
1993.
[11] 10 Questions for Carl Icahn (http:/ / www. time. com/ time/ magazine/ article/ 0,9171,1590446,00. html) by Barbara Kiviat, TIME
magazine, Feb. 15, 2007
[12] TWA - Death Of A Legend (http:/ / www. stlmag. com/ media/ St-Louis-Magazine/ October-2005/ TWA-Death-Of-A-Legend/ ) by Elaine
X. Grant, St Louis Magazine, Oct 2005
[13] Game of Greed (http:/ / www. time. com/ time/ magazine/ 0,9263,7601881205,00. html) (TIME magazine, 1988)
[14] Wallace, Anise C. " Nabisco Refinance Plan Set (http:/ / query. nytimes. com/ gst/ fullpage.
html?res=9C0CE2D91E31F935A25754C0A966958260)." The New York Times, July 16, 1990.
Leveraged buyout 75
[15] Stone, Dan G. (1990). April Fools: An Insider's Account of the Rise and Collapse of Drexel Burnham. New York City: Donald I. Fine.
ISBN 1556112289.
[16] Den of Thieves. Stewart, J. B. New York: Simon & Schuster, 1991. ISBN 0-671-63802-5.
[17] SORKIN, ANDREW ROSS and ROZHON, TRACIE. " Three Firms Are Said to Buy Toys 'R' Us for $6 Billion (http:/ / www. nytimes.
com/ 2005/ 03/ 17/ business/ 17toys. html)." New York Times, March 17, 2005.
[18] ANDREW ROSS SORKIN and DANNY HAKIM. " Ford Said to Be Ready to Pursue a Hertz Sale (http:/ / www. nytimes. com/ 2005/ 09/
08/ business/ 08ford. html)." New York Times, September 8, 2005
[19] PETERS, JEREMY W. " Ford Completes Sale of Hertz to 3 Firms (http:/ / www. nytimes. com/ 2005/ 09/ 13/ business/ 13hertz. html)."
New York Times, September 13, 2005
[20] SORKIN, ANDREW ROSS. " Sony-Led Group Makes a Late Bid to Wrest MGM From Time Warner (http:/ / www. nytimes. com/ 2004/
09/ 14/ business/ media/ 14studio. html)." New York Times, September 14, 2004
[21] " Capital Firms Agree to Buy SunGard Data in Cash Deal (http:/ / www. nytimes. com/ 2005/ 03/ 29/ business/ 29sungard. html)."
Bloomberg, March 29, 2005
[22] Samuelson, Robert J. " The Private Equity Boom (http:/ / www. washingtonpost. com/ wp-dyn/ content/ article/ 2007/ 03/ 14/
AR2007031402177. html)". The Washington Post, March 15, 2007.
[23] Dow Jones Private Equity Analyst as referenced in U.S. private-equity funds break record (http:/ / www. boston. com/ business/ articles/
2007/ 01/ 11/ us_private_equity_funds_break_record/ ) Associated Press, January 11, 2007.
[24] Dow Jones Private Equity Analyst as referenced in Private equity fund raising up in 2007: report (http:/ / www. reuters. com/ article/
idUSBNG14655120080108), Reuters, January 8, 2008.
[25] SORKIN, ANDREW ROSS. " HCA Buyout Highlights Era of Going Private (http:/ / www. nytimes. com/ 2006/ 07/ 25/ business/ 25buyout.
html)." New York Times, July 25, 2006.
[26] WERDIGIER, JULIA. " Equity Firm Wins Bidding for a Retailer, Alliance Boots (http:/ / www. nytimes. com/ 2007/ 04/ 25/ business/
worldbusiness/ 25boots. html)." New York Times, April 25, 2007
[27] Lonkevich, Dan and Klump, Edward. KKR, Texas Pacific Will Acquire TXU for $45 Billion (http:/ / www. bloomberg. com/ apps/
news?pid=20601087& sid=ardubKH_t2ic& refer=home) Bloomberg, February 26, 2007.
[28] SORKIN, ANDREW ROSS and de la MERCED, MICHAEL J. " Private Equity Investors Hint at Cool Down (http:/ / www. nytimes. com/
2007/ 06/ 26/ business/ 26place. html)." New York Times, June 26, 2007
[29] SORKIN, ANDREW ROSS. " Sorting Through the Buyout Freezeout (http:/ / www. nytimes. com/ 2007/ 08/ 12/ business/ yourmoney/
12deal. html)." New York Times, August 12, 2007.
[30] [[Economist (http:/ / www. )].com/finance/displaystory.cfm?story_id=9566005 Turmoil in the markets] The Economist July 27, 2007
[31] Modigliani, Franco & Miller, Merton H. (1958), "The Cost of Capital, Corporation Finance, and the Theory of Investment" (http:/ / www.
jstor. org/ pss/ 1809766), American Economic Review 48 (3): 261–297, .
[32] U.S. Bankruptcy Code, 11 U.S.C. § 548(2); Uniform Fraudulent Transfer Act, § 4. This is because the company usually gets no direct
financial benefit from the transaction but incurs the debt for it nevertheless.
[33] U.S. Bankruptcy Code, 11 U.S.C. § 546(e).
[34] QSI Holdings, Inc. v. Alford, --- F.3d ---, Case No. 08-1176 (6th Cir. July 6, 2009).
Management buyout 76
Management buyout
A management buyout (MBO) is a form of acquisition where a company's existing managers acquire a large part or
all of the company.
Overview
Management buyouts are similar in all major legal aspects to any other acquisition of a company. The particular
nature of the MBO lies in the position of the buyers as managers of the company, and the practical consequences that
follow from that. In particular, the due diligence process is likely to be limited as the buyers already have full
knowledge of the company available to them. The seller is also unlikely to give any but the most basic warranties to
the management, on the basis that the management know more about the company than the sellers do and therefore
the sellers should not have to warrant the state of the company.
In many cases the company will already be a private company, but if it is public then the management will take it
private.
Some concerns about management buyouts are that the asymmetric information possessed by management may offer
them unfair advantage relative to current owners. The impending possibility of an MBO may lead to principal-agent
problems, moral hazard, and perhaps even the subtle downward manipulation of the stock price prior to sale via
adverse information disclosure - including accelerated and aggressive loss recognition, public launching of
questionable projects and adverse earning surprises. Naturally, such corporate governance concerns also exist
whenever current senior management is able to benefit personally from the sale of their company or its assets. This
would include, for example, large parting bonuses for CEOs after a takeover or management buyout.
Since corporate valuation is often subject to considerable uncertainty and ambiguity, and since it can be heavily
influenced by asymmetric or inside information, some question the validity of MBOs and consider them to
potentially represent a form of insider trading.
The mere possibility of an MBO or a substantial parting bonus on sale may create perverse incentives that can reduce
the efficiency of a wide range of firms - even if they remain as public companies. This represents a substantial
potential negative externality.
Debt Financing
The management of a company will not usually have the money available to buy the company outright themselves.
They would first seek to borrow from a bank, provided the bank was willing to accept the risk. Management buyouts
are frequently seen as too risky for a bank to finance the purchase through a loan. Management teams are typically
asked to invest an amount of capital that is significant to them personally, depending on the funding source/banks
determination of the personal wealth of the management team. The bank then loans the company the remaining
portion of the amount paid to the owner. Companies that proactively shop aggressive funding sources should qualify
for total debt financing of at least four times (4X) cash flow.
Management buyout 77
Seller Financing
In certain circumstances it may be possible for the management and the original owner of the company to agree a
deal whereby the seller finances the buyout. The price paid at the time of sale will be nominal, with the real price
being paid over the following years out of the profits of the company. The timescale for the payment is typically 3–7
years.
This represents a disadvantage for the selling party, which must wait to receive its money after it has lost control of
the company. It is also dependent on the returned profits being increased significantly following the acquisition, in
order for the deal to represent a gain to the seller in comparison to the situation pre-sale. This will usually only
happen in very particular circumstances.
The vendor may nevertheless agree to vendor financing for tax reasons, as the consideration will be classified as
capital gain rather than as income. It may also receive some other benefit such as a higher overall purchase price than
would be obtained by a normal purchase.
The advantage for the management is that they do not need to become involved with private equity or a bank and
will be left in control of the company once the consideration has been paid.
Management buyout 78
Examples of MBOs
A classic example of an MBO involved Springfield Remanufacturing Corporation, a former plant in Springfield,
Missouri owned by Navistar (at that time, International Harvester) which was in danger of being closed or sold to
outside parties until its managers purchased the company.
In the UK, New Look was the subject of a management buyout in 2004 by Tom Singh, the founder of the company
who had floated it in 1998. He was backed by private equity houses Apax and Permira, who now own 60% of the
company. An earlier example of this in the UK was the management buyout of Virgin Interactive from Viacom
which was led by Mark Dyne
The Virgin Group has undergone several management buyouts in recent years. On September 17, 2007, Sir Richard
Branson announced that the UK arm of Virgin Megastores was to be sold off as part of a management buyout, and
from November 2007, will be known by a new name, Zavvi. On September 24, 2008, another part of the Virgin
group, Virgin Comics underwent a management buyout and changed its name to Liquid Comics. In the UK and
Ireland, Virgin Radio also underwent a similar process and became Absolute Radio.
See also
• Takeover
• Management buy-in
• Leveraged buyout
• Envy ratio
References
[1] "European buy-out market hits a seven year low, reports the Centre for Management Buy-out Research" (http:/ / www. nottingham. ac. uk/
business/ cmbor/ Press/ 23February2009. html). 2009-02-23. .
External links
• Definition of management buyout (http://www.investopedia.com/terms/m/mbo.asp)
• Definition of buy-in management buyout (http://www.investopedia.com/terms/b/buyinmanagementbuyout.
asp)
• Creative Management Buyout Strategies Article" (http://www.lanternadvisors.com/
ManagementBuyoutStrategiesWhitePaper.pdf)
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