Private Equity Primer (Wiki Collection)

Private Equity & LBO Digest
Wikipedia | Oct 17, 2010
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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
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

The history of private equity and venture capital and the development of these asset classes has occurred through a
series of boom and bust cycles since the middle of the 20th century. Within the broader private equity industry, two
distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel, although
interrelated tracks.
Since the origins of the modern private equity industry in 1946, there have been four major epochs marked by three
boom and bust cycles. The early history of private equity—from 1946 through 1981—was characterized by
relatively small volumes of private equity investment, rudimentary firm organizations and limited awareness of and
familiarity with the private equity industry. The first boom and bust cycle, from 1982 through 1993, was
characterized by the dramatic surge in leveraged buyout activity financed by junk bonds and culminating in the
massive buyout of RJR Nabisco before the near collapse of the leveraged buyout industry in the late 1980s and early
1990s. The second boom and bust cycle (from 1992 through 2002) emerged out of the ashes of the savings and
loan crisis, the insider trading scandals, the real estate market collapse and the recession of the early 1990s. This
period saw the emergence of more institutionalized private equity firms, ultimately culminating in the massive
Dot-com bubble in 1999 and 2000. 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.
In its early years through roughly the year 2000, the history of the private equity and venture capital asset classes is
best described through a narrative of developments in the United States as private equity in Europe consistently
lagged behind the North American industry. With the second private equity boom in the mid-1990s and liberalization
of regulation for institutional investors in Europe, the emergence of a mature European private equity market has
occurred.
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.
J.P. Morgan's acquisition of Carnegie Steel

Company in 1901 represents arguably the first
true modern buyout
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.
Origins of modern private equity

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. Whitney & Company.[1]
ARDC was founded by Georges Doriot, the "father of venture capitalism"[2] (founder of INSEAD and former dean
of Harvard Business School), with Ralph Flanders and Karl Compton (former president of MIT), to encourage
private sector investments in businesses run by soldiers who were returning from World War II. ARDC's
significance was primarily that it was the first institutional private equity investment firm that raised capital from
sources other than wealthy families although it had several notable investment successes as well.[3] ARDC is
credited with the first major venture capital success story when its 1957 investment of $70,000 in Digital Equipment
Corporation (DEC) would be valued at over $355 million after the company's initial public offering in 1968
(representing a return of over 500 times on its investment and an annualized rate of return of 101%).[4] Former
employees of ARDC went on to found several prominent venture capital firms including Greylock Partners (founded
in 1965 by Charlie Waite and Bill Elfers) and Morgan, Holland Ventures, the predecessor of Flagship Ventures
(founded in 1982 by James Morgan).[5] ARDC continued investing until 1971 with the retirement of Doriot. In 1972,
Doriot merged ARDC with Textron after having invested in over 150 companies.
J.H. Whitney & Company was founded by John Hay Whitney and his partner Benno Schmidt. Whitney had been
investing since the 1930s, founding Pioneer Pictures in 1933 and acquiring a 15% interest in Technicolor
Corporation with his cousin Cornelius Vanderbilt Whitney. By far, Whitney's most famous investment was in
Florida Foods Corporation. The company, having developed an innovative method for delivering nutrition to
American soldiers, later came to be known as Minute Maid orange juice and was sold to The Coca-Cola Company in
1960. J.H. Whitney & Company continues to make investments in leveraged buyout transactions and raised $750
million for its sixth institutional private equity fund in 2005.

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 Small Business Investment Act of 1958. The 1958 Act officially allowed the U.S.
Small Business Administration (SBA) to license private "Small Business Investment Companies" (SBICs) to help
the financing and management of the small entrepreneurial businesses in the United States. 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. Additionally, it was thought that
fostering entrepreneurial companies would spur technological advances to compete against the Soviet Union.
Facilitating the flow of capital through the economy up to the pioneering small concerns in order to stimulate the
U.S. economy was and still is the main goal of the SBIC program today.[6] The 1958 Act provided venture capital
firms structured either as SBICs or Minority Enterprise Small Business Investment Companies (MESBICs) access to
federal funds which could be leveraged at a ratio of up to 4:1 against privately raised investment funds. The success
of the Small Business Administration's efforts are viewed primarily in terms of the pool of professional private
equity investors that the program developed as the rigid regulatory limitations imposed by the program minimized
the role of SBICs. In 2005, the SBA significantly reduced its SBIC program, though SBICs continue to make private
equity investments.
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.
It was also in the 1960s that the common form of private

equity fund, still in use today, emerged. Private equity firms
organized limited partnerships to hold investments in which
the investment professionals served as general partner and the Sand Hill Road in Menlo Park, California, where many Bay
investors, who were passive limited partners, put up the Area venture capital firms are based
capital. 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.
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].
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.
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 Malcolm McLean's McLean Industries, Inc. of Pan-Atlantic Steamship Company in January
1955 and Waterman Steamship Corporation in May 1955.[12] Under the terms of the transactions, McLean borrowed
$42 million and raised an additional $7 million through an issue of preferred stock. When the deal closed, $20
million of Waterman cash and assets were used to retire $20 million of the loan debt. The newly elected board of
Waterman then voted to pay an immediate dividend of $25 million to McLean Industries.[13]
Similar to the approach employed in the McLean transaction, the use of publicly traded holding companies as
investment vehicles to acquire portfolios of investments in corporate assets would become a new trend in the 1960s
popularized by the likes of Warren Buffett (Berkshire Hathaway) and Victor Posner (DWG Corporation) and later
adopted by Nelson Peltz (Triarc), Saul Steinberg (Reliance Insurance) and Gerry Schwartz (Onex 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. In
fact, it is Posner who is often credited with coining the term "leveraged buyout" or "LBO"[14]
Posner, who had made a fortune in real estate investments in the 1930s and 1940s acquired a major stake in DWG
Corporation in 1966. Having gained control of the company, he used it as an investment vehicle that could execute
takeovers of other companies. Posner and DWG are perhaps best known for the hostile takeover of Sharon Steel
Corporation in 1969, one of the earliest such takeovers in the United States. Posner's investments were typically
motivated by attractive valuations, balance sheets and cash flow characteristics. Because of its high debt load,
Posner's DWG would generate attractive but highly volatile returns and would ultimately land the company in
financial difficulty. In 1987, Sharon Steel sought Chapter 11 bankruptcy protection.
Warren Buffett, who is typically described as a stock market investor rather than a private equity investor, employed
many of the same techniques in the creation on his Berkshire Hathaway conglomerate as Posner's DWG Corporation
and in later years by more traditional private equity investors. In 1965, with the support of the company's board of
directors, Buffett assumed control of Berkshire Hathaway. At the time of Buffett's investment, Berkshire Hathaway
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.
KKR and the pioneers of private equity

The industry that is today described as private equity was conceived by a number of corporate financiers, most
notably 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. Their acquisition of Orkin Exterminating
Company in 1964 is among the first significant leveraged buyout transactions.[15] 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.[16]
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. Most notably, Bear Stearns executive Cy Lewis had
rejected repeated proposals to form a dedicated investment fund within Bear Stearns and Lewis took exception to the
amount of time spent on outside activities.[17] Early investors included the Hillman Family[18] 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.[19] That year, the firm signed a precedent-setting deal to buy
the publicly traded Houdaille Industries, which made industrial pipes, for $380 million. It was by far the largest
take-private and the time.[20]
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 be survive through the various cycles both in leveraged buyouts and venture capital. Among the firms
founded during these years were: Cinven, Forstmann Little & Company, Welsh, Carson, Anderson & Stowe,
Candover, and GTCR.
Management buyouts also came into existence in the late 1970s and early 1980s. One of the most notable early
management buyout transactions was the acquisition of Harley-Davidson. 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.
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.[21]
• Employee Retirement Income Security Act of 1974 (ERISA) - With the passage of ERISA in 1974, corporate
pension funds were prohibited from holding certain risky investments including many investments in 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,"[22] 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.[23] 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. In 1980, the private equity industry would raise approximately $2.4
billion of annual investor commitments and by the end of the decade in 1989 that figure stood at $21.9 billion
marking the tremendous growth experienced.[24]
Beginning of the LBO boom

The beginning of the first boom period in private equity would be marked
by the well-publicized success of the Gibson Greetings acquisition in 1982
and would roar ahead through 1983 and 1984 with the soaring stock market
driving profitable exits for private equity investors.
In January 1982, former US Secretary of the Treasury William E. Simon,
Ray Chambers and a group of investors, which would later come to be
known as Wesray Capital Corporation, acquired Gibson Greetings, a
producer of greeting cards. The purchase price for Gibson was $80 million,
of which only $1 million was rumored to have been contributed by the
investors. By mid-1983, just sixteen months after the original deal, Gibson
completed a $290 million IPO and Simon made approximately $66
million.[25] [26] Simon and Wesray would later complete the $71.6 million
acquisition of Atlas Van Lines. The success of the Gibson Greetings
Michael Milken, the man credited with
investment attracted the attention of the wider media to the nascent boom in
creating the market for high yield "junk"
leveraged buyouts. bonds and spurring the LBO boom of the
1980s
Between 1979 and 1989, it was estimated that there were over 2,000
leveraged buyouts valued in excess of $250 million[27] 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).
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.
Venture capital in the 1980s

The public successes of the venture capital industry in the 1970s and early 1980s (e.g., DEC, Apple, Genentech)
gave rise to a major proliferation of venture capital investment firms. From just a few dozen firms at the start of the
decade, there were over 650 firms by the end of the 1980s, each searching for the next major "home run". While the
number of firms multiplied, the capital managed by these firms increased only 11% from $28 billion to $31 billion
over the course of the decade.[28]
The growth the industry was hampered by sharply declining returns and certain venture firms began posting losses
for the first time. In addition to the increased competition among firms, several other factors impacted returns. The
market for initial public offerings cooled in the mid-1980s before collapsing after the stock market crash in 1987 and
foreign corporations, particularly from Japan and Korea, flooded early stage companies with capital.[28]
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.
Corporate raiders, hostile takeovers and greenmail

Although buyout firms generally had different aims and methods, they were often lumped in with the "corporate
raiders" who came on the scene in the 1980s. The raiders were best known for hostile bids -- takeover attempts that
were opposed by management. By contrast, private equity firms generally attempted to strike deals with boards and
CEOs, though in many cases in the 1980s they allied with managements that were already under pressure from
raiders. 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. Hence, in the public mind, they were lumped together.[32]
Management of many large publicly traded corporations reacted negatively to the threat of potential hostile takeover
or corporate raid and pursued drastic defensive measures including poison pills, golden parachutes and increasing
debt levels on the company's balance sheet. Additionally, the threat of the corporate raid would lead to the practice of
"greenmail", where a corporate raider or other party would acquire a significant stake in the stock of a company and
receive an incentive payment (effectively a bribe) from the company in order to avoid pursuing a hostile takeover of
the company. Greenmail represented a transfer payment from a company's existing shareholders to a third party
investor and provided no value to existing shareholders but did benefit existing managers. The practice of
"greenmail" is not typically considered a tactic of private equity investors and is not condoned by market
participants.
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. Carl Icahn developed a reputation as a ruthless corporate raider after his hostile takeover of TWA in
1985.[33] The result of that takeover was Icahn systematically selling TWA's assets to repay the debt he used to
purchase the company, which was described as asset stripping.[34] In 1985, Pickens was profiled on the cover of
Time magazine as "one of the most famous and controversial businessmen in the U.S." for his pursuit of Unocal,
Gulf Oil and Cities Services.[35] In later years, many of the corporate raiders would be re-characterized as "Activist
shareholders".
Many of the corporate raiders were onetime clients of Michael Milken, whose investment banking firm Drexel
Burnham Lambert helped raise blind pools of capital with which corporate raiders could make a legitimate attempt to
take over a company and provided high-yield debt financing of the buyouts.
Drexel Burnham raised a $100 million blind pool in 1984 for Nelson Peltz and his holding company Triangle
Industries (later Triarc) to give credibility for takeovers, representing the first major blind pool raised for this
purpose. Two years later, in 1986, Wickes Companies, a holding company run by Sanford Sigoloff raised a $1.2
billion blind pool.[36]
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.
RJR Nabisco and the Barbarians at the Gate

Leveraged buyouts in the 1980s including Perelman's takeover of Revlon came to epitomize the "ruthless capitalism"
and "greed" popularly seen to be pervading Wall Street at the time. One of the final major buyouts of the 1980s
proved to be its most ambitious and marked both a high water mark and a sign of the beginning of the end of the
boom that had begun nearly a decade earlier. In 1989, KKR closed on a $31.1 billion dollar takeover of RJR
Nabisco. It was, at that time and for over 17 years, the largest leverage buyout in history. The event was chronicled
in the book, Barbarians at the Gate: The Fall of RJR Nabisco, and later made into a television movie starring James
Garner.
F. Ross Johnson was the President and CEO of RJR Nabisco at the time of the leveraged buyout and Henry Kravis
was a general partner at Kohlberg Kravis Roberts. The leveraged buyout was in the amount of $25 billion (plus
assumed debt), and the battle for control took place between October and November 1988. KKR would eventually
prevail in acquiring RJR Nabisco at $109 per share marking a dramatic increase from the original announcement that
Shearson Lehman Hutton would take RJR Nabisco private at $75 per share. A fierce series of negotiations and
horse-trading ensued which pitted KKR against Shearson Lehman Hutton and later Forstmann Little & Co. 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.
After Shearson Lehman's original bid, KKR quickly introduced a tender offer to obtain RJR Nabisco for $90 per
share—a price that enabled it to proceed without the approval of RJR Nabisco's management. RJR's management
team, working with Shearson Lehman and Salomon Brothers, submitted a bid of $112, a figure they felt certain
would enable them to outflank any response by Kravis's team. KKR's final bid of $109, while a lower dollar figure,
was ultimately accepted by the board of directors of RJR Nabisco. KKR's offer was guaranteed, whereas the
management offer (backed by Shearson Lehman and Salomon) lacked a "reset", meaning that the final share price
might have been lower than their stated $112 per share. Additionally, many in RJR's board of directors had grown
concerned at recent disclosures of Ross Johnson' unprecedented golden parachute deal. 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. 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.
LBO bust (1990 to 1992)

By the end of the 1980s the excesses of the buyout market were beginning to show, with the bankruptcy of several
large buyouts including Robert Campeau's 1988 buyout of Federated Department Stores, the 1986 buyout of the
Revco drug stores, Walter Industries, FEB Trucking and Eaton Leonard. Additionally, the RJR Nabisco deal was
showing signs of strain, leading to a recapitalization in 1990 that involved the contribution of $1.7 billion of new
equity from KKR.[48] Additionally, in response to the threat of unwelcome 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 (these practices are increasingly discredited).
The collapse of Drexel Burnham Lambert

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. The firm was first rocked by scandal on May 12, 1986, when
Dennis Levine, a Drexel managing director and investment banker, was charged with insider trading. Levine pleaded
guilty to four felonies, and implicated one of his recent partners, arbitrageur Ivan Boesky. Largely based on
information Boesky promised to provide about his dealings with Milken, the Securities and Exchange Commission
initiated an investigation of Drexel on November 17. Two days later, Rudy Giuliani, the United States Attorney for
the Southern District of New York, launched his own investigation.[49]
For two years, Drexel steadfastly denied any wrongdoing, claiming that the criminal and SEC cases were based
almost entirely on the statements of an admitted felon looking to reduce his sentence. However, it was not enough to
keep the SEC from suing Drexel in September 1988 for insider trading, stock manipulation, defrauding its clients
and stock parking (buying stocks for the benefit of another). All of the transactions involved Milken and his
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]
S&L and the shutdown of the Junk Bond Market

In the 1980s, the boom in private equity transactions, specifically leveraged buyouts, was driven by the availability
of financing, particularly high-yield debt, also known as "junk bonds". The collapse of the high yield market in 1989
and 1990 would signal the end of the LBO boom. At that time, many market observers were pronouncing the junk
bond market “finished.” This collapse would be due largely to three factors:
• The collapse of Drexel Burnham Lambert, the foremost underwriter of junk bonds (discussed above).
• The dramatic increase in default rates among junk bond issuing companies. The historical default rate for high
yield bonds from 1978 to 1988 was approximately 2.2% of total issuance. In 1989, defaults increased
dramatically to 4.3% of the then $190 billion market and an additional 2.6% of issuance defaulted in the first half
of 1990. As a result of the higher perceived risk, the differential in yield of the junk bond market over U.S.
treasuries (known as the "spread") had also increased by 700 basis points (7 percentage points). This made the
cost of debt in the high yield market significantly more expensive than it had been previously.[52] [53] The market
shut down altogether for lower rated issuers.
• The mandated withdrawal of savings and loans from the high yield market. In August 1989, the U.S. Congress
enacted the Financial Institutions Reform, Recovery and Enforcement Act of 1989 as a response to the savings
and loan crisis of the 1980s. Under the law, savings and loans (S&Ls) could no longer invest in bonds that were
rated below investment grade. Additionally, S&Ls were mandated to sell their holdings by the end of 1993
creating a huge supply of low priced assets that helped freeze the new issuance market.
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.
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]
Resurgence of leveraged buyouts

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. As private equity reemerged in the 1990s it
began to earn a new degree of legitimacy and respectability. Although in the 1980s, many of the acquisitions made
were unsolicited and unwelcome, private equity firms in the 1990s focused on making buyouts attractive
propositions for management and shareholders. According to The Economist, “[B]ig companies that would once
have turned up their noses at an approach from a private-equity firm are now pleased to do business with them.”[3]
Additionally, private equity investors became increasingly focused on the long term development of companies they
acquired, using less leverage in the acquisition. In the 1980s leverage would routinely represent 85% to 95% of the
purchase price of a company as compared to average debt levels between 20% and 40% in leveraged buyouts in the
1990s and the first decade of the 21st century. KKR's 1986 acquisition of Safeway, for example, was completed with
97% leverage and 3% equity contributed by KKR, whereas KKR's acquisition of TXU in 2007 was completed with
approximately 19% equity contributed ($8.5 billion of equity out of a total purchase price of $45 billion).
Additionally, private equity firms are more likely to make investments in capital expenditures and provide incentives
for management to build long-term value.
The Thomas H. Lee Partners acquisition of Snapple Beverages, in 1992, is often described as the deal that marked
the resurrection of the leveraged buyout after several dormant years.[54] Only eight months after buying the
company, Lee took Snapple Beverages public and in 1994, only two years after the original acquisition, Lee sold the
company to Quaker Oats for $1.7 billion. Lee was estimated to have made $900 million for himself and his investors
from the sale. Quaker Oats would subsequently sell the company, which performed poorly under new management,
three years later for only $300 million to Nelson Peltz's Triarc. As a result of the Snapple deal, Thomas H. Lee, who
had begun investing in private equity in 1974, would find new prominence in the private equity industry and catapult
his Boston-based Thomas H. Lee Partners to the ranks of the largest private equity firms.
It was also in this timeframe that the capital markets would start to open up again for private equity transactions.
During the 1990-1993 period, Chemical Bank established its position as a key lender to private equity firms under
the auspices of pioneering investment banker, James B. Lee, Jr. (known as Jimmy Lee, not related to Thomas H.
Lee). By the mid-1900s, under Jimmy Lee, Chemical had established itself as the largest lender in the financing of
leveraged buyouts. Lee built a syndicated leveraged finance business and related advisory businesses including the
first dedicated financial sponsor coverage group, which covered private equity firms in much the same way that
investment banks had traditionally covered various industry sectors.[55] [56]
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).
TPG was virtually alone in its conviction that there was an investment opportunity with the airline. The plan
included bringing in a new management team, improving aircraft utilization and focusing on lucrative routes. By
1998, TPG had generated an annual internal rate of return of 55% on its investment. Unlike Carl Icahn's hostile
takeover of TWA in 1985.[33] , Bonderman and Texas Pacific Group were widely hailed as saviors of the airline,
marking the change in tone from the 1980s. The buyout of Continental Airlines would be one of the few successes
for the private equity industry which has suffered several major failures, including the 2008 bankruptcies of ATA
Airlines, Aloha Airlines and Eos Airlines.

Among the most notable buyouts of the mid-to-late 1990s included: Duane Reade (1990 (1997), Sealy Corporation
(1997), KinderCare Learning Centers (1997), J. Crew (1997), Domino's Pizza (1998), Regal Entertainment Group
(1998), Oxford Health Plans (1998) and Petco (2000).
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.[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!.
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.
Stagnation in the LBO market

Meanwhile, as the venture sector collapsed, the activity in the leveraged buyout market also declined significantly.
Leveraged buyout firms had invested heavily in the telecommunications sector from 1996 to 2000 and profited from
the boom which suddenly fizzled in 2001. In that year at least 27 major telecommunications companies, (i.e., with
$100 million of liabilities or greater) filed for bankruptcy protection. Telecommunications, which made up a large
portion of the overall high yield universe of issuers, dragged down the entire high yield market. Overall corporate
default rates surged to levels unseen since the 1990 market collapse rising to 6.3% of high yield issuance in 2000 and
8.9% of issuance in 2001. Default rates on junk bonds peaked at 10.7 percent in January 2002 according to
Moody's.[60] [61] As a result, leveraged buyout activity ground to a halt.[62] [63] The major collapses of former
high-fliers including WorldCom, Adelphia Communications, Global Crossing and Winstar Communications were
among the most notable defaults in the market. In addition to the high rate of default, many investors lamented the
low recovery rates achieved through restructuring or bankruptcy.[61]
Among the most affected by the bursting of the internet and telecom bubbles were two of the largest and most active
private equity firms of the 1990s: Tom Hicks' Hicks Muse Tate & Furst and Ted Forstmann's Forstmann Little &
Company. These firms were often cited as the highest profile private equity casualties, having invested heavily in
technology and telecommunications companies.[64] Hicks Muse's reputation and market position were both damaged
by the loss of over $1 billion from minority investments in six telecommunications and 13 Internet companies at the
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]
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.
Resurgence of the large buyout

Marked by the two-stage buyout of Dex Media at the end of 2002 and 2003, large multi-billion dollar U.S. buyouts
could once again obtain significant high yield debt financing and larger transactions could be completed. The Carlyle
Group, Welsh, Carson, Anderson & Stowe, along with other private investors, led a $7.5 billion buyout of
QwestDex. The buyout was the third largest corporate buyout since 1989. QwestDex's purchase occurred in two
stages: a $2.75 billion acquisition of assets known as Dex Media East in November 2002 and a $4.30 billion
acquisition of assets known as Dex Media West in 2003. R. H. Donnelley Corporation acquired Dex Media in 2006.
Shortly after Dex Media, other larger buyouts would be completed signaling the resurgence in private equity was
underway. The acquisitions included Burger King (by Bain Capital), Jefferson Smurfit (by Madison Dearborn),
Houghton Mifflin[76] [77] (by Bain Capital, the Blackstone Group and Thomas H. Lee Partners) and TRW
Automotive by the Blackstone Group.
In 2006 USA Today reported retrospectively on the revival of private equity:[78]
LBOs are back, only they've rebranded themselves private equity and vow a happier ending. The firms say this
time it's completely different. Instead of buying companies and dismantling them, as was their rap in the '80s,
private equity firms… squeeze more profit out of underperforming companies.
But whether today's private equity firms are simply a regurgitation of their counterparts in the 1980s… or a
kinder, gentler version, one thing remains clear: private equity is now enjoying a "Golden Age." And with
returns that triple the S&P 500, it's no wonder they are challenging the public markets for supremacy.
By 2004 and 2005, major buyouts were once again becoming common and market observers were stunned by the
leverage levels and financing terms obtained by financial sponsors in their buyouts. Some of the notable buyouts of
this period include: Dollarama (2004), Toys "R" Us (2004), The Hertz Corporation (2005), Metro-Goldwyn-Mayer
(2005) and SunGard (2005).
Age of the mega-buyout

As 2005 ended and 2006 began, new "largest buyout"
records were set and surpassed several times with nine of
the top ten buyouts at the end of 2007 having been
announced in an 18-month window from the beginning of
2006 through the middle of 2007. 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. In 2006, private equity firms bought 654
U.S. companies for $375 billion, representing 18 times the
level of transactions closed in 2003.[80] Additionally, U.S.
based private equity firms raised $215.4 billion in investor David Rubinstein, the head of the Carlyle Group, the largest
private equity firm (by investor commitments) during the
commitments to 322 funds, surpassing the previous record [79]
2006-07 buyout boom.
set in 2000 by 22% and 33% higher than the 2005
fundraising total.[81] However, venture capital funds, which
were responsible for much of the fundraising volume in 2000 (the height of the dot-com bubble), raised only $25.1
billion in 2006, a 2% percent decline from 2005 and a significant decline from its peak.[82] The following year,
despite the onset of turmoil in the credit markets in the summer, saw yet another record year of fundraising with
$302 billion of investor commitments to 415 funds.[83]
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).
Publicly traded private equity

Although there had previously been certain instances of publicly traded private equity vehicles, the convergence of
private equity and the public equity markets attracted significantly greater attention when several of the largest
private equity firms pursued various options through the public markets. Taking private equity firms and private
equity funds public appeared an unusual move since private equity funds often buy public companies listed on
exchange and then take them private. Private equity firms are rarely subject to the quarterly reporting requirements
of the public markets and tout this independence to prospective sellers as a key advantage of going private.
Nevertheless, there are fundamentally two separate opportunities that private equity firms pursued in the public
markets. These options involved a public listing of either:
• A private equity firm (the management company), which provides shareholders an opportunity to gain exposure to
the management fees and carried interest earned by the investment professionals and managers of the private
equity firm. The most notable example of this public listing was completed by The Blackstone Group in 2007
• A private equity fund or similar investment vehicle, which allows investors that would otherwise be unable to
invest in a traditional private equity limited partnership to gain exposure to a portfolio of private equity
investments.
In May 2006, Kohlberg Kravis Roberts raised $5 billion in an initial public offering for a new permanent investment
vehicle (KKR Private Equity Investors or KPE) listing it on the Euronext exchange in Amsterdam (ENXTAM:
KPE). KKR raised more than three times what it had expected at the outset as many of the investors in KPE were
hedge funds seeking exposure to private equity but could not make long term commitments to private equity funds.
Because private equity had been booming in the preceding years, the proposition of investing in a KKR fund
appeared attractive to certain investors.[84] KPE's first-day performance was lackluster, trading down 1.7% and
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]
Less than two weeks after the Blackstone Group IPO,

rival firm Kohlberg Kravis Roberts filed with the
Schwarzman's Blackstone Group completed the first major IPO of a
SEC[93] in July 2007 to raise $1.25 billion by selling private equity firm in June 2007.
[79]
an ownership interest in its management

company.[94] KKR had previously listed its KKR Private Equity Investors (KPE) private equity fund vehicle in
2006. 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.
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).
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].
The Credit Crunch and post-modern private equity (2007 – 2008)

In July 2007, turmoil that had been affecting the mortgage markets, spilled over into the leveraged finance and
high-yield debt markets.[106] [107] The markets had been highly robust during the first six months of 2007, with
highly issuer friendly developments including PIK and PIK Toggle (interest is "Payable In Kind") and covenant light
debt widely available to finance large leveraged buyouts. July and August saw a notable slowdown in issuance levels
in the high yield and leveraged loan markets with only few issuers accessing the market. Uncertain market
conditions led to a significant widening of yield spreads, which coupled with the typical summer slowdown led to
many companies and investment banks to put their plans to issue debt on hold until the autumn. However, the
expected rebound in the market after Labor Day 2007 did not materialize and the lack of market confidence
prevented deals 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.[108] 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, most notably in transactions involving:
Harman International (announced and withdrawn 2007), Sallie Mae (announced 2007 but withdrawn 2008), Clear
Channel Communications (2007) and BCE (2007).
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 Apollo Management's acquisition of the Citigroup
Loan Portfolio (2008) and TPG Capital's PIPE investment in Washington Mutual (2008). According to investors and
fund managers, the consensus among industry members in late 2009 was that private equity firms will need to
become more like asset managers, offering buyouts as just part of their portfolio, or else focus tightly on specific
sectors in order to prosper. The industry must also become better in adding value by turning businesses around rather
than pure financial engineering[109] .
Responses to private equity
1980s reflections of private** equity

Although private equity rarely received a thorough treatment in popular culture, several films did feature
stereotypical "corporate raiders" prominently. Among the most notable examples of private equity featured in motion
pictures included:
• Wall Street (1987) – The notorious "corporate raider" and "greenmailer" Gordon Gekko, representing a synthesis
of the worst features of various famous private equity figures, intends to manipulate an ambitious young
stockbroker to take over a failing but decent airline. Although Gekko makes a pretense of caring about the airline,
his intentions prove to be to destroy the airline, strip its assets and lay off its employees before raiding the
corporate pension fund. Gekko would become a symbol in popular culture for unrestrained greed (with the
signature line, "Greed, for lack of a better word, is good") that would be attached to the private equity industry.
• Other People's Money (1991) – A self-absorbed corporate raider "Larry the Liquidator" (Danny DeVito), sets his
sights on New England Wire and Cable, a small-town business run by family patriarch Gregory Peck who is
principally interested in protecting his employees and the town.
• Pretty Woman (1990) – Although Richard Gere's profession is incidental to the plot, the selection of the corporate
raider who intends to destroy the hard work of a family-run business by acquiring the company in a hostile
takeover and then selling off the company's parts for a profit (compared in the movie to an illegal chop shop).
Ultimately, the corporate raider is won over and chooses not to pursue his original plans for the company.
Two other works were pivotal in framing the image of buyout firms.[110] Barbarians at the Gate, the 1990 best seller
about the fight over RJR Nabisco linked private equity to hostile takeovers and assaults on management. A blistering
story on the front page of the Wall Street Journal the same year about KKR's buyout of the Safeway supermarket
chain painted a much more damaging picture.[111] 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.
Contemporary reflections of private equity and private equity controversies

Carlyle group featured prominently in Michael Moore's 2003 film Fahrenheit 9-11. The film suggested that The
Carlyle Group exerted tremendous influence on U.S. government policy and contracts through their relationship with
the president’s father, George H. W. Bush, a former senior adviser to the Carlyle Group. Additionally, Moore cited
relationships with the Bin Laden family. 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 only weapons systems canceled by the
Bush administration.[112]
Over the next few years, attention intensified on private equity as the size of transactions and profile of the
companies increased. 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 Wall Street Journal
observing Blackstone Group's Steve Schwarzman's 60th birthday celebration in February 2007 described the event as
follows:[113]
The Armory's entrance hung with banners painted to replicate Mr. Schwarzman's sprawling Park Avenue
apartment. A brass band and children clad in military uniforms ushered in guests. A huge portrait of Mr.
Schwarzman, which usually hangs in his living room, was shipped in for the occasion.
The affair was emceed by comedian Martin Short. Rod Stewart performed. Composer Marvin Hamlisch did a
number from "A Chorus Line." Singer Patti LaBelle led the Abyssinian Baptist Church choir in a tune about
Mr. Schwarzman. Attendees included Colin Powell and New York Mayor Michael Bloomberg. The menu
included lobster, baked Alaska and a 2004 Louis Jadot Chassagne Montrachet, among other fine wines.
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
[9] http:/ / www. assetman. com

[10] 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.
[11] Official website of the National Venture Capital Association (http:/ / www. nvca. org/ ), the largest trade association for the venture capital
industry.
[12] 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.
[13] 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.
[14] Trehan, R. (2006). The History Of Leveraged Buyouts (http:/ / www. 4hoteliers. com/ 4hots_fshw. php?mwi=1757). December 4, 2006.
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[15] The History of Private Equity (http:/ / www. investmentu. com/ research/ private-equity-history. html) (Investment U, The Oxford Club
[16] Barbarians at the Gate, p. 133-136
[17] In 1976, Kravis was forced to serve as interim CEO of a failing direct mail company Advo.
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[20] David Carey and John E. Morris, King of Capital The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone (Crown
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[22] The “prudent man rule” is a fiduciary responsibility of investment managers under ERISA. Under the original application, each investment
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portfolio level rather than the investment level to satisfy fiduciary standards would also be accepted.
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[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.
html?res=9406E7D81231F936A25757C0A9679C8B63)." New York Times, April 15, 2001.
[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
[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). .
[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.
[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
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• Loewen, J. (2008). Money Magnet: Attract Investors to Your Business: John Wiley & Sons. ISBN
978-0-470-15575-2
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Guttenberg AG, 2005. Accessed May 22, 2008.
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Centre for Business Research, University Of Cambridge, 2007.
Early history of private equity

The early history of private equity relates to one of the major periods in the history of private equity and venture
capital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital
experienced growth along parallel although interrelated tracks.
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 Credit Mobilier,
founded in 1854 by Jacob and Isaac Pereire, who together with New
York based Jay Cooke financed the United States Transcontinental
Railroad.
J.P. Morgan's acquisition of Carnegie Steel

Company in 1901 represents arguably the first
true modern buyout
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.
Origins of modern private equity

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. Whitney & Company.[1]
ARDC was founded by Georges Doriot, the "father of venture capitalism"[2] (former dean of Harvard Business
School), with Ralph Flanders and Karl Compton (former president of MIT), to encourage private sector investments
in businesses run by soldiers who were returning from World War II. ARDC's significance was primarily that it was
the first institutional private equity investment firm that raised capital from sources other than wealthy families
although it had several notable investment successes as well.[3] ARDC is credited with the first major venture capital
success story when its 1957 investment of $70,000 in Digital Equipment Corporation (DEC) would be valued at over
$355 million after the company's initial public offering in 1968 (representing a return of over 500 times on its
investment and an annualized rate of return of 101%).[4] Former employees of ARDC went on to found several
prominent venture capital firms including Greylock Partners (founded in 1965 by Charlie Waite and Bill Elfers) and
Morgan, Holland Ventures, the predecessor of Flagship Ventures (founded in 1982 by James Morgan).[5] ARDC
continued investing until 1971 with the retirement of Doriot. In 1972, Doriot merged ARDC with Textron after
having invested in over 150 companies.
J.H. Whitney & Company was founded by John Hay Whitney and his partner Benno Schmidt. Whitney had been
investing since the 1930s, founding Pioneer Pictures in 1933 and acquiring a 15% interest in Technicolor
Corporation with his cousin Cornelius Vanderbilt Whitney. By far, Whitney's most famous investment was in
Florida Foods Corporation. The company, having developed an innovative method for delivering nutrition to
American soldiers, later came to be known as Minute Maid orange juice and was sold to The Coca-Cola Company in
1960. J.H. Whitney & Company continues to make investments in leveraged buyout transactions and raised $750
million for its sixth institutional private equity fund in 2005.

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 Small Business Investment Act of 1958. The 1958 Act officially allowed the U.S.
Small Business Administration (SBA) to license private "Small Business Investment Companies" (SBICs) to help
the financing and management of the small entrepreneurial businesses in the United States. 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. Additionally, it was thought that
fostering entrepreneurial companies would spur technological advances to compete against the Soviet Union.
Facilitating the flow of capital through the economy up to the pioneering small concerns in order to stimulate the
U.S. economy was and still is the main goal of the SBIC program today.[6] The 1958 Act provided venture capital
firms structured either as SBICs or Minority Enterprise Small Business Investment Companies (MESBICs) access to
federal funds which could be leveraged at a ratio of up to 4:1 against privately raised investment funds. The success
of the Small Business Administration's efforts are viewed primarily in terms of the pool of professional private
equity investors that the program developed as the rigid regulatory limitations imposed by the program minimized
the role of SBICs. In 2005, the SBA significantly reduced its SBIC program, though SBICs continue to make private
equity investments.
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.
It was also in the 1960s that the common form of private

equity fund, still in use today, emerged. Private equity firms
organized limited partnerships to hold investments in which
the investment professionals served as general partner and the Sand Hill Road in Menlo Park, California, where many Bay
investors, who were passive limited partners, put up the Area venture capital firms are based
capital. 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.
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].
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 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 Malcolm McLean's McLean Industries, Inc. of Pan-Atlantic Steamship Company in January
1955 and Waterman Steamship Corporation in May 1955.[19] Under the terms of the transactions, McLean borrowed
$42 million and raised an additional $7 million through an issue of preferred stock. When the deal closed, $20
million of Waterman cash and assets were used to retire $20 million of the loan debt. The newly elected board of
Waterman then voted to pay an immediate dividend of $25 million to McLean Industries.[20]
investment vehicles to acquire portfolios of investments in corporate assets would become a new trend in the 1960s
popularized by the likes of Warren Buffett (Berkshire Hathaway) and Victor Posner (DWG Corporation) and later
fact, it is Posner who is often credited with coining the term "leveraged buyout" or "LBO"[21]
Posner, who had made a fortune in real estate investments in the 1930s and 1940s acquired a major stake in DWG
Corporation in 1966. Having gained control of the company, he used it as an investment vehicle that could execute
takeovers of other companies. Posner and DWG are perhaps best known for the hostile takeover of Sharon Steel
Corporation in 1969, one of the earliest such takeovers in the United States. Posner's investments were typically
motivated by attractive valuations, balance sheets and cash flow characteristics. Because of its high debt load,
Posner's DWG would generate attractive but highly volatile returns and would ultimately land the company in
financial difficulty. In 1987, Sharon Steel sought Chapter 11 bankruptcy protection.
Warren Buffett, who is typically described as a stock market investor rather than a private equity investor, employed
many of the same techniques in the creation on his Berkshire Hathaway conglomerate as Posner's DWG Corporation
and in later years by more traditional private equity investors. In 1965, with the support of the company's board of
directors, Buffett assumed control of Berkshire Hathaway. At the time of Buffett's investment, Berkshire Hathaway
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.
KKR and the pioneers of private equity

The industry that is today described as private equity was conceived by a number of corporate financiers, most
notably 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. Their acquisition of Orkin Exterminating
Company in 1964 is among the first significant leveraged buyout transactions.[22] 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.[23]

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. Most notably, Bear Stearns executive Cy Lewis had
rejected repeated proposals to form a dedicated investment fund within Bear Stearns and Lewis took exception to the
amount of time spent on outside activities.[24] Early investors included the Hillman Family[25] 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.[26]
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 be 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;
• Forstmann Little & Company one of the largest private equity firms through the end of the 1990s, founded in
1978 by Ted Forstmann, Nick Forstmann and Brian Little;
• Clayton, Dubilier & Rice founded originally 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
• GTCR and Thoma Cressey (originally 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.[27]
Management buyouts also came into existence in the late 1970s and early 1980s. One of the most notable early
management buyout transactions was the acquisition of Harley-Davidson. 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.
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.[28]
• Employee Retirement Income Security Act of 1974 (ERISA) - With the passage of ERISA in 1974, corporate
pension funds were prohibited from holding certain risky investments including many investments in 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,"[29] 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.[30] 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. In 1980, the private equity industry would raise approximately $2.4
billion of annual investor commitments and by the end of the decade in 1989 that figure stood at $21.9 billion
marking the tremendous growth experienced.[31]
See also
• History of private equity and venture capital
• Private equity in the 1980s
• Private equity in the 21st century
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/ )
[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
[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
Company, Inc. from Waterman Steamship Corporation. In May, McLean Industries, Inc. completed the acquisition of the common stock of
[22] The History of Private Equity (http:/ / www. investmentu. com/ research/ private-equity-history. html) (Investment U, The Oxford Club
[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)
[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.
References
School Press, 2008
• Bruck, Connie. The Predators' Ball. New York: Simon and Schuster, 1988.
• 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 1980s

Private equity in the 1980s relates to one of the major periods in the history of private equity and venture
The development of the private equity and venture capital asset classes has occurred through a series of boom and
bust cycles since the middle of the 20th century. The 1980s saw the first major boom and bust cycle in private
equity. The cycle which is typically marked by the 1982 acquisition of Gibson Greetings and ending just over a
decade later was characterized by a dramatic surge in leveraged buyout (LBO) activity financed by junk bonds. The
period culminated in the massive buyout of RJR Nabisco before the near collapse of the leveraged buyout industry in
the late 1980s and early 1990s marked by the collapse of Drexel Burnham Lambert and the high-yield debt market.
Beginning of the LBO boom

The beginning of the first boom period in private equity would be marked
by the well-publicized success of the Gibson Greetings acquisition in 1982
and would roar ahead through 1983 and 1984 with the soaring stock market
driving profitable exits for private equity investors.
In January 1982, former US Secretary of the Treasury William E. Simon,
Ray Chambers and a group of investors, which would later come to be
known as Wesray Capital Corporation, acquired Gibson Greetings, a
producer of greeting cards. The purchase price for Gibson was $80 million,
of which only $1 million was rumored to have been contributed by the
investors. By mid-1983, just sixteen months after the original deal, Gibson
completed a $290 million IPO and Simon made approximately $66
million.[1] Simon and Wesray would later complete the $71.6 million
acquisition of Atlas Van Lines. The success of the Gibson Greetings
Michael Milken, the man credited with
investment attracted the attention of the wider media to the nascent boom in
creating the market for high yield "junk"
leveraged buyouts. bonds and spurring the LBO boom of the
1980s
Between 1979 and 1989, it was estimated that there were over 2,000
leveraged buyouts valued in excess of $250 million[2] Notable buyouts of
this period (not described elsewhere in this article) include:
• Malone & Hyde, 1984
KKR completed the first buyout of a public company by tender offer, by acquiring the food distributor and
supermarket operator together with the company's chairman Joseph R. Hyde III.[3]
• Wometco Enterprises, 1984
KKR completed the first billion-dollar buyout transaction to acquire the leisure-time company with interests in
television, movie theaters and tourist attractions. The buyout comprised the acquisition of 100% of the
outstanding shares for $842 million and the assumption of $170 million of the company's outstanding debt.[4]
• Beatrice Companies, 1985
KKR sponsored the $6.1 billion management buyout of Beatrice, which owned Samsonite and Tropicana
among other consumer brands. At the time of its closing in 1985, Beatrice was the largest buyout completed.[5]
[6]
• Sterling Jewelers, 1985

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
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.
Venture capital in the 1980s

The public successes of the venture capital industry in the 1970s and early 1980s (e.g., DEC, Apple, Genentech)
gave rise to a major proliferation of venture capital investment firms. From just a few dozen firms at the start of the
decade, there were over 650 firms by the end of the 1980s, each searching for the next major "home run". While the
number of firms multiplied, the capital managed by these firms increased only 11% from $28 billion to $31 billion
over the course of the decade.[24]
The growth the industry was hampered by sharply declining returns and certain venture firms began posting losses
for the first time. In addition to the increased competition among firms, several other factors impacted returns. The
market for initial public offerings cooled in the mid-1980s before collapsing after the stock market crash in 1987 and
foreign corporations, particularly from Japan and Korea, flooded early stage companies with capital.[24]
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), Citicorp (today Court Square Capital Partners and CVC Capital
Partners, First Chicago Bank (the predecessor of GTCR and Madison Dearborn Partners) 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.[24] [25] [26] 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.[27]
Although lower profile than their buyout counterparts, new leading venture capital firms were also formed including
Institutional Venture Partners (IVP) in 1980, Draper Fisher Jurvetson (originally Draper Associates) in 1985 and
Canaan Partners in 1987 among others.
Corporate raiders, hostile takeovers and greenmail

Although the "corporate raider" moniker is rarely applied to contemporary private equity investors, there is no
formal distinction between a "corporate raid" and other private equity investments acquisitions of existing
businesses. The label was typically ascribed by constituencies within the acquired company or the media. However,
a corporate raid would typically feature a leveraged buyout that would involve a hostile takeover of the company,
perceived asset stripping, major layoffs or other significant corporate restructuring activities. Management of many
large publicly traded corporations reacted negatively to the threat of potential hostile takeover or corporate raid and
pursued drastic defensive measures including poison pills, golden parachutes and increasing debt levels on the
company's balance sheet. Additionally, the threat of the corporate raid would lead to the practice of "greenmail",
where a corporate raider or other party would acquire a significant stake in the stock of a company and receive an
incentive payment (effectively a bribe) from the company in order to avoid pursuing a hostile takeover of the
company. Greenmail represented a transfer payment from a company's existing shareholders to a third party investor
and provided no value to existing shareholders but did benefit existing managers. The practice of "greenmail" is not
typically considered a tactic of private equity investors and is not condoned by market participants.
Among the most notable corporate raiders of the 1980s included 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. Carl Icahn developed a reputation as a ruthless corporate raider after his hostile takeover of TWA in
1985.[28] The result of that takeover was Icahn systematically selling TWA's assets to repay the debt he used to
purchase the company, which was described as asset stripping.[29] In later years, many of the corporate raiders would
be re-characterized as "Activist shareholders".
Many of the corporate raiders were onetime clients of Michael Milken, whose investment banking firm, Drexel
Burnham Lambert helped raise blind pools of capital with which corporate raiders could make a legitimate attempt to
takeover a company and provided high-yield debt financing of the buyouts.
Drexel Burnham raised a $100 million blind pool in 1984 for Nelson Peltz and his holding company Triangle
Industries (later Triarc) to give credibility for takeovers, representing the first major blind pool raised for this
purpose. Two years later, in 1986, Wickes Companies, a holding company run by Sanford Sigoloff would raise a
$1.2 billion blind pool.[30]
In 1985, Milken raised a $750 million for a similar blind pool for Ronald Perelman which would ultimate 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.[31] 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 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.[32] The buyout would prove troubling, burdened by a heavy debt load.[33] [34] [35] Under
Perelman's control, Revlon sold 4 divisions: two of which 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.[36] 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.
RJR Nabisco and the Barbarians at the Gate

Leveraged buyouts in the 1980s including Perelman's takeover of Revlon came to epitomize the "ruthless capitalism"
and "greed" popularly seen to be pervading Wall Street at the time. One of the final major buyouts of the 1980s
proved to be its most ambitious and marked both a high water mark and a sign of the beginning of the end of the
boom that had begun nearly a decade earlier. In 1989, KKR closed on a $31.1 billion dollar takeover of RJR
Nabisco. It was, at that time and for over 17 years, the largest leverage buyout in history. The event was chronicled
in the book, Barbarians at the Gate: The Fall of RJR Nabisco, and later made into a television movie starring James
Garner.
F. Ross Johnson was the President and CEO of RJR Nabisco at the time of the leveraged buyout and Henry Kravis
was a general partner at Kohlberg Kravis Roberts. The leveraged buyout was in the amount of $25 billion (plus
assumed debt), and the battle for control took place between October and November 1988. KKR would eventually
prevail in acquiring RJR Nabisco at $109 per share marking a dramatic increase from the original announcement that
Shearson Lehman Hutton would take RJR Nabisco private at $75 per share. A fierce series of negotiations and
horse-trading ensued which pitted KKR against Shearson Lehman Hutton and later Forstmann Little & Co. 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.
After Shearson Lehman's original bid, KKR quickly introduced a tender offer to obtain RJR Nabisco for $90 per
share—a price that enabled it to proceed without the approval of RJR Nabisco's management. RJR's management
team, working with Shearson Lehman and Salomon Brothers, submitted a bid of $112, a figure they felt certain
would enable them to outflank any response by Kravis's team. KKR's final bid of $109, while a lower dollar figure,
was ultimately accepted by the board of directors of RJR Nabisco. KKR's offer was guaranteed, whereas the
management offer (backed by Shearson Lehman and Salomon) lacked a "reset", meaning that the final share price
might have been lower than their stated $112 per share. Additionally, many in RJR's board of directors had grown
concerned at recent disclosures of Ross Johnson' unprecedented golden parachute deal. 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. Has the buyout craze gone too far?".[37]
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.
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.[38] 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.[39] 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.[40]
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.
LBO bust (1990 to 1992)

Contemporary reflections of private equity
1980s reflections of private equity

Although private equity rarely received a thorough treatment in popular culture, several films did feature
stereotypical "corporate raiders" prominently. Among the most notable examples of private equity featured in motion
pictures included:
• Wall Street (1987) – The notorious "corporate raider" and "greenmailer" Gordon Gekko represents a synthesis of
the worst features of various famous private equity figures intends to manipulate an ambitious young stockbroker
to takeover failing but decent airline. Although Gekko makes a pretense of caring about the airline, his intentions
prove to be to destroy the airline, strip its assets and lay off its employees before raiding the corporate pension
fund. Gekko would become a symbol in popular culture for unrestrained greed (with the signature line, "Greed,
for lack of a better word, is good") that would be attached to the private equity industry.
• Other People's Money (1991) – A self-absorbed corporate raider "Larry the Liquidator" (Danny DeVito), sets his
sights on New England Wire and Cable, a small-town business run by family patriarch Gregory Peck who is
principally interested in protecting his employees and the town.
• Pretty Woman (1990) – Although Richard Gere's profession is incidental to the plot, the selection of the corporate
raider who intends to destroy the hard work of a family-run business by acquiring the company in a hostile
takeover and then sell off the company's parts for a profit (compared in the movie to an illegal chop shop).
Ultimately, the corporate raider is won over and chooses not to pursue his original plans for the company.
See also
• Early history of private equity
Notes
1984.
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.
[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
[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.
[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.
References
School Press, 2008

bust cycles since the middle of the 20th century. Private equity emerged in the 1990s out of the ashes of the savings
and loan crisis, the insider trading scandals, the real estate market collapse and the recession of the early 1990s
which had culminated in the collapse of Drexel Burnham Lambert and had caused the shutdown of the high-yield
debt market. This period saw the emergence of more institutionalized private equity firms, ultimately culminating in
the massive Dot-com bubble in 1999 and 2000.
LBO bust (1990 to 1992)

The collapse of Drexel Burnham Lambert

due to its leadership in the issuance of high-yield debt. The firm was first rocked by scandal on May 12, 1986, when
Dennis Levine, a Drexel managing director and investment banker, was charged with insider trading. Levine pleaded
guilty to four felonies, and implicated one of his recent partners, arbitrageur Ivan Boesky. Largely based on
information Boesky promised to provide about his dealings with Milken, the Securities and Exchange Commission
initiated an investigation of Drexel on November 17. Two days later, Rudy Giuliani, the United States Attorney for
the Southern District of New York, launched his own investigation.[2]
For two years, Drexel steadfastly denied any wrongdoing, claiming that the criminal and SEC cases were based
almost entirely on the statements of an admitted felon looking to reduce his sentence. However, it was not enough to
keep the SEC from suing Drexel in September 1988 for insider trading, stock manipulation, defrauding its clients
and stock parking (buying stocks for the benefit of another). All of the transactions involved Milken and his
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.[2]
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.[2]
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.[3]
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.[2] 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.[3] [4] 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.[3]
S&L and the shutdown of the Junk Bond Market

In the 1980s, the boom in private equity transactions, specifically leveraged buyouts, was driven by the availability
of financing, particularly high-yield debt, also known as "junk bonds". The collapse of the high yield market in 1989
and 1990 would signal the end of the LBO boom. At that time, many market observers were pronouncing the junk
bond market “finished.” This collapse would be due largely to three factors:
• The collapse of Drexel Burnham Lambert, the foremost underwriter of junk bonds (discussed above).
• The dramatic increase in default rates among junk bond issuing companies. The historical default rate for high
yield bonds from 1978 to 1988 was approximately 2.2% of total issuance. In 1989, defaults increased
dramatically to 4.3% of the then $190 billion market and an additional 2.6% of issuance defaulted in the first half
of 1990. As a result of the higher perceived risk, the differential in yield of the junk bond market over U.S.
treasuries (known as the "spread") had also increased by 700 basis points (7 percentage points). This made the
cost of debt in the high yield market significantly more expensive than it had been previously.[5] [6] The market
shut down altogether for lower rated issuers.
• The mandated withdrawal of savings and loans from the high yield market. In August 1989, the U.S. Congress
enacted the Financial Institutions Reform, Recovery and Enforcement Act of 1989 as a response to the savings
and loan crisis of the 1980s. Under the law, savings and loans (S&Ls) could no longer invest in bonds that were
rated below investment grade. Additionally, S&Ls were mandated to sell their holdings by the end of 1993
creating a huge supply of low priced assets that helped freeze the new issuance market.
Despite the adverse market conditions, several of the largest private equity firms were founded in this period
including:
• Apollo Management founded in 1990 by Leon Black, a former Drexel Burnham Lambert banker and Michael
Milken lieutenant;
• Madison Dearborn founded in 1992, by a team of professionals who previously made investments for First
Chicago Bank.[7] ; and
• TPG Capital (formerly Texas Pacific Group) in 1992 by David Bonderman and James Coulter, who had worked
previously with Robert M. Bass.
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]
Resurgence of leveraged buyouts

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. As private equity reemerged in the 1990s it
began to earn a new degree of legitimacy and respectability. Although in the 1980s, many of the acquisitions made
were unsolicited and unwelcome, private equity firms in the 1990s focused on making buyouts attractive
propositions for management and shareholders. According to The Economist, “[B]ig companies that would once
have turned up their noses at an approach from a private-equity firm are now pleased to do business with them.”[9]
Additionally, private equity investors became increasingly focused on the long term development of companies they
acquired, using less leverage in the acquisition. This was in part due to the lack of leverage available for buyouts
during this period. In the 1980s leverage would routinely represent 85% to 95% of the purchase price of a company
as compared to average debt levels between 20% and 40% in leveraged buyouts in the 1990s and the first decade of
the 21st century. KKR's 1986 acquisition of Safeway, for example, was completed with 97% leverage and 3% equity
contributed by KKR, whereas KKR's acquisition of TXU in 2007 was completed with approximately 19% equity
contributed ($8.5 billion of equity out of a total purchase price of $45 billion). Additionally, private equity firms are
more likely to make investments in capital expenditures and provide incentives for management to build long-term
value.
The Thomas H. Lee Partners acquisition of Snapple Beverages, in 1992, is often described as the deal that marked
the resurrection of the leveraged buyout after several dormant years.[10] Only eight months after buying the
company, Lee took Snapple Beverages public and in 1994, only two years after the original acquisition, Lee sold the
company to Quaker Oats for $1.7 billion. Lee was estimated to have made $900 million for himself and his investors
from the sale. Quaker Oats would subsequently sell the company, which performed poorly under new management,
three years later for only $300 million to Nelson Peltz's Triarc. As a result of the Snapple deal, Thomas H. Lee, who
had begun investing in private equity in 1974, would find new prominence in the private equity industry and catapult
his Boston-based Thomas H. Lee Partners to the ranks of the largest private equity firms.
It was also in this timeframe that the capital markets would start to open up again for private equity transactions.
During the 1990-1993 period, Chemical Bank established its position as a key lender to private equity firms under
the auspices of pioneering investment banker, James B. Lee, Jr. (known as Jimmy Lee, not related to Thomas H.
Lee). By the mid-1900s, under Jimmy Lee, Chemical had established itself as the largest lender in the financing of
leveraged buyouts. Lee built a syndicated leveraged finance business and related advisory businesses including the
first dedicated financial sponsor coverage group, which covered private equity firms in much the same way that
investment banks had traditionally covered various industry sectors.[11] [12]
The following year, David Bonderman and James Coulter, who had worked for Robert M. Bass during the 1980s,
together with William S. Price III, completed a buyout of Continental Airlines in 1993, through their nascent Texas
Pacific Group, (today TPG Capital). TPG was virtually alone in its conviction that there was an investment
opportunity with the airline. The plan included bringing in a new management team, improving aircraft utilization
and focusing on lucrative routes. By 1998, TPG had generated an annual internal rate of return of 55% on its
investment. Unlike Carl Icahn's hostile takeover of TWA in 1985.[13] , Bonderman and Texas Pacific Group were
widely hailed as saviors of the airline, marking the change in tone from the 1980s. The buyout of Continental
Airlines would be one of the few successes for the private equity industry which has suffered several major failures,
including the 2008 bankruptcies of ATA Airlines, Aloha Airlines and Eos Airlines.
Among the most notable buyouts of the mid-to-late 1990s included:
• Duane Reade, 1990, 1997
The company's founders sold Duane Reade to Bain Capital for approximately $300 million. In 1997, Bain
Capital then sold the chain to DLJ Merchant Banking Partners[14] Duane Reade completed its initial public
offering (IPO) on February 10, 1998
• Sealy Corporation, 1997
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.
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)
to write-off their large proportions of their
See also
Notes
ISBN 1556112289.
[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
[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.
[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
School Press, 2008
• Bruck, Connie. The Predators' Ball. New York: Simon and Schuster, 1988.


bust cycles since the middle of the 20th century. As the 20th century ended, so, too, did the dot-com bubble and the
tremendous growth in venture capital that had marked the previous five years. In the wake of the collapse of the
dot-com bubble, a new "Golden Age" of private equity ensued, as leveraged buyouts reach unparalleled size and the
private equity firms achieved new levels of scale and institutionalization, exemplified by the initial public offering of
the Blackstone Group in 2007.
Bursting the Internet Bubble and the private equity crash (2000–2003)
to write-off large proportions of their
Stagnation in the LBO market

Meanwhile, as the venture sector collapsed, the activity in the leveraged buyout market also declined significantly.
Leveraged buyout firms had invested heavily in the telecommunications sector from 1996 to 2000 and profited from
the boom which suddenly fizzled in 2001. In that year at least 27 major telecommunications companies, (i.e., with
$100 million of liabilities or greater) filed for bankruptcy protection. Telecommunications, which made up a large
portion of the overall high yield universe of issuers, dragged down the entire high yield market. Overall corporate
default rates surged to levels unseen since the 1990 market collapse rising to 6.3% of high yield issuance in 2000 and
8.9% of issuance in 2001. Default rates on junk bonds peaked at 10.7 percent in January 2002 according to
Moody's.[1] [2] As a result, leveraged buyout activity ground to a halt.[3] [4] The major collapses of former high-fliers
including WorldCom, Adelphia Communications, Global Crossing and Winstar Communications were among the
most notable defaults in the market. In addition to the high rate of default, many investors lamented the low recovery
rates achieved through restructuring or bankruptcy.[2]
Among the most affected by the bursting of the internet and telecom bubbles were two of the largest and most active
private equity firms of the 1990s: Tom Hicks' Hicks Muse Tate & Furst and Ted Forstmann's Forstmann Little &
Company. These firms were often cited as the highest profile private equity casualties, having invested heavily in
technology and telecommunications companies.[5] Hicks Muse's reputation and market position were both damaged
by the loss of over $1 billion from minority investments in six telecommunications and 13 Internet companies at the
peak of the 1990s stock market bubble.[6] [7] [8] Similarly, Forstmann suffered major losses from investments in
McLeodUSA and XO Communications.[9] [10] 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.[11] 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.[12]
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.[13] [14] 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:
• Chase Capital Partners sold a $500 million portfolio of private equity funds interests in 2000.
• National Westminster Bank completed the sale of over 250 direct equity investments valued at nearly $1 billion in
2000.[15]
• UBS AG sold a $1.3 billion portfolio of private equity fund interests in over 50 funds in 2003.[16]
• Deutsche Bank sold a $2 billion investment portfolio as part of a spinout of MidOcean Partners, funded by a
consortium of secondary investors, in 2003.
• 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.
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.
Resurgence of the large buyout

Marked by the two-stage buyout of Dex Media at the end of 2002 and 2003, large multi-billion dollar U.S. buyouts
could once again obtain significant high yield debt financing and larger transactions could be completed. The Carlyle
Group, Welsh, Carson, Anderson & Stowe, along with other private investors, led a $7.5 billion buyout of
QwestDex. The buyout was the third largest corporate buyout since 1989. QwestDex's purchase occurred in two
stages: a $2.75 billion acquisition of assets known as Dex Media East in November 2002 and a $4.30 billion
acquisition of assets known as Dex Media West in 2003. R. H. Donnelley Corporation acquired Dex Media in 2006.
Shortly after Dex Media, other larger buyouts would be completed signaling the resurgence in private equity was
underway. The acquisitions included Burger King (by Bain Capital), Jefferson Smurfit (by Madison Dearborn),
Houghton Mifflin[20] [21] (by Bain Capital, the Blackstone Group and Thomas H. Lee Partners) and TRW
Automotive by the Blackstone Group.
In 2006 USA Today reported retrospectively on the revival of private equity:[22]

LBOs are back, only they've rebranded themselves private equity and vow a happier ending. The firms say this
time it's completely different. Instead of buying companies and dismantling them, as was their rap in the '80s,
private equity firms… squeeze more profit out of underperforming companies.
But whether today's private equity firms are simply a regurgitation of their counterparts in the 1980s… or a
kinder, gentler version, one thing remains clear: private equity is now enjoying a "Golden Age." And with
returns that triple the S&P 500, it's no wonder they are challenging the public markets for supremacy.
By 2004 and 2005, major buyouts were once again becoming common and market observers were stunned by the
leverage levels and financing terms obtained by financial sponsors in their buyouts. Some of the notable buyouts of
this period include:
• Dollarama, 2004
The U.S. chain of "dollar stores" was sold for $850 million to Bain Capital.[23]
• Toys "R" Us, 2004
A consortium of Bain Capital, Kohlberg Kravis Roberts and real estate development company Vornado Realty
Trust announced the $6.6 billion acquisition of the toy retailer. A month earlier, Cerberus Capital
Management, made a $5.5 billion offer for both the toy and baby supplies businesses.[24]
• The Hertz Corporation, 2005
Carlyle Group, Clayton Dubilier & Rice and Merrill Lynch completed the $15.0 billion leveraged buyout of
the largest car rental agency from Ford.[25] [26]
• Metro-Goldwyn-Mayer, 2005
A consortium led by Sony and TPG Capital completed the $4.81 billion buyout of the film studio. The
consortium also included media-focused firms Providence Equity Partners and Quadrangle Group as well as
DLJ Merchant Banking Partners.[27]
• SunGard, 2005
SunGard was acquired by a consortium of seven private equity investment firms in a transaction valued at
$11.3 billion. The partners in the acquisition were Silver Lake Partners, which led the deal as well as Bain
Capital, the Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts, Providence Equity
Partners, and Texas Pacific Group. This represented the largest leveraged buyout completed since the takeover
of RJR Nabisco at the end of the 1980s leveraged buyout boom. Also, at the time of its announcement,
SunGard would be the largest buyout of a technology company in history, a distinction it would cede to the
buyout of Freescale Semiconductor. The SunGard transaction is also notable in the number of firms involved
in the transaction. The involvement of seven firms in the consortium was criticized by investors in private
equity who considered cross-holdings among firms to be generally unattractive.[28]
Age of the mega-buyout

As 2005 ended and 2006 began, new "largest buyout"
records were set and surpassed several times with nine of
the top ten buyouts at the end of 2007 having been
announced in an 18-month window from the beginning of
2006 through the middle of 2007. 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. In 2006, private equity firms bought 654
U.S. companies for $375 billion, representing 18 times the
level of transactions closed in 2003.[30] Additionally, U.S.
based private equity firms raised $215.4 billion in investor David Rubinstein, the head of the Carlyle Group, the largest
private equity firm (by investor commitments) during the
commitments to 322 funds, surpassing the previous record [29]
2006-07 buyout boom.
set in 2000 by 22% and 33% higher than the 2005
fundraising total.[31] However, venture capital funds, which
were responsible for much of the fundraising volume in 2000 (the height of the dot-com bubble), raised only
$25.1 billion in 2006, a 2% percent decline from 2005 and a significant decline from its peak.[32] The following year,
despite the onset of turmoil in the credit markets in the summer, saw yet another record year of fundraising with
$302 billion of investor commitments to 415 funds.[33]
• Georgia-Pacific Corp, 2005

In December 2005, Koch Industries, a privately-owned company controlled by Charles G. Koch and David H.
Koch, acquired pulp and paper producer Georgia-Pacific for $21 billion.[34] The acquisition marked the first
buyout in excess of $20 billion and largest buyout overall since RJR Nabisco and pushed Koch Industries
ahead of Cargill as the largest privately-held company in the US, based on revenue.[35]
• Albertson's, 2006
Albertson's accepted a $15.9 billion takeover offer ($9.8 billion in cash and stock and the assumption of
$6.1 billion in debt) from SuperValu to buy most Albertson's grocery operations. The drugstore chain CVS
acquired 700 stand-alone Sav-On and Osco pharmacies and a distribution center, and a group including
Cerberus Capital Management and the Kimco Realty Corporation acquired some 655 underperforming grocery
stores and a number of distribution centers.[36]
• Equity Office Properties, 2006 – Blackstone Group completes the $37.7 billion[37] acquisition of one of the
largest owners of commercial office properties in the US. At the time of its announcement, the Equity Office
buyout became the largest in history, surpassing the buyout of HCA. It would later be surpassed by the buyouts of
TXU and BCE (announced but as of the end of the first quarter of 2008 not yet completed).
• Freescale Semiconductor, 2006
A consortium led by the Blackstone Group and including the Carlyle Group, Permira and the TPG Capital
completed the $17.6 billion takeover of the semiconductor company. At the time of its announcement,
Freescale would be the largest leveraged buyout of a technology company ever, surpassing the 2005 buyout of
SunGard.[38]
• GMAC, 2006
General Motors sold a 51% majority stake in its financing arm, GMAC Financial Services to a consortium led
by Cerberus Capital Management, valuing the company at $16.8 billion.[39] Separately, General Motors sold a
78% stake in GMAC Commercial Holding Corporation, renamed Capmark Financial Group, its real estate
venture, to a group of investors headed by Kohlberg Kravis Roberts and Goldman Sachs Capital Partners in a
$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
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.
Publicly traded private equity

Although there had previously been certain instances of publicly traded private equity vehicles, the convergence of
private equity and the public equity markets attracted significantly greater attention when several of the largest
private equity firms pursued various options through the public markets. Taking private equity firms and private
equity funds public appeared an unusual move since private equity funds often buy public companies listed on
exchange and then take them private. Private equity firms are rarely subject to the quarterly reporting requirements
of the public markets and tout this independence to prospective sellers as a key advantage of going private.
Nevertheless, there are fundamentally two separate opportunities that private equity firms pursued in the public
markets. These options involved a public listing of either:
• A private equity firm (the management company), which provides shareholders an opportunity to gain exposure to
the management fees and carried interest earned by the investment professionals and managers of the private
equity firm. The most notable example of this public listing was completed by The Blackstone Group in 2007
• A private equity fund or similar investment vehicle, which allows investors that would otherwise be unable to
invest in a traditional private equity limited partnership to gain exposure to a portfolio of private equity
investments.
In May 2006, Kohlberg Kravis Roberts raised $5 billion in an initial public offering for a new permanent investment
vehicle (KKR Private Equity Investors or KPE) listing it on the Euronext exchange in Amsterdam (ENXTAM:
KPE}}). KKR raised more than three times what it had expected at the outset as many of the investors in KPE were
hedge funds seeking exposure to private equity but could not make long term commitments to private equity funds.
Because private equity had been booming in the preceding years, the proposition of investing in a KKR fund
appeared attractive to certain investors.[56] However, KPE's first-day performance was lackluster, trading down 1.7%
and trading volume was limited.[57] Initially, a handful of other private equity firms and hedge funds had planned to
follow KKR's lead but shelved those plans when KPE's performance continued to falter after its IPO. 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.[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]
Less than two weeks after the Blackstone Group IPO,

rival firm Kohlberg Kravis Roberts filed with the
SEC[63] in July 2007 to raise $1.25 billion by selling
an ownership interest in its management
Schwarzman's Blackstone Group completed the first major IPO of a
company.[64] KKR had previously listed its KKR private equity firm in June 2007.
[29]
Private Equity Investors (KPE) private equity fund

vehicle in 2006. 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.
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).
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]
The Credit Crunch and post-modern private equity (2007–2008)

high-yield debt markets.[86] [87] The markets had been highly robust during the first six months of 2007, with highly
issuer friendly developments including PIK and PIK Toggle (interest is "Payable In Kind") and covenant light debt
widely available to finance large leveraged buyouts. July and August saw a notable slowdown in issuance levels in
the high yield and leveraged loan markets with only few issuers accessing the market. Uncertain market conditions
led to a significant widening of yield spreads, which coupled with the typical summer slowdown led to many
companies and investment banks to put their plans to issue debt on hold until the autumn. However, the expected
rebound in the market after Labor Day 2007 did not materialize and the lack of market confidence prevented deals
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]
Contemporary reflections of private equity and private equity controversies

Carlyle group featured prominently in Michael Moore's 2003 film Fahrenheit 9-11. The film suggested that The
Carlyle Group exerted tremendous influence on U.S. government policy and contracts through their relationship with
the president’s father, George H. W. Bush, a former senior adviser to the Carlyle Group. Additionally, Moore cited
relationships with the Bin Laden family. 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.[104]
Over the next few years, attention intensified on private equity as the size of transactions and profile of the
companies increased. 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 Wall Street Journal
observing Blackstone Group's Steve Schwarzman's 60th birthday celebration in February 2007 described the event as
follows:[105]
The Armory's entrance hung with banners painted to replicate Mr. Schwarzman's sprawling Park Avenue
apartment. A brass band and children clad in military uniforms ushered in guests. A huge portrait of Mr.
Schwarzman, which usually hangs in his living room, was shipped in for the occasion.
The affair was emceed by comedian Martin Short. Rod Stewart performed. Composer Marvin Hamlisch did a
number from "A Chorus Line." Singer Patti LaBelle led the Abyssinian Baptist Church choir in a tune about
Mr. Schwarzman. Attendees included Colin Powell and New York Mayor Michael Bloomberg. The menu
included lobster, baked Alaska and a 2004 Louis Jadot Chassagne Montrachet, among other fine wines.
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 Rubinstein, the founder of The Carlyle
Group 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."[105]
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.[106] [107] [108] A number of leading private equity executives were targeted by the
union members[109] 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.
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.[110] 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.[111] In 2009,
the Canadian regulatory bodies set up rigorous regulation for dealers in exempt (non-publicly traded) securities.
Exempt-market dealers sell securities that are exempt from prospectus requirements and must register with the
Ontario Securities Commission. [112]
See also
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.
[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)
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[23] "Dollarama undergoes major transformation" (http:/ / www. canada. com/ nationalpost/ financialpost/ story.
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[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.
[32] Dow Jones Private Equity Analyst as referenced in Taub, Stephen. Record Year for Private Equity Fundraising (http:/ / www. cfo. com/
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[34] Wayne, Leslie. " Koch Industries and Georgia-Pacific May Be a Perfect Fit (http:/ / www. nytimes. com/ 2005/ 11/ 15/ business/ 15place.
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[35] America's Largest Private Companies (http:/ / www. forbes. com/ lists/ 2007/ 21/
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[37] Source: Thomson Financial
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[43] MOUAWAD, JAD. " Kinder Morgan Agrees to an Improved Buyout Offer Led by Its Chairman (http:/ / www. nytimes. com/ 2006/ 08/ 29/
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[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/
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[45] " Takeover firms will pay $15.3b to buy Danish phone giant TDC (http:/ / www. boston. com/ business/ technology/ articles/ 2005/ 12/ 01/
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[46] " TDC-One year on (http:/ / www. penews. com/ today/ supplements/ casestudies/ content/ 1047758801/ container/ 2449030860/ )." Dow
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[47] Sorkin, Andrew Ross. " 2 Firms Pay $4.3 Billion for Sabre (http:/ / travel. nytimes. com/ 2006/ 12/ 12/ business/ 12deal. html)." New York
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[48] Sachdev, Ameet. " Orbitz travels to 4th owner: Blackstone Group to buy from Cendant." (http:/ / www. highbeam. com/ doc/
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[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
[51] de la MERCED, MICHAEL J. " Biomet Accepts Sweetened Takeover Offer (http:/ / www. nytimes. com/ 2007/ 06/ 08/ business/ 08biomet.
[52] MAYNARD, MICHELINE and LANDLER, MARK. " Chrysler Group to Be Sold for $7.4 Billion (http:/ / query. nytimes. com/ gst/
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[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.
[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.
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[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.
[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)
[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
[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)."
[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.
References
School Press, 2008
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
Origins of the leveraged buyouts

The first leveraged buyout may have been the purchase by McLean Industries, Inc. of Pan-Atlantic Steamship
Company in January 1955 and Waterman Steamship Corporation in May 1955.[4] Under the terms of that
transaction, McLean borrowed $42 million and raised an additional $7 million through an issue of preferred stock.
When the deal closed, $20 million of Waterman cash and assets were used to retire $20 million of the loan debt.[5]
investment vehicles to acquire portfolios of investments in corporate assets was a relatively new trend in the 1960s,
popularized by the likes of Warren Buffett (Berkshire Hathaway) and Victor Posner (DWG Corporation), and later
fact it is Posner who is often credited with coining the term "leveraged buyout" or "LBO"[6]
The leveraged buyout boom of the 1980s was conceived by a number of corporate financiers, most notably 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. Many of the
target 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. Thus a sale to a financial buyer might prove attractive. Their
Leveraged buyout 70
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.
Leveraged buyouts in the 1980s

In January 1982, former US Secretary of the Treasury William Simon and a group of investors acquired Gibson
Greetings, a producer of greeting cards, for $80 million, of which only $1 million was rumored to have been
contributed by the investors. By mid-1983, just sixteen months after the original deal, Gibson completed a $290
million IPO and Simon made approximately $66 million.[9] The success of the Gibson Greetings investment
attracted the attention of the wider media to the nascent boom in leveraged buyouts. Between 1979 and 1989, it was
estimated that there were over 2,000 leveraged buyouts valued in excess of $250 billion[10]
During the 1980s, constituencies within acquired companies and the media ascribed the "corporate raid" label to
many private equity investments, particularly those that featured a hostile takeover of the company, perceived asset
stripping, major layoffs or other significant corporate restructuring activities. Among the most notable investors to be
labeled corporate raiders in the 1980s included 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. Carl
Icahn developed a reputation as a ruthless corporate raider after his hostile takeover of TWA in 1985.[11] [12] Many
of the corporate raiders were onetime clients of Michael Milken, whose investment banking firm, Drexel Burnham
Lambert helped raise blind pools of capital with which corporate raiders could make a legitimate attempt to take over
a company and provided high-yield debt financing of the buyouts.
One of the final major buyouts of the 1980s proved to be its most ambitious and marked both a high water mark and
a sign of the beginning of the end of the boom that had begun nearly a decade earlier. In 1989, KKR closed in on a
$31.1 billion dollar takeover of RJR Nabisco. It was, at that time and for over 17 years, the largest leverage buyout in
history. The event was chronicled in the book (and later the movie), Barbarians at the Gate: The Fall of RJR
Nabisco. KKR would eventually prevail in acquiring RJR Nabisco at $109 per share marking a dramatic increase
from the original announcement that Shearson Lehman Hutton would take RJR Nabisco private at $75 per share. A
fierce series of negotiations and horse-trading ensued which pitted KKR against Shearson Lehman Hutton and later
Forstmann Little & Co. 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. After Shearson
Lehman's original bid, KKR quickly introduced a tender offer to obtain RJR Nabisco for $90 per share—a price that
enabled it to proceed without the approval of RJR Nabisco's management. RJR's management team, working with
Shearson Lehman and Salomon Brothers, submitted a bid of $112, a figure they felt certain would enable them to
outflank any response by Kravis's team. KKR's final bid of $109, while a lower dollar figure, was ultimately
accepted by the board of directors of RJR Nabisco.[13] At $31.1 billion of transaction value, RJR Nabisco was by far
the largest leveraged buyout 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.
equity from KKR.[14]
Leveraged buyout 71
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]
Age of the mega-buyout 2005-2007

companies (specifically the Sarbanes-Oxley Act) would set the stage for the largest boom private equity had seen.
Marked by the buyout of Dex Media in 2002, large multi-billion dollar U.S. buyouts could once again obtain
significant high yield debt financing and larger transactions could be completed. By 2004 and 2005, major buyouts
were once again becoming common, including the acquisitions of Toys "R" Us[17] , The Hertz Corporation [18] [19] ,
Metro-Goldwyn-Mayer[20] and SunGard[21] in 2005.
As 2005 ended and 2006 began, new "largest buyout" records were set and surpassed several times with nine of the
top ten buyouts at the end of 2007 having been announced in an 18-month window from the beginning of 2006
through the middle of 2007. In 2006, private equity firms bought 654 U.S. companies for $375 billion, representing
18 times the level of transactions closed in 2003.[22] Additionally, U.S. based private equity firms raised $215.4
billion in investor commitments to 322 funds, surpassing the previous record set in 2000 by 22% and 33% higher
than the 2005 fundraising total[23] The following year, despite the onset of turmoil in the credit markets in the
summer, saw yet another record year of fundraising with $302 billion of investor commitments to 415 funds[24]
Among the mega-buyouts completed during the 2006 to 2007 boom were: Equity Office Properties, HCA[25] ,
Alliance Boots[26] and TXU[27] .
high-yield debt markets.[28] [29] The markets had been highly robust during the first six months of 2007, with highly
issuer friendly developments including PIK and PIK Toggle (interest is "Payable In Kind") and covenant light debt
widely available to finance large leveraged buyouts. July and August saw a notable slowdown in issuance levels in
the high yield and leveraged loan markets with only few issuers accessing the market. Uncertain market conditions
led to a significant widening of yield spreads, which coupled with the typical summer slowdown led to many
companies and investment banks to put their plans to issue debt on hold until the autumn. However, the expected
rebound in the market after Labor Day 2007 did not materialize and the lack of market confidence prevented deals
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.[30] As 2007 ended and 2008 began, it was clear that lending standards had tightened and the
era of "mega-buyouts" had come to an end. Nevertheless, private equity continues to be a large and active asset class
and the private equity firms, with hundreds of billions of dollars of committed capital from investors are looking to
deploy capital in new and different transactions.
Leveraged buyout 72
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
• 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
Company, Inc. from Waterman Steamship Corporation. In May McLean Industries, Inc. completed the acquisition of the common stock of
[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
1984.
1993.
Leveraged buyout 75
ISBN 1556112289.
[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)."
[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
[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.
[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
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.
The Purpose of an MBO

The purpose of such a buyout from the managers' point of view may be to save their jobs, either if the business has
been scheduled for closure or if an outside purchaser would bring in its own management team. They may also want
to maximize the financial benefits they receive from the success they bring to the company by taking the profits for
themselves. This is often a way to ward off aggressive buyers.
Financing a Management Buyout
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.
Private Equity Financing

If a bank is unwilling to lend, the management will commonly look to private equity investors to fund the majority of
buyout. A high proportion of management buyouts are financed in this way. The private equity investors will invest
money in return for a proportion of the shares in the company, though they may also grant a loan to the management.
The exact financial structuring will depend on the backer's desire to balance the risk with its return, with debt being
less risky but less profitable than capital investment.
Although the management may not have resources to buy the company, private equity houses will require that the
managers each make as large an investment as they can afford in order to ensure that the management are locked in
by an overwhelming vested interest in the success of the company. It is common for the management to re-mortgage
their houses in order to acquire a small percentage of the company.
Private equity backers are likely to have somewhat different goals to the management. They generally aim to
maximise their return and make an exit after 3–5 years while minimising risk to themselves, whereas the
management rarely look beyond their careers at the company and will take a long-term view.
While certain aims do coincide - in particular the primary aim of profitability - certain tensions can arise. The
backers will invariably impose the same warranties on the management in relation to the company that the sellers
will have refused to give the management. This "warranty gap" means that the management will bear all the risk of
any defects in the company that affects its value.
As a condition of their investment, the backers will also impose numerous terms on the management concerning the
way that the company is run. The purpose is to ensure that the management run the company in a way that will
maximise the returns during the term of the backers' investment, whereas the management might have hoped to build
the company for long-term gains. Though the two aims are not always incompatible, the management may feel
restricted.
The European buyout market was worth €43.9bn in 2008, a 60 per cent fall on the €108.2bn of deals in 2007. The
last time the buyout market was at this level was in 2001 when it reached just €34bn.[1]
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.
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)
Article Sources and Contributors 79
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Arjan1071, Arthena, Athaenara, Bender235, Biblbroks, Bobbyi, Boing! said Zebedee, Bombastus, Bonás, Bungofpot, CBooch10, Canterbury Tail, Chimpex, Chrism, David Haslam,
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Private Equity Primer (Wiki Collection)

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Private Equity Primer (Wiki Collection)

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Private Equity & LBO Digest

Wikipedia | Oct 17, 2010

History of private equity and venture capital

J.P. Morgan's acquisition of Carnegie Steel

Origins of modern private equity

million for its sixth institutional private equity fund in 2005.

It was also in the 1960s that the common form of private

capital. The compensation structure, still in use today, also

Early history of leveraged buyouts (1955-1981)

McLean Industries and public holding companies

KKR and the pioneers of private equity

Regulatory and tax changes impact the boom

The first private equity boom (1982 to 1993)

Beginning of the LBO boom

Venture capital in the 1980s

Corporate raiders, hostile takeovers and greenmail

RJR Nabisco and the Barbarians at the Gate

LBO bust (1990 to 1992)

The collapse of Drexel Burnham Lambert

S&L and the shutdown of the Junk Bond Market

Resurgence of leveraged buyouts

Airlines, Aloha Airlines and Eos Airlines.

Stagnation in the LBO market

Resurgence of the large buyout

Age of the mega-buyout

Publicly traded private equity

Less than two weeks after the Blackstone Group IPO,

an ownership interest in its management

The Credit Crunch and post-modern private equity (2007 – 2008)

Responses to private equity

1980s reflections of private** equity

Contemporary reflections of private equity and private equity controversies

[9] http:/ / www. assetman. com

• Loos, Nicolaus. Value Creation in Leveraged Buyouts (http://www.unisg.ch/www/edis.nsf/

Early history of private equity

J.P. Morgan's acquisition of Carnegie Steel

Origins of modern private equity

million for its sixth institutional private equity fund in 2005.

It was also in the 1960s that the common form of private

capital. The compensation structure, still in use today, also

Early history of leveraged buyouts (1955-1981)

McLean Industries and public holding companies

KKR and the pioneers of private equity

investments, the $27 million investment in Cobblers ended in bankruptcy.[23]

Regulatory and tax changes impact the boom

The first private equity boom (1982 to 1993)

Private equity in the 1980s

Beginning of the LBO boom

• Sterling Jewelers, 1985

Venture capital in the 1980s

Corporate raiders, hostile takeovers and greenmail

RJR Nabisco and the Barbarians at the Gate

LBO bust (1990 to 1992)

Contemporary reflections of private equity

1980s reflections of private equity

Private equity in the 1990s

LBO bust (1990 to 1992)

The collapse of Drexel Burnham Lambert

S&L and the shutdown of the Junk Bond Market

Resurgence of leveraged buyouts

• Trehan, R. (2006). The History Of Leveraged Buyouts (http://www.4hoteliers.com/4hots_fshw.

Private equity in the 2000s

Stagnation in the LBO market