Early history of private equity
History of private equity and venture capital |
---|
Early history |
(origins of modern private equity) |
The 1980s |
(leveraged buyout boom) |
The 1990s |
(leveraged buyout and the venture capital bubble) |
The 2000s |
(dot-com bubble to the credit crunch) |
The 2010s |
(expansion) |
The 2020s |
(COVID-19 recession) |
The early history of private equity relates to one of the major periods in the
The origins of the modern private equity industry trace back to 1946 with the formation of the first venture capital firms. The thirty-five-year period from 1946 through the end of the 1970s was characterized by relatively small volumes of private equity investment, rudimentary firm organizations and limited awareness of and familiarity with the private equity industry.
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
Later,
Due to structural restrictions imposed on American banks under the
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,
Origins of modern private equity
It was not until after
ARDC was founded by
Before World War II, venture capital investments (originally known as "development capital") were primarily the domain of wealthy individuals and families. One of the first steps toward a professionally managed venture capital industry was the passage of the
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
It was also in the 1960s that the common form of
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.
The growth of the venture capital industry was fueled by the emergence of the independent investment firms on
- 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 Davisin 1969;
- Saunders Karp & Megrue(founded 1989);
- Menlo Ventures, co-founded by H.DuBose Montgomery in 1976;
- 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:
- Kleiner, Perkins, Caufield & Byers.[11]
- Genentech a biotechnology company, founded in 1976 with venture capital from Robert A. Swanson.[12][13]
- Kleiner, Perkins and Sevin Rosen Funds.[15]
- 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 and Menlo Ventures. 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 leveraged buyouts (1955-1981)
McLean Industries and public holding companies
Although not strictly private equity, and certainly not labeled so at the time, the first leveraged buyout may have been the purchase by
Similar to the approach employed in the McLean transaction, the use of
Posner, who had made a fortune in real estate investments in the 1930s and 1940s acquired a major stake in
The pioneers of private equity
Lewis Cullman's acquisition of Orkin Exterminating Company in 1964 is among the first significant leveraged buyout transactions.[22][23][24] However, the industry that is today described as private equity was conceived by several financiers, including Jerome Kohlberg Jr. and later his protégé, Henry Kravis. Working for Bear Stearns at the time, Kohlberg and Kravis along with Kravis' cousin George Roberts began a series of what they described as "bootstrap" investments. They targeted family-owned businesses, many of which had been founded in the years following World War II and by the 1960s and 1970s were facing succession issues. Many of these companies lacked a viable or attractive exit for their founders as they were too small to be taken public and the founders were reluctant to sell out to competitors, making a sale to a financial buyer potentially attractive. 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. Although they had a number of highly successful investments, the $27 million investment in Cobblers ended in bankruptcy.[25]
By 1976, tensions had built up between Bear Stearns and Kohlberg, Kravis and Roberts leading to their departure and the formation of
Meanwhile, in 1974, Thomas H. Lee founded a new investment firm to focus on acquiring companies through leveraged buyout transactions, one of the earliest independent private equity firms to focus on leveraged buyouts of more mature companies rather than venture capital investments in growth companies. Lee's firm, Thomas H. Lee Partners, while initially generating less fanfare than other entrants in the 1980s, would emerge as one of the largest private equity firms globally by the end of the 1990s.
The second half of the 1970s and the first years of the 1980s saw the emergence of several private equity firms that would survive through the various cycles both in leveraged buyouts and venture capital. Among the firms founded during these years were:
- Cinven, a European buyout firm, founded in 1977;
- Ted Forstmann, Nick Forstmann and Brian Little;
- Clayton, Dubilier & Rice founded as Clayton & Dubilier in 1978;
- Welsh, Carson, Anderson & Stowe founded by Pat Welsh, Russ Carson, Bruce Anderson and Richard Stowe in 1979;
- Candover, one of the earliest European buyout firms, founded in 1980; and
- Thoma Cressey ( Golder Thoma & Cressey, later Golder Thoma Cressey & Rauner) founded in 1980 by Stanley Golder, who built the private equity program at First Chicago Corp. that backed Federal Express.[29]
Regulatory and tax changes impact the boom
The advent of the boom in leveraged buyouts in the 1980s was supported by three major legal and regulatory events:
- Failure of the Carter tax plan of 1977 - In his first year in office, Jimmy Carter put forth a revision to the corporate tax system that would have, among other results, reduced the disparity in treatment of interest paid to bondholders and dividends paid to stockholders. Carter's proposals did not achieve support from the business community or Congress and was not enacted. Because of the different tax treatment, the use of leverage to reduce taxes was popular among private equity investors and would become increasingly popular with the reduction of the capital gains tax rate.[30]
- privately held companies. In 1975, fundraising for private equity investments cratered, according to the Venture Capital Institute, totaling only $10 million during the course of the year. In 1978, the US Labor Department relaxed certain of the ERISA restrictions, under the "prudent man rule",[31] thus allowing corporate pension funds to invest in private equity resulting in a major source of capital available to invest in venture capital and other private equity. Time reported in 1978 that fund raising had increased from $39 million in 1977 to $570 million just one year later.[32] Additionally, many of these same corporate pension investors would become active buyers 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.
The first private equity boom (1982 to 1993)
The decade of the 1980s is perhaps more closely associated with the leveraged buyout than any decade before or since. For the first time, the public became aware of the ability of private equity to affect mainstream companies, and "corporate raiders" and "hostile takeovers" entered the public consciousness. The decade would see one of the largest booms in private equity culminating in the 1989 leveraged buyout of RJR Nabisco, which would reign as the largest leveraged buyout transaction for nearly 17 years. The private equity industry would raise approximately $2.4 billion of annual investor commitments In 1980, and by the end of the decade that figure stood at $21.9 billion, marking the tremendous growth experienced.[33]
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
- ^ Wilson, John. The New Ventures, Inside the High Stakes World of Venture Capital.
- ^ WGBH Public Broadcasting Service, "Who made America?"-Georges Doriot" Archived December 11, 2007, at the Wayback Machine
- ^ The New Kings of Capitalism, Survey on the Private Equity industry The Economist, November 25, 2004
- ^ Joseph W. Bartlett, "What Is Venture Capital?" Archived February 28, 2008, at the Wayback Machine
- ^ Kirsner, Scott (April 6, 2008). "Venture capital's grandfather". The Boston Globe.
- ^ "Small Business Administration Investment Division (SBIC)". Archived from the original on December 18, 2010. Retrieved July 30, 2008.
- ^ The Future of Securities Regulation 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.
- ^ "Draper Investment Company". Archived from the original on October 2, 2011. Retrieved September 26, 2009. Web site history
- ^ 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.
- ^ Official website of the National Venture Capital Association, the largest trade association for the venture capital industry.
- ^ Tandem Computers FundingUniverse.com
- S2CID 4357773.
- ^ "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". Archived from the original on April 18, 2012. Retrieved July 30, 2008.
- ^ Apple Computer, Inc. FundingUniverse.com
- ^ Electronic Arts Inc. FundingUniverse.com
- ^ Compaq Computer Corporation FundingUniverse.com
- ^ Smith, Fred (October 2002). "How I Delivered the Goods" (PDF). Fortune. Archived from the original (PDF) on September 28, 2007.
- ^ FedEx Corporation FundingUniverse.com
- ^ 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.
- 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.
- ^ Trehan, R. (2006). The History Of Leveraged Buyouts. December 4, 2006. Accessed May 22, 2008
- ^ Madoff, Ray D. (June 16, 2019). "Opinion | the Case for Giving Money Away Now". Wall Street Journal.
- ^ "The Philanthropist Discusses Tsunami Relief, Public Versus Private Giving, and Why Parents Should Limit Their Children's Inheritance". Newsweek. January 11, 2005.
- ^ "Lewis B. Cullman '41". Obituaries. Yale Alumni Magazine.
- ^ Barbarians at the Gate, p. 133-136
- ^ In 1976, Kravis was forced to serve as interim CEO of a failing direct mail company Advo.
- ^ Refers to Henry Hillman and the Hillman Company. The Hillman Company (Answers.com profile)
- ^ Barbarians at the Gate, p. 136-140
- ^ "Private Equity Pioneer Golder Dies".[permanent dead link] Reueters Buyouts, January 24, 2000.
- ^ Saunders, Laura. How The Government Subsidizes Leveraged Takeovers. Forbes, November 28, 1988.
- ^ 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.
- ^ Taylor, Alexander L. (August 10, 1981). "Boom Time in Venture Capital". Time.
- ^ Source: Thomson Financial's VentureXpert Archived May 21, 2007, at the Wayback Machine database for Commitments. Searching "All Private Equity Funds" (Venture Capital, Buyout and Mezzanine).
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. 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. 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 Archived September 11, 2008, at the Wayback Machine, 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 Archived September 11, 2008, at the Wayback Machine. 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[permanent dead link]. GE Capital Speaker Discusses New Trends in Asset Class. Speech to GSB February 13, 2002. Accessed May 22, 2008.
- Trehan, R. (2006). The History Of Leveraged Buyouts. December 4, 2006. Accessed May 22, 2008.
- Cheffins, Brian. "The Eclipse of Private Equity Archived September 11, 2008, at the Wayback Machine". Centre for Business Research, University of Cambridge, 2007.