History of private equity and venture capital

The second boom and bust cycle (from 1992 through 2002) emerged from the ashes of the savings and loan crisis, the insider trading scandals, the real estate market collapse and the recession of the early 1990s.

The third boom and bust cycle (from 2003 through 2007) came in the wake of the collapse of the dot-com bubble—leveraged buyouts reach unparalleled size and the institutionalization of private equity firms is exemplified by the Blackstone Group's 2007 initial public offering.

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 (ARDC) and J.H.

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.

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.

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.

The leveraged buyout was by far the largest take-private at the time[25] and soon ended in a spectacular failure, breakup of the half-a-century-old company and loss of thousands of jobs, even though creditors earned a profit.

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.

Between 1979 and 1989, it was estimated that there were over 2,000 leveraged buyouts valued in excess of $250 million[33] Notable buyouts of this period (not described elsewhere in this article) include: Malone & Hyde (1984), Wometco Enterprises (1984), Beatrice Companies (1985), Sterling Jewelers (1985), Revco Drug Stores (1986), Safeway (1986), Southland Corporation (1987), Jim Walter Corp (later Walter Industries, Inc., 1987), BlackRock (1988), Federated Department Stores (1988), Marvel Entertainment (1988), Uniroyal Goodrich Tire Company (1988) and Hospital Corporation of America (1989).

But both groups bought companies through leveraged buyouts; both relied heavily on junk bond financing; and under both types of owners in many cases major assets were sold, costs were slashed and employees were laid off.

Among the most notable corporate raiders of the 1980s were Carl Icahn, Victor Posner, Nelson Peltz, Robert M. Bass, T. Boone Pickens, Harold Clark Simmons, Kirk Kerkorian, Sir James Goldsmith, Saul Steinberg and Asher Edelman.

Many of the major banking players of the day, including Morgan Stanley, Goldman Sachs, Salomon Brothers, and Merrill Lynch were actively involved in advising and financing the parties.

Time magazine featured 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.

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.

This collapse would be due largely to three factors: Despite the adverse market conditions, several of the largest private equity firms were founded in this period including: Apollo Management, Madison Dearborn and TPG Capital.

[30] Private equity in the 1980s was a controversial topic, commonly associated with corporate raids, hostile takeovers, asset stripping, layoffs, plant closings and outsized profits to investors.

[60][61] The following year, David Bonderman and James Coulter, who had worked for Robert M. Bass during the 1980s completed a buyout of Continental Airlines in 1993, through their nascent Texas Pacific Group, (today TPG Capital).

Unlike Carl Icahn's hostile takeover of TWA in 1985,[39] Bonderman and Texas Pacific Group were widely hailed as saviors of the airline, marking the change in tone from the 1980s.

[63] 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.

As 2002 ended and 2003 began, the private equity sector, which 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.

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 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.

[78] 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.

[87] Among the largest buyouts of this period included: Georgia-Pacific Corp (2005), Albertson's (2006), EQ Office (2006), Freescale Semiconductor (2006), Ally Financial 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).

[89] 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.

[91] 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.

[95][96] Less than two weeks after the Blackstone Group IPO, rival firm Kohlberg Kravis Roberts filed with the SEC[97] in July 2007 to raise $1.25 billion by selling an ownership interest in its management company.

Some of the most notable of these transactions completed in the depths of the credit crunch include Apollo Management's acquisition of the Citigroup Loan Portfolio (2008) and TPG Capital's PIPE investment in Washington Mutual (2008).

[114] The piece, which later won a Pulitzer Prize, began with the suicide of a Safeway worker in Texas who had been laid off and went on to chronicle how KKR had sold off hundreds of stores after the buyout and slashed jobs.

"[117] 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.