Private equity in the 2000s
Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital expanded along parallel and interrelated tracks.
The development of the private equity and venture capital asset classes evolved, from the middle of the 20th century, through a series of boom-and-bust business cycles.
Two years later, the PricewaterhouseCoopers MoneyTree Survey showed that total venture capital investments held steady at 2003 levels through the second quarter of 2005.
These firms were often cited as the highest profile private equity casualties, having invested heavily in technology and telecommunications companies.
As a result, despite the relatively limited activity, those funds that invested during the adverse market conditions delivered attractive returns to investors.
[15][16] 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 (publicly disclosed) secondary transactions, completed by financial institutions during this period, include: 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.
[citation needed] 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, Qwest Communications International, among others, would create a new regime of rules and regulations for publicly traded corporations.
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.
[20] 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.
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),[21] making it then the largest non-corporate LBO in European history.
Larger buyouts followed, signaling a resurgence in private equity, including Burger King by Bain Capital; Jefferson Smurfit by Madison Dearborn; Houghton Mifflin[22][23] by Bain Capital, The Blackstone Group and Thomas H. Lee Partners; and TRW Automotive by Blackstone.
Additionally, the buyout boom was not limited to the United States as industrialized countries in Europe and the Asia-Pacific region also saw new records set.
Because private equity had been booming in the preceding years, the proposition of investing in a KKR fund appeared attractive to certain investors.
[60] 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.
[63][64] Less than two weeks after The Blackstone Group IPO, rival firm Kohlberg Kravis Roberts filed with the SEC[65] in July 2007 to raise $1.25 billion by selling an ownership interest in its management company.
The onset of the credit crunch and the shutdown of the IPO market would dampen the prospects of obtaining a valuation that would be attractive to KKR and the flotation was repeatedly postponed.
[67] Similarly, in January 2008, Silver Lake Partners sold a 9.9 percent stake in its management company to the California Public Employees' Retirement System (CalPERS) for $275 million.
Some of the most notable of these transactions completed in the depths of the credit crunch include: Carlyle group featured prominently in Michael Moore's 2003 film Fahrenheit 9-11.
The movie quotes author Dan Briody claiming that the Carlyle Group "gained" from September 11 because it owned United Defense, a military contractor, although the firm's $11 billion Crusader artillery rocket system developed for the U.S. Army is one of the few weapons systems canceled by the Bush administration.
The attention would increase significantly following a series of events involving The Blackstone Group: the firm's initial public offering and the birthday celebration of its CEO.
The lavish event which reminded many of the excesses of notorious executives including Bernie Ebbers (WorldCom) and Dennis Kozlowski (Tyco International).
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.
[107][108][109] A number of leading private equity executives were targeted by the union members[110] however the SEIU's campaign was not nearly as effective at slowing the buyout boom as the credit crunch of 2007 and 2008 would ultimately prove to be.
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.
