Early history of private equity
Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel although interrelated tracks.
Investors have been acquiring businesses and making minority investments in privately held companies since the dawn of the industrial revolution.
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 equity and debt securities.
It was not until after World War II that what is considered today to be true private equity investments began to emerge marked by the founding of the first two venture capital firms in 1946: American Research and Development Corporation.
Whitney & Company continues to make investments in leveraged buyout transactions and raised $750 million for its sixth institutional private equity fund in 2005.
Passage of the Act addressed concerns raised in a Federal Reserve Board report to Congress that concluded that a major gap existed in the capital markets for long-term funding for growth-oriented small businesses.
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.
The compensation structure, still in use today, also emerged with limited partners paying an annual management fee of 1-2% and a carried interest typically representing up to 20% of the profits of the partnership.
In 1964 Bill Draper and Paul Wythes founded Sutter Hill Ventures, and Pitch Johnson formed Asset Management Company.
Located, in Menlo Park, CA, Kleiner Perkins, Sequoia and later venture capital firms would have access to the burgeoning technology industries in the area.
[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.
Among the firms founded in this period, in addition to Kleiner Perkins and Sequoia, that continue to invest actively are: Venture capital played an instrumental role in developing many of the major technology companies of the 1980s.
These investment vehicles would utilize a number of the same tactics and target the same type of companies as more traditional leveraged buyouts and in many ways could be considered a forerunner of the later private equity firms.
Buffett's value investing approach and focus on earnings and cash flows are characteristic of later private equity investors.
[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.
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.
[27] By 1978, with the revision of the ERISA regulations, the nascent KKR was successful in raising its first institutional fund with approximately $30 million of investor commitments.
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.
A group of managers at Harley-Davidson, the motorcycle manufacturer, bought the company from AMF in a leveraged buyout in 1981, but racked up big losses the following year and had to ask for protection from Japanese competitors.
