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Private Equity & LBO DigestWikipedia | Oct 17, 2010

ContentsArticles

History of private equity and venture capital 1Early history of private equity 26Private equity in the 1980s 35Private equity in the 1990s 44Private equity in the 2000s 51Envy ratio 67Leveraged buyout 68Management buyout 76

ReferencesArticle Sources and Contributors 79Image Sources, Licenses and Contributors 80

Article LicensesLicense 81

History of private equity and venture capital 1

History of private equity and venture capitalThe history of private equity and venture capital and the development of these asset classes has occurred through aseries of boom and bust cycles since the middle of the 20th century. Within the broader private equity industry, twodistinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel, althoughinterrelated tracks.Since the origins of the modern private equity industry in 1946, there have been four major epochs marked by threeboom and bust cycles. The early history of private equity—from 1946 through 1981—was characterized byrelatively small volumes of private equity investment, rudimentary firm organizations and limited awareness of andfamiliarity with the private equity industry. The first boom and bust cycle, from 1982 through 1993, wascharacterized by the dramatic surge in leveraged buyout activity financed by junk bonds and culminating in themassive buyout of RJR Nabisco before the near collapse of the leveraged buyout industry in the late 1980s and early1990s. The second boom and bust cycle (from 1992 through 2002) emerged out of the ashes of the savings andloan crisis, the insider trading scandals, the real estate market collapse and the recession of the early 1990s. Thisperiod saw the emergence of more institutionalized private equity firms, ultimately culminating in the massiveDot-com bubble in 1999 and 2000. The third boom and bust cycle (from 2003 through 2007) came in the wake ofthe collapse of the Dot-com bubble—leveraged buyouts reach unparalleled size and the institutionalization of privateequity 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 isbest described through a narrative of developments in the United States as private equity in Europe consistentlylagged behind the North American industry. With the second private equity boom in the mid-1990s and liberalizationof regulation for institutional investors in Europe, the emergence of a mature European private equity market hasoccurred.

Pre-history

J.P. Morgan's acquisition of Carnegie SteelCompany in 1901 represents arguably the first

true modern buyout

Investors have been acquiring businesses and making minorityinvestments in privately held companies since the dawn of theindustrial revolution. Merchant bankers in London and Paris financedindustrial concerns in the 1850s; most notably Credit Mobilier,founded in 1854 by Jacob and Isaac Pereire, who together with NewYork based Jay Cooke financed the United States TranscontinentalRailroad.

History of private equity and venture capital 2

Andrew Carnegie sold his steel company to J.P.Morgan in 1901 in arguably the first true modern

buyout

Later, J. Pierpont Morgan's J.P. Morgan & Co. would finance railroadsand other industrial companies throughout the United States. In certainrespects, J. Pierpont Morgan's 1901 acquisition of Carnegie SteelCompany from Andrew Carnegie and Henry Phipps for $480 millionrepresents the first true major buyout as they are thought of today.

Due to structural restrictions imposed on American banks under theGlass-Steagall Act and other regulations in the 1930s, there was noprivate merchant banking industry in the United States, a situation thatwas quite exceptional in developed nations. As late as the 1980s,Lester Thurow, a noted economist, decried the inability of the financialregulation 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 ofequity and debt securities. Investment banks would later enter thespace, however long after independent firms had become wellestablished.

With few exceptions, private equity in the first half of the 20th century was the domain of wealthy individuals andfamilies. The Vanderbilts, Whitneys, Rockefellers and Warburgs were notable investors in private companies in thefirst half of the century. In 1938, Laurance S. Rockefeller helped finance the creation of both Eastern Air Lines andDouglas Aircraft and the Rockefeller family had vast holdings in a variety of companies. Eric M. Warburg foundedE.M. Warburg & Co. in 1938, which would ultimately become Warburg Pincus, with investments in both leveragedbuyouts and venture capital.

Origins of modern private equityIt was not until after World War II that what is considered today to be true private equity investments began toemerge marked by the founding of the first two venture capital firms in 1946: American Research and DevelopmentCorporation. (ARDC) and J.H. Whitney & Company.[1]

ARDC was founded by Georges Doriot, the "father of venture capitalism"[2] (founder of INSEAD and former deanof Harvard Business School), with Ralph Flanders and Karl Compton (former president of MIT), to encourageprivate sector investments in businesses run by soldiers who were returning from World War II. ARDC'ssignificance was primarily that it was the first institutional private equity investment firm that raised capital fromsources other than wealthy families although it had several notable investment successes as well.[3] ARDC iscredited with the first major venture capital success story when its 1957 investment of $70,000 in Digital EquipmentCorporation (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] Formeremployees of ARDC went on to found several prominent venture capital firms including Greylock Partners (foundedin 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

History of private equity and venture capital 3

million for its sixth institutional private equity fund in 2005.Before World War II, venture capital investments (originally known as "development capital") were primarily thedomain of wealthy individuals and families. One of the first steps toward a professionally-managed venture capitalindustry 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 helpthe financing and management of the small entrepreneurial businesses in the United States. Passage of the Actaddressed concerns raised in a Federal Reserve Board report to Congress that concluded that a major gap existed inthe capital markets for long-term funding for growth-oriented small businesses. Additionally, it was thought thatfostering 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 theU.S. economy was and still is the main goal of the SBIC program today.[6] The 1958 Act provided venture capitalfirms structured either as SBICs or Minority Enterprise Small Business Investment Companies (MESBICs) access tofederal funds which could be leveraged at a ratio of up to 4:1 against privately raised investment funds. The successof the Small Business Administration's efforts are viewed primarily in terms of the pool of professional privateequity investors that the program developed as the rigid regulatory limitations imposed by the program minimizedthe role of SBICs. In 2005, the SBA significantly reduced its SBIC program, though SBICs continue to make privateequity investments.

Early venture capital and the growth of Silicon Valley (1959 - 1981)

Sand Hill Road in Menlo Park, California, where many BayArea venture capital firms are based

During the 1960s and 1970s, venture capital firms focusedtheir investment activity primarily on starting and expandingcompanies. More often than not, these companies wereexploiting breakthroughs in electronic, medical ordata-processing technology. As a result, venture capital cameto be almost synonymous with technology finance.It is commonly noted that the first venture-backed startup wasFairchild Semiconductor (which produced the firstcommercially practicable integrated circuit), funded in 1959by what would later become Venrock Associates.[7] Venrockwas founded in 1969 by Laurance S. Rockefeller, the fourth ofJohn D. Rockefeller's six children as a way to allow otherRockefeller children to develop exposure to venture capitalinvestments.

It was also in the 1960s that the common form of privateequity fund, still in use today, emerged. Private equity firmsorganized limited partnerships to hold investments in whichthe investment professionals served as general partner and theinvestors, who were passive limited partners, put up thecapital. The compensation structure, still in use today, alsoemerged with limited partners paying an annual management fee of 1-2% and a carried interest typicallyrepresenting 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] byWilliam Henry Draper III and Franklin P. Johnson, Jr. In 1964 Bill Draper and Paul Wythes founded Sutter HillVentures, and Pitch Johnson formed Asset Management Company [9].

History of private equity and venture capital 4

The growth of the venture capital industry was fueled by the emergence of the independent investment firms on SandHill 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 technologyindustries in the area. By the early 1970s, there were many semiconductor companies based in the Santa ClaraValley as well as early computer firms using their devices and programming and service companies.[10] Throughoutthe 1970s, a group of private equity firms, focused primarily on venture capital investments, would be founded thatwould become the model for later leveraged buyout and venture capital investment firms. In 1973, with the numberof 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 capitalfirms suffered a temporary downturn in 1974, when the stock market crashed and investors were naturally wary ofthis new kind of investment fund. It was not until 1978 that venture capital experienced its first major fundraisingyear, as the industry raised approximately $750 million. During this period, the number of venture firms alsoincreased. Among the firms founded in this period, in addition to Kleiner Perkins and Sequoia, that continue toinvest actively are AEA Investors, TA Associates, Mayfield Fund, Apax Partners, New Enterprise Associates, OakInvestment 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 companiesAlthough not strictly private equity, and certainly not labeled so at the time, the first leveraged buyout may havebeen the purchase by Malcolm McLean's McLean Industries, Inc. of Pan-Atlantic Steamship Company in January1955 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, $20million of Waterman cash and assets were used to retire $20 million of the loan debt. The newly elected board ofWaterman 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 asinvestment vehicles to acquire portfolios of investments in corporate assets would become a new trend in the 1960spopularized by the likes of Warren Buffett (Berkshire Hathaway) and Victor Posner (DWG Corporation) and lateradopted 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 moretraditional leveraged buyouts and in many ways could be considered a forerunner of the later private equity firms. Infact, 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 DWGCorporation in 1966. Having gained control of the company, he used it as an investment vehicle that could executetakeovers of other companies. Posner and DWG are perhaps best known for the hostile takeover of Sharon SteelCorporation in 1969, one of the earliest such takeovers in the United States. Posner's investments were typicallymotivated 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 infinancial 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

History of private equity and venture capital 5

was a textile company, however, Buffett used Berkshire Hathaway as an investment vehicle to make acquisitions andminority investments in dozens of the insurance and reinsurance industries (GEICO) and varied companiesincluding: American Express, The Buffalo News, the Coca-Cola Company, Fruit of the Loom, Nebraska FurnitureMart and See's Candies. Buffett's value investing approach and focus on earnings and cash flows are characteristic oflater private equity investors. Buffett would distinguish himself relative to more traditional leveraged buyoutpractitioners through his reluctance to use leverage and hostile techniques in his investments.

KKR and the pioneers of private equityThe industry that is today described as private equity was conceived by a number of corporate financiers, mostnotably Jerome Kohlberg, Jr. and later his protégé, Henry Kravis. Working for Bear Stearns at the time, Kohlbergand 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 WorldWar II and by the 1960s and 1970s were facing succession issues. Many of these companies lacked a viable orattractive exit for their founders as they were too small to be taken public and the founders were reluctant to sell outto competitors, making a sale to a financial buyer potentially attractive. Their acquisition of Orkin ExterminatingCompany in 1964 is among the first significant leveraged buyout transactions.[15] In the following years, the threeBear Stearns bankers would complete a series of buyouts including Stern Metals (1965), Incom (a division ofRockwood International, 1971), Cobblers Industries (1971) and Boren Clay (1973) as well as Thompson Wire, EagleMotors and Barrows through their investment in Stern Metals. Although they had a number of highly successfulinvestments, 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 departureand the formation of Kohlberg Kravis Roberts in that year. Most notably, Bear Stearns executive Cy Lewis hadrejected repeated proposals to form a dedicated investment fund within Bear Stearns and Lewis took exception to theamount of time spent on outside activities.[17] Early investors included the Hillman Family[18] By 1978, with therevision of the ERISA regulations, the nascent KKR was successful in raising its first institutional fund withapproximately $30 million of investor commitments.[19] That year, the firm signed a precedent-setting deal to buythe publicly traded Houdaille Industries, which made industrial pipes, for $380 million. It was by far the largesttake-private and the time.[20]

Meanwhile in 1974, Thomas H. Lee founded a new investment firm to focus on acquiring companies throughleveraged buyout transactions, one of the earliest independent private equity firms to focus on leveraged buyouts ofmore mature companies rather than venture capital investments in growth companies. Lee's firm, Thomas H. LeePartners, while initially generating less fanfare than other entrants in the 1980s, would emerge as one of the largestprivate 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 thatwould be survive through the various cycles both in leveraged buyouts and venture capital. Among the firmsfounded 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 earlymanagement 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 biglosses the following year and had to ask for protection from Japanese competitors.

History of private equity and venture capital 6

Regulatory and tax changes impact the boomThe 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 tobondholders and dividends paid to stockholders. Carter's proposals did not achieve support from the businesscommunity or Congress and was not enacted. Because of the different tax treatment, the use of leverage to reducetaxes was popular among private equity investors and would become increasingly popular with the reduction ofthe capital gains tax rate.[21]

• Employee Retirement Income Security Act of 1974 (ERISA) - With the passage of ERISA in 1974, corporatepension funds were prohibited from holding certain risky investments including many investments in privatelyheld companies. In 1975, fundraising for private equity investments cratered, according to the Venture CapitalInstitute, totaling only $10 million during the course of the year. In 1978, the US Labor Department relaxedcertain of the ERISA restrictions, under the "prudent man rule,"[22] thus allowing corporate pension funds toinvest in private equity resulting in a major source of capital available to invest in venture capital and otherprivate equity. Time reported in 1978 that fund raising had increased from $39 million in 1977 to $570 millionjust one year later.[23] Additionally, many of these same corporate pension investors would become active buyersof 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 ratefrom 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 ofthe 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 orsince. 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 largestbooms in private equity culminating in the 1989 leveraged buyout of RJR Nabisco, which would reign as the largestleveraged buyout transaction for nearly 17 years. In 1980, the private equity industry would raise approximately $2.4billion of annual investor commitments and by the end of the decade in 1989 that figure stood at $21.9 billionmarking the tremendous growth experienced.[24]

History of private equity and venture capital 7

Beginning of the LBO boom

Michael Milken, the man credited withcreating the market for high yield "junk"bonds and spurring the LBO boom of the

1980s

The beginning of the first boom period in private equity would be markedby the well-publicized success of the Gibson Greetings acquisition in 1982and would roar ahead through 1983 and 1984 with the soaring stock marketdriving 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 beknown as Wesray Capital Corporation, acquired Gibson Greetings, aproducer of greeting cards. The purchase price for Gibson was $80 million,of which only $1 million was rumored to have been contributed by theinvestors. By mid-1983, just sixteen months after the original deal, Gibsoncompleted a $290 million IPO and Simon made approximately $66million.[25] [26] Simon and Wesray would later complete the $71.6 millionacquisition of Atlas Van Lines. The success of the Gibson Greetingsinvestment attracted the attention of the wider media to the nascent boom inleveraged buyouts.

Between 1979 and 1989, it was estimated that there were over 2,000leveraged buyouts valued in excess of $250 million[27] Notable buyouts ofthis 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), SouthlandCorporation (1987), Jim Walter Corp (later Walter Industries, Inc., 1987), BlackRock (1988), Federated DepartmentStores (1988), Marvel Entertainment (1988), Uniroyal Goodrich Tire Company (1988) and Hospital Corporation ofAmerica (1989).

Because of the high leverage on many of the transactions of the 1980s, failed deals occurred regularly, however thepromise of attractive returns on successful investments attracted more capital. With the increased leveraged buyoutactivity and investor interest, the mid-1980s saw a major proliferation of private equity firms. Among the majorfirms founded in this period were:Bain Capital, Chemical Venture Partners, Hellman & Friedman, Hicks & Haas, (later Hicks Muse Tate & Furst), TheBlackstone 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 inexisting private equity funds was founded and then, two years later in 1984, First Reserve Corporation, the firstprivate equity firm focused on the energy sector, was founded.

Venture capital in the 1980sThe 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 thedecade, there were over 650 firms by the end of the 1980s, each searching for the next major "home run". While thenumber of firms multiplied, the capital managed by these firms increased only 11% from $28 billion to $31 billionover the course of the decade.[28]

The growth the industry was hampered by sharply declining returns and certain venture firms began posting lossesfor the first time. In addition to the increased competition among firms, several other factors impacted returns. Themarket for initial public offerings cooled in the mid-1980s before collapsing after the stock market crash in 1987 andforeign corporations, particularly from Japan and Korea, flooded early stage companies with capital.[28]

History of private equity and venture capital 8

In response to the changing conditions, corporations that had sponsored in-house venture investment arms, includingGeneral Electric and Paine Webber either sold off or closed these venture capital units. Additionally, venture capitalunits 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 maturecompanies. Even industry founders J.H. Whitney & Company and Warburg Pincus began to transition towardleveraged buyouts and growth capital investments.[28] [29] [30] Many of these venture capital firms attempted to stayclose to their areas of expertise in the technology industry by acquiring companies in the industry that had reachedcertain 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 atotal 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 includingDraper Fisher Jurvetson (originally Draper Associates) in 1985 and Canaan Partners in 1987 among others.

Corporate raiders, hostile takeovers and greenmailAlthough buyout firms generally had different aims and methods, they were often lumped in with the "corporateraiders" who came on the scene in the 1980s. The raiders were best known for hostile bids -- takeover attempts thatwere opposed by management. By contrast, private equity firms generally attempted to strike deals with boards andCEOs, though in many cases in the 1980s they allied with managements that were already under pressure fromraiders. 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 laidoff. 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 takeoveror corporate raid and pursued drastic defensive measures including poison pills, golden parachutes and increasingdebt 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 andreceive an incentive payment (effectively a bribe) from the company in order to avoid pursuing a hostile takeover ofthe company. Greenmail represented a transfer payment from a company's existing shareholders to a third partyinvestor 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 marketparticipants.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 AsherEdelman. Carl Icahn developed a reputation as a ruthless corporate raider after his hostile takeover of TWA in1985.[33] The result of that takeover was Icahn systematically selling TWA's assets to repay the debt he used topurchase the company, which was described as asset stripping.[34] In 1985, Pickens was profiled on the cover ofTime 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 "Activistshareholders".Many of the corporate raiders were onetime clients of Michael Milken, whose investment banking firm DrexelBurnham Lambert helped raise blind pools of capital with which corporate raiders could make a legitimate attempt totake 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 TriangleIndustries (later Triarc) to give credibility for takeovers, representing the first major blind pool raised for thispurpose. Two years later, in 1986, Wickes Companies, a holding company run by Sanford Sigoloff raised a $1.2billion blind pool.[36]

History of private equity and venture capital 9

In 1985, Milken raised $750 million for a similar blind pool for Ronald Perelman which would ultimately proveinstrumental in acquiring his biggest target: The Revlon Corporation. In 1980, Ronald Perelman, the son of awealthy 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 andfailed to acquire it 10 years earlier.[37] Perelman would ultimately divest the company's core business and useMacAndrews & Forbes as a holding company investment vehicle for subsequent leveraged buyouts includingTechnicolor, 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 andmanagement, 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 equityfirm 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 wassold 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 salesof stock. As of December 31, 2007, Perelman still retains a minority ownership interest in Revlon. The Revlontakeover, because of its well-known brand, was profiled widely by the media and brought new attention to theemerging boom in leveraged buyout activity.In later years, Milken and Drexel would shy away from certain of the more "notorious" corporate raiders as Drexeland the private equity industry attempted to move upscale.

RJR Nabisco and the Barbarians at the GateLeveraged 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 1980sproved to be its most ambitious and marked both a high water mark and a sign of the beginning of the end of theboom that had begun nearly a decade earlier. In 1989, KKR closed on a $31.1 billion dollar takeover of RJRNabisco. It was, at that time and for over 17 years, the largest leverage buyout in history. The event was chronicledin the book, Barbarians at the Gate: The Fall of RJR Nabisco, and later made into a television movie starring JamesGarner.F. Ross Johnson was the President and CEO of RJR Nabisco at the time of the leveraged buyout and Henry Kraviswas a general partner at Kohlberg Kravis Roberts. The leveraged buyout was in the amount of $25 billion (plusassumed debt), and the battle for control took place between October and November 1988. KKR would eventuallyprevail in acquiring RJR Nabisco at $109 per share marking a dramatic increase from the original announcement thatShearson Lehman Hutton would take RJR Nabisco private at $75 per share. A fierce series of negotiations andhorse-trading ensued which pitted KKR against Shearson Lehman Hutton and later Forstmann Little & Co. Many ofthe major banking players of the day, including Morgan Stanley, Goldman Sachs, Salomon Brothers, and MerrillLynch 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

History of private equity and venture capital 10

Ross Johnson on the cover of their December 1988 issue along with the headline, "A Game of Greed: This mancould 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 asa deal-breaker in KKR's favor was little more than an excuse to reject Ross Johnson's higher payout of $112 pershare. 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 and2007, a number of leveraged buyout transactions were completed that for the first time surpassed the RJR Nabiscoleveraged buyout in terms of nominal purchase price. However, adjusted for inflation, none of the leveraged buyoutsof the 2006 – 2007 period would surpass RJR Nabisco. Unfortunately for KKR, size would not equate with successas the high purchase price and debt load would burden the performance of the investment. It had to pump additionalequity into the company a year after the buyout closed and years later, when it sold the last of its investment, it hadchalked up a $700 million loss.[44]

Interestingly, two years earlier, in 1987, Jerome Kohlberg, Jr. resigned from Kohlberg Kravis Roberts & Co. overdifferences in strategy. Kohlberg did not favor the larger buyouts (including Beatrice Companies (1985) andSafeway (1986) and would later likely have included the 1989 takeover of RJR Nabisco), highly leveragedtransactions or hostile takeovers being pursued increasingly by KKR.[45] The split would ultimately proveacrimonious as Kohlberg sued Kravis and Roberts for what he alleged were improper business tactics. The case waslater settled out of court.[46] Instead, Kohlberg chose to return to his roots, acquiring smaller, middle-marketcompanies and in 1987, he would found a new private equity firm Kohlberg & Company along with his son JamesA. Kohlberg, at the time a KKR executive. Jerome Kohlberg would continue investing successfully for another sevenyears 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 asmajor 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 severallarge buyouts including Robert Campeau's 1988 buyout of Federated Department Stores, the 1986 buyout of theRevco drug stores, Walter Industries, FEB Trucking and Eaton Leonard. Additionally, the RJR Nabisco deal wasshowing signs of strain, leading to a recapitalization in 1990 that involved the contribution of $1.7 billion of newequity from KKR.[48] Additionally, in response to the threat of unwelcome LBOs, certain companies adopted anumber of techniques, such as the poison pill, to protect them against hostile takeovers by effectively self-destructingthe company if it were to be taken over (these practices are increasingly discredited).

The collapse of Drexel Burnham LambertDrexel Burnham Lambert was the investment bank most responsible for the boom in private equity during the 1980sdue to its leadership in the issuance of high-yield debt. The firm was first rocked by scandal on May 12, 1986, whenDennis Levine, a Drexel managing director and investment banker, was charged with insider trading. Levine pleadedguilty to four felonies, and implicated one of his recent partners, arbitrageur Ivan Boesky. Largely based oninformation Boesky promised to provide about his dealings with Milken, the Securities and Exchange Commissioninitiated an investigation of Drexel on November 17. Two days later, Rudy Giuliani, the United States Attorney forthe 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

History of private equity and venture capital 11

department. Giuliani began seriously considering indicting Drexel under the powerful Racketeer Influenced andCorrupt 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 $1billion in lieu of having its assets frozen, unnerved many at Drexel. Most of Drexel's capital was borrowed money, asis 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 survivea month at most.[50]

With literally minutes to go before being indicted, Drexel reached an agreement with the government in which itpleaded nolo contendere (no contest) to six felonies – three counts of stock parking and three counts of stockmanipulation.[49] It also agreed to pay a fine of $650 million – at the time, the largest fine ever levied undersecurities laws. Milken left the firm after his own indictment in March 1989.[50] [51] Effectively, Drexel was now aconvicted felon.In April 1989, Drexel settled with the SEC, agreeing to stricter safeguards on its oversight procedures. Later thatmonth, 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. OnFebruary 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 ReserveSystem, Drexel Burnham Lambert officially filed for Chapter 11 bankruptcy protection.[50]

S&L and the shutdown of the Junk Bond MarketIn the 1980s, the boom in private equity transactions, specifically leveraged buyouts, was driven by the availabilityof financing, particularly high-yield debt, also known as "junk bonds". The collapse of the high yield market in 1989and 1990 would signal the end of the LBO boom. At that time, many market observers were pronouncing the junkbond 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 increaseddramatically to 4.3% of the then $190 billion market and an additional 2.6% of issuance defaulted in the first halfof 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 thecost of debt in the high yield market significantly more expensive than it had been previously.[52] [53] The marketshut down altogether for lower rated issuers.

• The mandated withdrawal of savings and loans from the high yield market. In August 1989, the U.S. Congressenacted the Financial Institutions Reform, Recovery and Enforcement Act of 1989 as a response to the savingsand loan crisis of the 1980s. Under the law, savings and loans (S&Ls) could no longer invest in bonds that wererated below investment grade. Additionally, S&Ls were mandated to sell their holdings by the end of 1993creating 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 periodincluding: Apollo Management, Madison Dearborn and TPG Capital.

History of private equity and venture capital 12

The second private equity boom and the origins of modern private equityBeginning roughly in 1992, three years after the RJR Nabisco buyout, and continuing through the end of the decadethe private equity industry once again experienced a tremendous boom, both in venture capital (as will be discussedbelow) 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, outpacingthe growth of almost every other asset class.[24]

Resurgence of leveraged buyoutsPrivate 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 itbegan to earn a new degree of legitimacy and respectability. Although in the 1980s, many of the acquisitions madewere unsolicited and unwelcome, private equity firms in the 1990s focused on making buyouts attractivepropositions for management and shareholders. According to The Economist, “[B]ig companies that would oncehave 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 theyacquired, using less leverage in the acquisition. In the 1980s leverage would routinely represent 85% to 95% of thepurchase price of a company as compared to average debt levels between 20% and 40% in leveraged buyouts in the1990s and the first decade of the 21st century. KKR's 1986 acquisition of Safeway, for example, was completed with97% leverage and 3% equity contributed by KKR, whereas KKR's acquisition of TXU in 2007 was completed withapproximately 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 incentivesfor management to build long-term value.The Thomas H. Lee Partners acquisition of Snapple Beverages, in 1992, is often described as the deal that markedthe resurrection of the leveraged buyout after several dormant years.[54] Only eight months after buying thecompany, Lee took Snapple Beverages public and in 1994, only two years after the original acquisition, Lee sold thecompany to Quaker Oats for $1.7 billion. Lee was estimated to have made $900 million for himself and his investorsfrom 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, whohad begun investing in private equity in 1974, would find new prominence in the private equity industry and catapulthis 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 underthe 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 ofleveraged buyouts. Lee built a syndicated leveraged finance business and related advisory businesses including thefirst dedicated financial sponsor coverage group, which covered private equity firms in much the same way thatinvestment 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

History of private equity and venture capital 13

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 Associationwas initially founded as an informal networking group for limited partner investors in private equity funds in theearly 1990s. However the organization would evolve into an advocacy organization for private equity investors withmore than 200 member organizations from 10 countries. As of the end of 2007, ILPA members had total assets undermanagement in excess of $5 trillion with more than $850 billion of capital commitments to private equityinvestments.

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 hotstartups, excess supply of IPOs and the inexperience of many venture capital fund managers. Unlike the leveragedbuyout industry, after total capital raised increased to $3 billion in 1983, growth in the venture capital industryremained limited through the 1980s and the first half of the 1990s increasing to just over $4 billion more than adecade later in 1994.After a shakeout of venture capital managers, the more successful firms retrenched, focusing increasingly onimproving operations at their portfolio companies rather than continuously making new investments. Results wouldbegin to turn very attractive, successful and would ultimately generate the venture capital boom of the 1990s. FormerWharton Professor Andrew Metrick refers to these first 15 years of the modern venture capital industry beginning in1980 as the "pre-boom period" in anticipation of the boom that would begin in 1995 and last through the bursting ofthe 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 SiliconValley benefited from a huge surge of interest in the nascent Internet and other computer technologies. Initial publicofferings of stock for technology and other growth companies were in abundance and venture firms were reapinglarge 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!.

History of private equity and venture capital 14

The bursting of the Internet Bubble and the private equity crash (2000 to2003)

The technology-heavy NASDAQ Composite index peaked at 5,048 in March2000, reflecting the high point of the dot-com bubble.

The Nasdaq crash and technology slump thatstarted in March 2000 shook virtually the entireventure capital industry as valuations for startuptechnology companies collapsed. Over the nexttwo years, many venture firms had been forcedto write-off large proportions of theirinvestments and many funds were significantly"under water" (the values of the fund'sinvestments were below the amount of capitalinvested). Venture capital investors sought toreduce size of commitments they had made toventure capital funds and in numerous instances,investors sought to unload existing commitmentsfor cents on the dollar in the secondary market.By mid-2003, the venture capital industry hadshriveled to about half its 2001 capacity.Nevertheless, PricewaterhouseCoopers' MoneyTree Survey [59] shows that total venture capital investments heldsteady 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 in2000, 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 rangedfrom 0.164% to 0.182 % in 2003 and 2004. The revival of an Internet-driven environment (thanks to deals such aseBay's purchase of Skype, the News Corporation's purchase of MySpace.com, and the very successful Google.comand Salesforce.com IPOs) have helped to revive the venture capital environment. However, as a percentage of theoverall private equity market, venture capital has still not reached its mid-1990s level, let alone its peak in 2000.

Stagnation in the LBO marketMeanwhile, 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 fromthe 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 largeportion of the overall high yield universe of issuers, dragged down the entire high yield market. Overall corporatedefault rates surged to levels unseen since the 1990 market collapse rising to 6.3% of high yield issuance in 2000 and8.9% of issuance in 2001. Default rates on junk bonds peaked at 10.7 percent in January 2002 according toMoody's.[60] [61] As a result, leveraged buyout activity ground to a halt.[62] [63] The major collapses of formerhigh-fliers including WorldCom, Adelphia Communications, Global Crossing and Winstar Communications wereamong the most notable defaults in the market. In addition to the high rate of default, many investors lamented thelow 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

History of private equity and venture capital 15

peak of the 1990s stock market bubble.[65] [66] [67] Similarly, Forstmann suffered major losses from investments inMcLeodUSA and XO Communications.[68] [69] Tom Hicks resigned from Hicks Muse at the end of 2004 andForstmann Little was unable to raise a new fund. The treasure of the State of Connecticut, sued Forstmann Little toreturn the state's $96 million investment to that point and to cancel the commitment it made to take its totalinvestment to $200 million.[70] The humbling of these private equity titans could hardly have been predicted by theirinvestors in the 1990s and forced fund investors to conduct due diligence on fund managers more carefully andinclude 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 higherequity contributions than had been seen. Private equity firms benefited from the lower valuation multiples. As aresult, despite the relatively limited activity, those funds that invested during the adverse market conditions deliveredattractive returns to investors. Meanwhile, in Europe LBO activity began to increase as the market continued tomature. In 2001, for the first time, European buyout activity exceeded US activity with $44 billion of dealscompleted in Europe as compared with just $10.7 billion of deals completed in the US. This was a function of thefact 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 wasincreasingly active in these years was the nascent secondary market for private equity interests. Secondarytransaction volume increased from historical levels of 2% or 3% of private equity commitments to 5% of theaddressable 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 portfoliosthat were typically used as a means to gain entry to lucrative leveraged finance and mergers and acquisitionsassignments but had created hundreds of millions of dollars of losses. Some of the most notable financial institutionsto 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 reelingfrom major losses in telecommunications and technology companies and had been severely constrained by tightcredit markets. As 2003 got underway, private equity began a five year resurgence that would ultimately result in thecompletion of 13 of the 15 largest leveraged buyout transactions in history, unprecedented levels of investmentactivity 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 tradedcompanies 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 ofcorporate 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 focuson short term earnings rather than long term value creation, many public company executives lamented the extra costand bureaucracy associated with Sarbanes-Oxley compliance. For the first time, many large corporations saw privateequity ownership as potentially more attractive than remaining public. Sarbanes-Oxley would have the oppositeeffect on the venture capital industry. The increased compliance costs would make it nearly impossible for venturecapitalists to bring young companies to the public markets and dramatically reduced the opportunities for exits viaIPO. Instead, venture capitalists have been forced increasingly to rely on sales to strategic buyers for an exit of theirinvestment.[74]

History of private equity and venture capital 16

Interest rates, which began a major series of decreases in 2002 would reduce the cost of borrowing and increase theability of private equity firms to finance large acquisitions. Lower interest rates would encourage investors to returnto relatively dormant high-yield debt and leveraged loan markets, making debt more readily available to financebuyouts. Additionally, alternative investments also became increasingly important as investors focused on yieldsdespite 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 readilyavailable. In 2001, for example, BT Group agreed to sell its international yellow pages directories business (YellGroup) 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 publisherMcLeodUSA for about $600 million, and floated on London's FTSE in 2003.

Resurgence of the large buyoutMarked by the two-stage buyout of Dex Media at the end of 2002 and 2003, large multi-billion dollar U.S. buyoutscould once again obtain significant high yield debt financing and larger transactions could be completed. The CarlyleGroup, Welsh, Carson, Anderson & Stowe, along with other private investors, led a $7.5 billion buyout ofQwestDex. The buyout was the third largest corporate buyout since 1989. QwestDex's purchase occurred in twostages: a $2.75 billion acquisition of assets known as Dex Media East in November 2002 and a $4.30 billionacquisition 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 wasunderway. 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 TRWAutomotive 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 thistime 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 akinder, gentler version, one thing remains clear: private equity is now enjoying a "Golden Age." And withreturns 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 theleverage levels and financing terms obtained by financial sponsors in their buyouts. Some of the notable buyouts ofthis period include: Dollarama (2004), Toys "R" Us (2004), The Hertz Corporation (2005), Metro-Goldwyn-Mayer(2005) and SunGard (2005).

History of private equity and venture capital 17

Age of the mega-buyout

David Rubinstein, the head of the Carlyle Group, the largestprivate equity firm (by investor commitments) during the

2006-07 buyout boom.[79]

As 2005 ended and 2006 began, new "largest buyout"records were set and surpassed several times with nine ofthe top ten buyouts at the end of 2007 having beenannounced in an 18-month window from the beginning of2006 through the middle of 2007. Additionally, the buyoutboom was not limited to the United States as industrializedcountries in Europe and the Asia-Pacific region also sawnew records set. In 2006, private equity firms bought 654U.S. companies for $375 billion, representing 18 times thelevel of transactions closed in 2003.[80] Additionally, U.S.based private equity firms raised $215.4 billion in investorcommitments to 322 funds, surpassing the previous recordset in 2000 by 22% and 33% higher than the 2005fundraising total.[81] However, venture capital funds, whichwere responsible for much of the fundraising volume in 2000 (the height of the dot-com bubble), raised only $25.1billion 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 OfficeProperties (2006 ), Freescale Semiconductor (2006), GMAC (2006), HCA (2006), Kinder Morgan (2006), Harrah'sEntertainment (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 equityAlthough there had previously been certain instances of publicly traded private equity vehicles, the convergence ofprivate equity and the public equity markets attracted significantly greater attention when several of the largestprivate equity firms pursued various options through the public markets. Taking private equity firms and privateequity funds public appeared an unusual move since private equity funds often buy public companies listed onexchange and then take them private. Private equity firms are rarely subject to the quarterly reporting requirementsof 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 publicmarkets. 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 privateequity 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 toinvest in a traditional private equity limited partnership to gain exposure to a portfolio of private equityinvestments.

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

History of private equity and venture capital 18

trading volume was limited.[85] Initially, a handful of other private equity firms, including Blackstone, and hedgefunds 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 froman 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 secondarysales of selected limited partnership interests in and undrawn commitments to certain KKR-managed funds in orderto generate liquidity and repay borrowings.[88]

Schwarzman's Blackstone Group completed the first major IPO of aprivate equity firm in June 2007.[79]

On March 22, 2007, after nine months of secretpreparations, the Blackstone Group filed with theSEC[89] to raise $4 billion in an initial publicoffering. On June 21, Blackstone sold a 12.3% stakein its ownership to the public for $4.13 billion in thelargest U.S. IPO since 2002.[90] Traded on the NewYork 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 theSEC[93] in July 2007 to raise $1.25 billion by sellingan ownership interest in its managementcompany.[94] KKR had previously listed its KKR Private Equity Investors (KPE) private equity fund vehicle in2006. The onset of the credit crunch and the shutdown of the IPO market would dampen the prospects of obtaining avaluation 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. InSeptember 2007, the Carlyle Group sold a 7.5% interest in its management company to Mubadala DevelopmentCompany, which is owned by the Abu Dhabi Investment Authority (ADIA) for $1.35 billion, which valued Carlyleat approximately $20 billion.[95] Similarly, in January 2008, Silver Lake Partners sold a 9.9% stake in itsmanagement 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 July2007. By pursuing a private placement rather than a public offering, Apollo would be able to avoid much of thepublic scrutiny applied to Blackstone and KKR.[97] [98] In April 2008, Apollo filed with the SEC[99] to permit someholders of its privately traded stock to sell their shares on the New York Stock Exchange.[100] In April 2004, Apolloraised $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 asby making direct equity investments in companies. The Company also invests in the securities of publiccompanies.[101]

Historically, in the United States, there had been a group of publicly traded private equity firms that were registeredas business development companies (BDCs) under the Investment Company Act of 1940.[102] Typically, BDCs arestructured similar to real estate investment trusts (REITs) in that the BDC structure reduces or eliminates corporateincome 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, discussedearlier) are: American Capital Strategies (NASDAQ: ACAS), Allied Capital Corp((NASDAQ:ALD), Ares CapitalCorporation (NASDAQ:ARCC), Gladstone Investment Corp (NASDAQ:GAIN) and Kohlberg Capital Corp(NASDAQ:KCAP).

History of private equity and venture capital 19

Secondary market and the evolution of the private equity asset classIn the wake of the collapse of the equity markets in 2000, many investors in private equity sought an early exit fromtheir outstanding commitments.[103] The surge in activity in the secondary market, which had previously been arelatively small niche of the private equity industry, prompted new entrants to the market, however the market wasstill characterized by limited liquidity and distressed prices with private equity funds trading at significant discountsto fair value.Beginning in 2004 and extending through 2007, the secondary market transformed into a more efficient market inwhich 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 sellerswere distressed to an active market with ample supply of assets and numerous market participants.[104] By 2006active portfolio management had become far more common in the increasingly developed secondary market and anincreasing number of investors had begun to pursue secondary sales to rebalance their private equity portfolios. Thecontinued evolution of the private equity secondary market reflected the maturation and evolution of the largerprivate equity industry. Among the most notable publicly disclosed secondary transactions (it is estimated that overtwo-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 andhigh-yield debt markets.[106] [107] The markets had been highly robust during the first six months of 2007, withhighly issuer friendly developments including PIK and PIK Toggle (interest is "Payable In Kind") and covenant lightdebt widely available to finance large leveraged buyouts. July and August saw a notable slowdown in issuance levelsin the high yield and leveraged loan markets with only few issuers accessing the market. Uncertain marketconditions led to a significant widening of yield spreads, which coupled with the typical summer slowdown led tomany companies and investment banks to put their plans to issue debt on hold until the autumn. However, theexpected rebound in the market after Labor Day 2007 did not materialize and the lack of market confidenceprevented deals from pricing. By the end of September, the full extent of the credit situation became obvious asmajor lenders including Citigroup and UBS AG announced major writedowns due to credit losses. The leveragedfinance markets came to a near standstill.[108] As a result of the sudden change in the market, buyers would begin towithdraw 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), ClearChannel Communications (2007) and BCE (2007).Additionally, the credit crunch has prompted buyout firms to pursue a new group of transactions in order to deploytheir 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 thesetransactions completed in the depths of the credit crunch include Apollo Management's acquisition of the CitigroupLoan Portfolio (2008) and TPG Capital's PIPE investment in Washington Mutual (2008). According to investors andfund managers, the consensus among industry members in late 2009 was that private equity firms will need tobecome more like asset managers, offering buyouts as just part of their portfolio, or else focus tightly on specificsectors in order to prosper. The industry must also become better in adding value by turning businesses around ratherthan pure financial engineering[109] .

History of private equity and venture capital 20

Responses to private equity

1980s reflections of private** equityAlthough private equity rarely received a thorough treatment in popular culture, several films did featurestereotypical "corporate raiders" prominently. Among the most notable examples of private equity featured in motionpictures 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 youngstockbroker 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 thecorporate pension fund. Gekko would become a symbol in popular culture for unrestrained greed (with thesignature 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 hissights on New England Wire and Cable, a small-town business run by family patriarch Gregory Peck who isprincipally 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 corporateraider who intends to destroy the hard work of a family-run business by acquiring the company in a hostiletakeover 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 sellerabout the fight over RJR Nabisco linked private equity to hostile takeovers and assaults on management. A blisteringstory on the front page of the Wall Street Journal the same year about KKR's buyout of the Safeway supermarketchain painted a much more damaging picture.[111] The piece, which later won a Pulitzer Prize, began with the suicideof a Safeway worker in Texas who had been laid off and went on to chronicle how KKR had sold off hundreds ofstores after the buyout and slashed jobs.

Contemporary reflections of private equity and private equity controversiesCarlyle group featured prominently in Michael Moore's 2003 film Fahrenheit 9-11. The film suggested that TheCarlyle Group exerted tremendous influence on U.S. government policy and contracts through their relationship withthe president’s father, George H. W. Bush, a former senior adviser to the Carlyle Group. Additionally, Moore citedrelationships 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 billionCrusader artillery rocket system developed for the U.S. Army is one of the only weapons systems canceled by theBush administration.[112]

Over the next few years, attention intensified on private equity as the size of transactions and profile of thecompanies increased. The attention would increase significantly following a series of events involving TheBlackstone Group: the firm's initial public offering and the birthday celebration of its CEO. The Wall Street Journalobserving Blackstone Group's Steve Schwarzman's 60th birthday celebration in February 2007 described the event asfollows:[113]

The Armory's entrance hung with banners painted to replicate Mr. Schwarzman's sprawling Park Avenueapartment. 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 anumber from "A Chorus Line." Singer Patti LaBelle led the Abyssinian Baptist Church choir in a tune aboutMr. Schwarzman. Attendees included Colin Powell and New York Mayor Michael Bloomberg. The menuincluded lobster, baked Alaska and a 2004 Louis Jadot Chassagne Montrachet, among other fine wines.

History of private equity and venture capital 21

Schwarzman received a severe backlash from both critics of the private equity industry and fellow investors inprivate equity. The lavish event which reminded many of the excesses of notorious executives including BernieEbbers (WorldCom) and Dennis Kozlowski (Tyco International). David Bonderman, the founder of TPG Capitalremarked, "We have all wanted to be private – at least until now. When Steve Schwarzman's biography with all thedollar signs is posted on the web site none of us will like the furor that results – and that's even if you like RodStewart."[113] As the IPO drew closer, there were moves by a number of congressman and senators to block the stockoffering and to raise taxes on private equity firms and/or their partners -- proposals many attributed in part to theextravagance of the party.[114]

Rubinstein's fears would be confirmed when in 2007, the Service Employees International Union launched acampaign against private equity firms, specifically the largest buyout firms through public events, protests as well asleafleting and web campaigns.[115] [116] [117] A number of leading private equity executives were targeted by theunion members[118] however the SEIU's campaign was non nearly as effective at slowing the buyout boom as thecredit 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 highlightingthe role of sovereign wealth funds in private equity. The SEIU pushed legislation in California that would disallowinvestments by state agencies (particularly CalPERS and CalSTRS) in firms with ties to certain sovereign wealthfunds.[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 majorityof their income is derived from carried interest, payments received from the profits on a private equity fund'sinvestments) 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 EconomicsPhiladelphia, Pennsylvania. October 24, 2007.

[8] Draper Investment Company Histoy (http:/ / www. draperco. com/ history. html) Retrieved, July 2010

History of private equity and venture capital 22

[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 ofWaterman 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 AmericanSteamship 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.Accessed May 22, 2008

[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.[18] 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)[19] Barbarians at the Gate, p. 136-140[20] David Carey and John E. Morris, King of Capital The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone (Crown

2010) (http:/ / www. randomhouse. com/ catalog/ display. pperl?isbn=9780307452993), pp. 13-14[21] Saunders, Laura. How The Government Subsidizes Leveraged Takeovers (http:/ / www. forbes. com/ forbes/ 1988/ 1128/ 192_print. html).

Forbes, November 28, 1988.[22] 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 deemedpotentially risky. Under the revised 1978 interpretation, the concept of portfolio diversification of risk, measuring risk at the aggregateportfolio level rather than the investment level to satisfy fiduciary standards would also be accepted.

[23] Taylor, Alexander L. " Boom Time in Venture Capital (http:/ / www. time. com/ time/ magazine/ article/ 0,9171,954903-3,00. html)". TIMEmagazine, Aug. 10, 1981.

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[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). .[110] King of Capital, pp. 98-100[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, June13, 2007.

[114] King of Capital, pp. 271-276[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 EquityMarket. Staff Study 168, Board of Governors of the Federal Reserve System.

• Gibson, Paul. "The Art of Getting Funded." Electronic Business, March 1999.• Gladstone, David J. Venture Capital Handbook. Rev. ed. Englewood Cliffs, NJ: Prentice Hall, 1988.• Hsu, D., and Kinney, M (2004). Organizing venture capital: the rise and demise of American Research and

Development Corporation (http:/ / brie. berkeley. edu/ ~briewww/ publications/ WP163. pdf), 1946-1973.Working paper 163. Accessed May 22, 2008

• Littman, Jonathan. "The New Face of Venture Capital." Electronic Business, March 1998.• Loewen, J. (2008). Money Magnet: Attract Investors to Your Business: John Wiley & Sons. ISBN

978-0-470-15575-2

History of private equity and venture capital 26

• Loos, Nicolaus. Value Creation in Leveraged Buyouts (http:/ / www. unisg. ch/ www/ edis. nsf/wwwDisplayIdentifier/ 3052/ $FILE/ dis3052. pdf). Dissertation of the University of St. Gallen. Lichtenstein:Guttenberg AG, 2005. Accessed May 22, 2008.

• National Venture Capital Association, 2005, The 2005 NVCA Yearbook.• Schell, James M. Private Equity Funds: Business Structure and Operations. New York: Law Journal Press, 1999.• Sharabura, Scott. (2002). Private Equity: past, present, and future (http:/ / media. www. chibus. com/ media/

storage/ paper408/ news/ 2002/ 02/ 18/ GsbBusiness/ Private. 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.

• Trehan, R. (2006). The History Of Leveraged Buyouts (http:/ / www. 4hoteliers. com/ 4hots_fshw.php?mwi=1757). December 4, 2006. Accessed May 22, 2008.

• Cheffins, Brian. " THE ECLIPSE OF PRIVATE EQUITY (http:/ / www. cbr. cam. ac. uk/ pdf/ wp339. pdf)".Centre for Business Research, University Of Cambridge, 2007.

Early history of private equityThe early history of private equity relates to one of the major periods in the history of private equity and venturecapital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capitalexperienced 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 capitalfirms. The thirty-five year period from 1946 through the end of the 1970s was characterized by relatively smallvolumes of private equity investment, rudimentary firm organizations and limited awareness of and familiarity withthe private equity industry.

Pre-history

J.P. Morgan's acquisition of Carnegie SteelCompany in 1901 represents arguably the first

true modern buyout

Investors have been acquiring businesses and making minorityinvestments in privately held companies since the dawn of theindustrial revolution. Merchant bankers in London and Paris financedindustrial concerns in the 1850s; most notably Credit Mobilier,founded in 1854 by Jacob and Isaac Pereire, who together with NewYork based Jay Cooke financed the United States TranscontinentalRailroad.

Early history of private equity 27

Andrew Carnegie sold his steel company to J.P.Morgan in 1901 in arguably the first true modern

buyout

Later, J. Pierpont Morgan's J.P. Morgan & Co. would finance railroadsand other industrial companies throughout the United States. In certainrespects, J. Pierpont Morgan's 1901 acquisition of Carnegie SteelCompany from Andrew Carnegie and Henry Phipps for $480 millionrepresents the first true major buyout as they are thought of today.

Due to structural restrictions imposed on American banks under theGlass-Steagall Act and other regulations in the 1930s, there was noprivate merchant banking industry in the United States, a situation thatwas quite exceptional in developed nations. As late as the 1980s,Lester Thurow, a noted economist, decried the inability of the financialregulation 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 ofequity and debt securities. Investment banks would later enter thespace, however long after independent firms had become wellestablished.

With few exceptions, private equity in the first half of the 20th century was the domain of wealthy individuals andfamilies. The Vanderbilts, Whitneys, Rockefellers and Warburgs were notable investors in private companies in thefirst half of the century. In 1938, Laurance S. Rockefeller helped finance the creation of both Eastern Air Lines andDouglas Aircraft and the Rockefeller family had vast holdings in a variety of companies. Eric M. Warburg foundedE.M. Warburg & Co. in 1938, which would ultimately become Warburg Pincus, with investments in both leveragedbuyouts and venture capital.

Origins of modern private equityIt was not until after World War II that what is considered today to be true private equity investments began toemerge marked by the founding of the first two venture capital firms in 1946: American Research and DevelopmentCorporation. (ARDC) and J.H. Whitney & Company.[1]

ARDC was founded by Georges Doriot, the "father of venture capitalism"[2] (former dean of Harvard BusinessSchool), with Ralph Flanders and Karl Compton (former president of MIT), to encourage private sector investmentsin businesses run by soldiers who were returning from World War II. ARDC's significance was primarily that it wasthe first institutional private equity investment firm that raised capital from sources other than wealthy familiesalthough it had several notable investment successes as well.[3] ARDC is credited with the first major venture capitalsuccess 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 itsinvestment and an annualized rate of return of 101%).[4] Former employees of ARDC went on to found severalprominent venture capital firms including Greylock Partners (founded in 1965 by Charlie Waite and Bill Elfers) andMorgan, Holland Ventures, the predecessor of Flagship Ventures (founded in 1982 by James Morgan).[5] ARDCcontinued investing until 1971 with the retirement of Doriot. In 1972, Doriot merged ARDC with Textron afterhaving 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

Early history of private equity 28

million for its sixth institutional private equity fund in 2005.Before World War II, venture capital investments (originally known as "development capital") were primarily thedomain of wealthy individuals and families. One of the first steps toward a professionally-managed venture capitalindustry 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 helpthe financing and management of the small entrepreneurial businesses in the United States. Passage of the Actaddressed concerns raised in a Federal Reserve Board report to Congress that concluded that a major gap existed inthe capital markets for long-term funding for growth-oriented small businesses. Additionally, it was thought thatfostering 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 theU.S. economy was and still is the main goal of the SBIC program today.[6] The 1958 Act provided venture capitalfirms structured either as SBICs or Minority Enterprise Small Business Investment Companies (MESBICs) access tofederal funds which could be leveraged at a ratio of up to 4:1 against privately raised investment funds. The successof the Small Business Administration's efforts are viewed primarily in terms of the pool of professional privateequity investors that the program developed as the rigid regulatory limitations imposed by the program minimizedthe role of SBICs. In 2005, the SBA significantly reduced its SBIC program, though SBICs continue to make privateequity investments.

Early venture capital and the growth of Silicon Valley (1959 - 1981)

Sand Hill Road in Menlo Park, California, where many BayArea venture capital firms are based

During the 1960s and 1970s, venture capital firms focusedtheir investment activity primarily on starting and expandingcompanies. More often than not, these companies wereexploiting breakthroughs in electronic, medical ordata-processing technology. As a result, venture capital cameto be almost synonymous with technology finance.It is commonly noted that the first venture-backed startup wasFairchild Semiconductor (which produced the firstcommercially practicable integrated circuit), funded in 1959by what would later become Venrock Associates.[7] Venrockwas founded in 1969 by Laurance S. Rockefeller, the fourth ofJohn D. Rockefeller's six children as a way to allow otherRockefeller children to develop exposure to venture capitalinvestments.

It was also in the 1960s that the common form of privateequity fund, still in use today, emerged. Private equity firmsorganized limited partnerships to hold investments in whichthe investment professionals served as general partner and theinvestors, who were passive limited partners, put up thecapital. The compensation structure, still in use today, alsoemerged with limited partners paying an annual management fee of 1-2% and a carried interest typicallyrepresenting 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] byWilliam Henry Draper III and Franklin P. Johnson, Jr. In 1964 Bill Draper and Paul Wythes founded Sutter HillVentures, and Pitch Johnson formed Asset Management Company [9].

Early history of private equity 29

The growth of the venture capital industry was fueled by the emergence of the independent investment firms on SandHill 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 technologyindustries in the area. By the early 1970s, there were many semiconductor companies based in the Santa ClaraValley as well as early computer firms using their devices and programming and service companies.[9] Throughoutthe 1970s, a group of private equity firms, focused primarily on venture capital investments, would be founded thatwould become the model for later leveraged buyout and venture capital investment firms. In 1973, with the numberof 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 capitalfirms suffered a temporary downturn in 1974, when the stock market crashed and investors were naturally wary ofthis new kind of investment fund. It was not until 1978 that venture capital experienced its first major fundraisingyear, as the industry raised approximately $750 million. During this period, the number of venture firms alsoincreased. Among the firms founded in this period, in addition to Kleiner Perkins and Sequoia, that continue toinvest 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 lateryears the iPod, founded in 1978. In December 1980, Apple went public. Its offering of 4.6 million shares at $22each 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 personalinvestment of an estimated $200,000. Seven months later in December 1982, Hawkins secured $2 million ofventure 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 millionto fund the startup of Compaq, which would ultimately grow into one of the largest personal computermanufacturers before merging with Hewlett Packard in 2002.[16]

• Federal Express, Venture capitalists invested $80 million to help founder Frederick W. Smith purchase his firstDassault Falcon 20 airplanes.[17] [18]

• LSI Corporation was funded in 1981 with $6 million from noted venture capitalists including Sequoia Capital. Asecond round of financing for an additional $16 million was completed in March 1982. The firm went public onMay 13, 1983, netting $153 million, the largest technology IPO to that point.

Early history of private equity 30

Early history of leveraged buyouts (1955-1981)

McLean Industries and public holding companiesAlthough not strictly private equity, and certainly not labeled so at the time, the first leveraged buyout may havebeen the purchase by Malcolm McLean's McLean Industries, Inc. of Pan-Atlantic Steamship Company in January1955 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, $20million of Waterman cash and assets were used to retire $20 million of the loan debt. The newly elected board ofWaterman then voted to pay an immediate dividend of $25 million to McLean Industries.[20]

Similar to the approach employed in the McLean transaction, the use of publicly traded holding companies asinvestment vehicles to acquire portfolios of investments in corporate assets would become a new trend in the 1960spopularized by the likes of Warren Buffett (Berkshire Hathaway) and Victor Posner (DWG Corporation) and lateradopted 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 moretraditional leveraged buyouts and in many ways could be considered a forerunner of the later private equity firms. Infact, 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 DWGCorporation in 1966. Having gained control of the company, he used it as an investment vehicle that could executetakeovers of other companies. Posner and DWG are perhaps best known for the hostile takeover of Sharon SteelCorporation in 1969, one of the earliest such takeovers in the United States. Posner's investments were typicallymotivated 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 infinancial 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, employedmany of the same techniques in the creation on his Berkshire Hathaway conglomerate as Posner's DWG Corporationand in later years by more traditional private equity investors. In 1965, with the support of the company's board ofdirectors, Buffett assumed control of Berkshire Hathaway. At the time of Buffett's investment, Berkshire Hathawaywas a textile company, however, Buffett used Berkshire Hathaway as an investment vehicle to make acquisitions andminority investments in dozens of the insurance and reinsurance industries (GEICO) and varied companiesincluding: American Express, The Buffalo News, the Coca-Cola Company, Fruit of the Loom, Nebraska FurnitureMart and See's Candies. Buffett's value investing approach and focus on earnings and cash flows are characteristic oflater private equity investors. Buffett would distinguish himself relative to more traditional leveraged buyoutpractitioners through his reluctance to use leverage and hostile techniques in his investments.

KKR and the pioneers of private equityThe 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

Early history of private equity 31

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 departureand the formation of Kohlberg Kravis Roberts in that year. Most notably, Bear Stearns executive Cy Lewis hadrejected repeated proposals to form a dedicated investment fund within Bear Stearns and Lewis took exception to theamount of time spent on outside activities.[24] Early investors included the Hillman Family[25] By 1978, with therevision of the ERISA regulations, the nascent KKR was successful in raising its first institutional fund withapproximately $30 million of investor commitments.[26]

Meanwhile in 1974, Thomas H. Lee founded a new investment firm to focus on acquiring companies throughleveraged buyout transactions, one of the earliest independent private equity firms to focus on leveraged buyouts ofmore mature companies rather than venture capital investments in growth companies. Lee's firm, Thomas H. LeePartners, while initially generating less fanfare than other entrants in the 1980s, would emerge as one of the largestprivate 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 thatwould be survive through the various cycles both in leveraged buyouts and venture capital. Among the firmsfounded 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 FederalExpress.[27]

Management buyouts also came into existence in the late 1970s and early 1980s. One of the most notable earlymanagement 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 biglosses the following year and had to ask for protection from Japanese competitors.

Regulatory and tax changes impact the boomThe 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 tobondholders and dividends paid to stockholders. Carter's proposals did not achieve support from the businesscommunity or Congress and was not enacted. Because of the different tax treatment, the use of leverage to reducetaxes was popular among private equity investors and would become increasingly popular with the reduction ofthe 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

Early history of private equity 32

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 ratefrom 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 ofthe 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 orsince. 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 largestbooms in private equity culminating in the 1989 leveraged buyout of RJR Nabisco, which would reign as the largestleveraged buyout transaction for nearly 17 years. In 1980, the private equity industry would raise approximately $2.4billion of annual investor commitments and by the end of the decade in 1989 that figure stood at $21.9 billionmarking the tremendous growth experienced.[31]

See also• History of private equity and venture capital

• Private equity in the 1980s• Private equity in the 1990s• Private equity in the 21st century

• Private equity firms (category)• Venture capital firms (category)• Private equity and venture capital investors (category)• Financial sponsor• Private equity firm• Private equity fund• Private equity secondary market• Mezzanine capital• Private investment in public equity• Taxation of Private Equity and Hedge Funds• Investment banking• Mergers and acquisitions

Notes[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 EconomicsPhiladelphia, Pennsylvania. October 24, 2007.

[8] http:/ / www. draperco. com/ history. html Web site history

Early history of private equity 33

[9] In 1971, a series of articles entitled "Silicon Valley USA" were published in the Electronic News, a weekly trade publication, giving rise tothe 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 capitalindustry.

[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 twodecided 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

[19] On January 21, 1955, McLean Industries, Inc. purchased the capital stock of Pan Atlantic Steamship Corporation and Gulf Florida TerminalCompany, Inc. from Waterman Steamship Corporation. In May, McLean Industries, Inc. completed the acquisition of the common stock ofWaterman Steamship Corporation from its founders and other stockholders.

[20] 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 AmericanSteamship Corporation--Investigation of Control, July 8, 1957.

[21] Trehan, R. (2006). The History Of Leveraged Buyouts (http:/ / www. 4hoteliers. com/ 4hots_fshw. php?mwi=1757). December 4, 2006.Accessed May 22, 2008

[22] The History of Private Equity (http:/ / www. investmentu. com/ research/ private-equity-history. html) (Investment U, The Oxford Club[23] Barbarians at the Gate, p. 133-136[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)[26] Barbarians at the Gate, p. 136-140[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 investmentwas expected to adhere to risk standards on its own merits, limiting the ability of investment managers to make any investments deemedpotentially risky. Under the revised 1978 interpretation, the concept of portfolio diversification of risk, measuring risk at the aggregateportfolio 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)". TIMEmagazine, Aug. 10, 1981.

[31] Source: Thomson Financial's VentureXpert (http:/ / vx. thomsonib. com/ ) database for Commitments. Searching "All Private Equity Funds"(Venture Capital, Buyout and Mezzanine).

Early history of private equity 34

References• Ante, Spencer. Creative capital : Georges Doriot and the birth of venture capital. Boston: Harvard Business

School Press, 2008• Bance, A. (2004). Why and how to invest in private equity (http:/ / www. evca. com/ pdf/ Invest. pdf). European

Private Equity and Venture Capital Association (EVCA). Accessed May 22, 2008.• Bruck, Connie. The Predators' Ball. New York: Simon and Schuster, 1988.• Burrill, G. Steven, and Craig T. Norback. The Arthur Young Guide to Raising Venture Capital. Billings, MT:

Liberty House, 1988.• Burrough, Bryan. Barbarians at the Gate. New York : Harper & Row, 1990.• Craig. Valentine V. Merchant Banking: Past and Present (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

Development Corporation (http:/ / brie. berkeley. edu/ ~briewww/ publications/ WP163. pdf), 1946-1973.Working paper 163. Accessed May 22, 2008

• Littman, Jonathan. "The New Face of Venture Capital." Electronic Business, March 1998.• Loos, Nicolaus. Value Creation in Leveraged Buyouts (http:/ / www. unisg. ch/ www/ edis. nsf/

wwwDisplayIdentifier/ 3052/ $FILE/ dis3052. pdf). Dissertation of the University of St. Gallen. Lichtenstein:Guttenberg AG, 2005. Accessed May 22, 2008.

• National Venture Capital Association, 2005, The 2005 NVCA Yearbook.• Schell, James M. Private Equity Funds: Business Structure and Operations. New York: Law Journal Press, 1999.• Sharabura, S. (2002). Private Equity: past, present, and future (http:/ / media. www. chibus. com/ media/ storage/

paper408/ news/ 2002/ 02/ 18/ GsbBusiness/ Equity. Past. Present. And. Future-187504. shtml). GE CapitalSpeaker Discusses New Trends in Asset Class. Speech to GSB 2/13/2002. Accessed May 22, 2008.

• Trehan, R. (2006). The History Of Leveraged Buyouts (http:/ / www. 4hoteliers. com/ 4hots_fshw.php?mwi=1757). December 4, 2006. Accessed May 22, 2008.

• Cheffins, Brian. " THE ECLIPSE OF PRIVATE EQUITY (http:/ / www. cbr. cam. ac. uk/ pdf/ wp339. pdf)".Centre for Business Research, University Of Cambridge, 2007.

Private equity in the 1980s 35

Private equity in the 1980sPrivate equity in the 1980s relates to one of the major periods in the history of private equity and venturecapital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capitalexperienced growth along parallel although interrelated tracks.The development of the private equity and venture capital asset classes has occurred through a series of boom andbust cycles since the middle of the 20th century. The 1980s saw the first major boom and bust cycle in privateequity. The cycle which is typically marked by the 1982 acquisition of Gibson Greetings and ending just over adecade later was characterized by a dramatic surge in leveraged buyout (LBO) activity financed by junk bonds. Theperiod culminated in the massive buyout of RJR Nabisco before the near collapse of the leveraged buyout industry inthe late 1980s and early 1990s marked by the collapse of Drexel Burnham Lambert and the high-yield debt market.

Beginning of the LBO boom

Michael Milken, the man credited withcreating the market for high yield "junk"bonds and spurring the LBO boom of the

1980s

The beginning of the first boom period in private equity would be markedby the well-publicized success of the Gibson Greetings acquisition in 1982and would roar ahead through 1983 and 1984 with the soaring stock marketdriving 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 beknown as Wesray Capital Corporation, acquired Gibson Greetings, aproducer of greeting cards. The purchase price for Gibson was $80 million,of which only $1 million was rumored to have been contributed by theinvestors. By mid-1983, just sixteen months after the original deal, Gibsoncompleted a $290 million IPO and Simon made approximately $66million.[1] Simon and Wesray would later complete the $71.6 millionacquisition of Atlas Van Lines. The success of the Gibson Greetingsinvestment attracted the attention of the wider media to the nascent boom inleveraged buyouts.

Between 1979 and 1989, it was estimated that there were over 2,000leveraged buyouts valued in excess of $250 million[2] Notable buyouts ofthis period (not described elsewhere in this article) include:

• Malone & Hyde, 1984KKR completed the first buyout of a public company by tender offer, by acquiring the food distributor andsupermarket operator together with the company's chairman Joseph R. Hyde III.[3]

• Wometco Enterprises, 1984KKR completed the first billion-dollar buyout transaction to acquire the leisure-time company with interests intelevision, movie theaters and tourist attractions. The buyout comprised the acquisition of 100% of theoutstanding shares for $842 million and the assumption of $170 million of the company's outstanding debt.[4]

• Beatrice Companies, 1985KKR sponsored the $6.1 billion management buyout of Beatrice, which owned Samsonite and Tropicanaamong other consumer brands. At the time of its closing in 1985, Beatrice was the largest buyout completed.[5]

[6]

• Sterling Jewelers, 1985

Private equity in the 1980s 36

One of Thomas H. Lee's early successes was the acquisition of Akron, Ohio-based Sterling Jewelers for $28million. Lee reported put in less than $3 million and when the company was sold two years later for $210million walked away with over $180 million in profits. The combined company was an early predecessor towhat is now Signet Group, one of Europe's largest jewelry retail chains.[7]

• Revco Drug Stores , 1986The drug store chain was taken private in a management buyout transaction. However, within two years thecompany was unable to support its debt load and filed for bankruptcy protection.[8] Bondholders in the Revcobuyout ultimately contended that the buyout was so poorly constructed that the transaction should have beenunwound.[9]

• Safeway, 1986KKR completed a friendly $5.5 billion buyout of supermarket operator, Safeway, to help management avoidhostile overtures from Herbert and Robert Haft of Dart Drug.[10] Safeway was taken public again in 1990.

• Southland Corporation, 1987John Thompson, the founder of convenience store operator 7-Eleven, completed a $5.2 billion managementbuyout of the company he founded.[11] The buyout suffered from the 1987 stock market crash and after failinginitially raise high yield debt financing, the company was required to offer a portion of the company's stock asan inducement to invest in the company's bonds.[12] [13]

• Jim Walter Corp (later Walter Industries, Inc.), 1987KKR acquired the company for $3.3 billion in early 1988 but faced issues with the buyout almostimmediately. Most notably, a subsidiary of Jim Walter Corp (Celotex) faced a large asbestos lawsuit andincurred liabilities that the courts ruled would need to be satisfied by the parent company.[14] In 1989, theholding company that KKR used for the Jim Walter buyout filed for Chapter 11 bankruptcy protection.[15]

• Blackrock, 1988Blackstone Group began the leveraged buildup of BlackRock, which is an asset manager. Blackstone sold itsinterest in 1994 and today Blackrock is listed on the New York Stock Exchange.

• Federated Department Stores, 1988Robert Campeau's Campeau Corporation completed a $6.6 billion merger with Federated, owner of theBloomingdale's, Filene's and Abraham & Straus department stores.[16]

• Marvel Entertainment, 1988Ronald Perelman acquired the company and oversaw a major expansion of its titles in the early 1990s beforetaking the company public on the New York Stock Exchange in 1991.[17] [18] The company would later sufferas a result of its massive debt load and ultimately the bondholders, led by Carl Icahn would take control of thecompany.[19]

• Uniroyal Goodrich Tire Company, 1988Clayton & 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 Michelinfor $1.5 billion.[22]

• Hospital Corporation of America, 1989The 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 privateagain 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

Private equity in the 1980s 37

activity and investor interest, the mid-1980s saw a major proliferation of private equity firms. Among the majorfirms 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 inexisting private equity funds was founded and then, two years later in 1984, First Reserve Corporation, the firstprivate equity firm focused on the energy sector, was founded.

Venture capital in the 1980sThe 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 thedecade, there were over 650 firms by the end of the 1980s, each searching for the next major "home run". While thenumber of firms multiplied, the capital managed by these firms increased only 11% from $28 billion to $31 billionover the course of the decade.[24]

The growth the industry was hampered by sharply declining returns and certain venture firms began posting lossesfor the first time. In addition to the increased competition among firms, several other factors impacted returns. Themarket for initial public offerings cooled in the mid-1980s before collapsing after the stock market crash in 1987 andforeign 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, includingGeneral Electric and Paine Webber either sold off or closed these venture capital units. Additionally, venture capitalunits within Chemical Bank (today CCMP Capital), Citicorp (today Court Square Capital Partners and CVC CapitalPartners, First Chicago Bank (the predecessor of GTCR and Madison Dearborn Partners) and Continental IllinoisNational Bank (today CIVC Partners), among others, began shifting their focus from funding early stage companiestoward investments in more mature companies. Even industry founders J.H. Whitney & Company and WarburgPincus began to transition toward leveraged buyouts and growth capital investments.[24] [25] [26] Many of theseventure capital firms attempted to stay close to their areas of expertise in the technology industry by acquiringcompanies 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'sliquidation paid to the company's creditors.[27]

Although lower profile than their buyout counterparts, new leading venture capital firms were also formed includingInstitutional Venture Partners (IVP) in 1980, Draper Fisher Jurvetson (originally Draper Associates) in 1985 andCanaan Partners in 1987 among others.

Private equity in the 1980s 38

Corporate raiders, hostile takeovers and greenmailAlthough the "corporate raider" moniker is rarely applied to contemporary private equity investors, there is noformal distinction between a "corporate raid" and other private equity investments acquisitions of existingbusinesses. 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 manylarge publicly traded corporations reacted negatively to the threat of potential hostile takeover or corporate raid andpursued drastic defensive measures including poison pills, golden parachutes and increasing debt levels on thecompany'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 anincentive payment (effectively a bribe) from the company in order to avoid pursuing a hostile takeover of thecompany. Greenmail represented a transfer payment from a company's existing shareholders to a third party investorand provided no value to existing shareholders but did benefit existing managers. The practice of "greenmail" is nottypically 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 AsherEdelman. Carl Icahn developed a reputation as a ruthless corporate raider after his hostile takeover of TWA in1985.[28] The result of that takeover was Icahn systematically selling TWA's assets to repay the debt he used topurchase the company, which was described as asset stripping.[29] In later years, many of the corporate raiders wouldbe re-characterized as "Activist shareholders".Many of the corporate raiders were onetime clients of Michael Milken, whose investment banking firm, DrexelBurnham Lambert helped raise blind pools of capital with which corporate raiders could make a legitimate attempt totakeover 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 TriangleIndustries (later Triarc) to give credibility for takeovers, representing the first major blind pool raised for thispurpose. 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 proveinstrumental in acquiring his biggest target: The Revlon Corporation. In 1980, Ronald Perelman, the son of awealthy 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 andfailed to acquire it 10 years earlier.[31] Perelman would ultimately divest the company's core business and useMacAndrews & Forbes as a holding company investment vehicle for subsequent leveraged buyouts includingTechnicolor, 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 andmanagement, Perelman continued press forward with a hostile takeover raising his offer from an initial bid of $47.50per share until it reached $53.00 per share. After receiving a higher offer from a white knight, private equity firmForstmann Little & Company, Perelman's Pantry Pride finally was able to make a successful bid for Revlon, valuingthe company at $2.7 billion.[32] The buyout would prove troubling, burdened by a heavy debt load.[33] [34] [35] UnderPerelman's control, Revlon sold 4 divisions: two of which were sold for $1 billion, its vision care division was soldfor $574 million and its National Health Laboratories division was spun out to the public market in 1988. Revlonalso made acquisitions including Max Factor in 1987 and Betrix in 1989 later selling them to Procter & Gamble in1991.[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 boomin leveraged buyout activity.

Private equity in the 1980s 39

In later years, Milken and Drexel would shy away from certain of the more "notorious" corporate raiders as Drexeland the private equity industry attempted to move upscale.

RJR Nabisco and the Barbarians at the GateLeveraged 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 1980sproved to be its most ambitious and marked both a high water mark and a sign of the beginning of the end of theboom that had begun nearly a decade earlier. In 1989, KKR closed on a $31.1 billion dollar takeover of RJRNabisco. It was, at that time and for over 17 years, the largest leverage buyout in history. The event was chronicledin the book, Barbarians at the Gate: The Fall of RJR Nabisco, and later made into a television movie starring JamesGarner.F. Ross Johnson was the President and CEO of RJR Nabisco at the time of the leveraged buyout and Henry Kraviswas a general partner at Kohlberg Kravis Roberts. The leveraged buyout was in the amount of $25 billion (plusassumed debt), and the battle for control took place between October and November 1988. KKR would eventuallyprevail in acquiring RJR Nabisco at $109 per share marking a dramatic increase from the original announcement thatShearson Lehman Hutton would take RJR Nabisco private at $75 per share. A fierce series of negotiations andhorse-trading ensued which pitted KKR against Shearson Lehman Hutton and later Forstmann Little & Co. Many ofthe major banking players of the day, including Morgan Stanley, Goldman Sachs, Salomon Brothers, and MerrillLynch 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 pershare—a price that enabled it to proceed without the approval of RJR Nabisco's management. RJR's managementteam, working with Shearson Lehman and Salomon Brothers, submitted a bid of $112, a figure they felt certainwould 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 themanagement offer (backed by Shearson Lehman and Salomon) lacked a "reset", meaning that the final share pricemight have been lower than their stated $112 per share. Additionally, many in RJR's board of directors had grownconcerned at recent disclosures of Ross Johnson' unprecedented golden parachute deal. TIME magazine featuredRoss Johnson on the cover of their December 1988 issue along with the headline, "A Game of Greed: This mancould 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 asa deal-breaker in KKR's favor was little more than an excuse to reject Ross Johnson's higher payout of $112 pershare. 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 and2007, a number of leveraged buyout transactions were completed that for the first time surpassed the RJR Nabiscoleveraged buyout in terms of nominal purchase price. However, adjusted for inflation, none of the leveraged buyoutsof the 2006 – 2007 period would surpass RJR Nabisco. Unfortunately for KKR, size would not equate with successas 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. overdifferences in strategy. Kohlberg did not favor the larger buyouts (including Beatrice Companies (1985) andSafeway (1986) and would later likely have included the 1989 takeover of RJR Nabisco), highly leveragedtransactions or hostile takeovers being pursued increasingly by KKR.[38] The split would ultimately proveacrimonious as Kohlberg sued Kravis and Roberts for what he alleged were improper business tactics. The case waslater settled out of court.[39] Instead, Kohlberg chose to return to his roots, acquiring smaller, middle-marketcompanies and in 1987, he would found a new private equity firm Kohlberg & Company along with his son JamesA. Kohlberg, at the time a KKR executive. Jerome Kohlberg would continue investing successfully for another sevenyears before retiring from Kohlberg & Company in 1994 and turning his firm over to his son.[40]

Private equity in the 1980s 40

As the market reached its peak in 1988 and 1989, new private equity firms were founded which would emerge asmajor 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)By the end of the 1980s the excesses of the buyout market were beginning to show, with the bankruptcy of severallarge buyouts including Robert Campeau's 1988 buyout of Federated Department Stores, the 1986 buyout of theRevco drug stores, Walter Industries, FEB Trucking and Eaton Leonard. Additionally, the RJR Nabisco deal wasshowing signs of strain, leading to a recapitalization in 1990 that involved the contribution of $1.7 billion of newequity from KKR.[44] Additionally, in response to the threat of unwelcome LBOs, certain companies adopted anumber of techniques, such as the poison pill, to protect them against hostile takeovers by effectively self-destructingthe company if it were to be taken over (these practices are increasingly discredited).

Contemporary reflections of private equity

1980s reflections of private equityAlthough private equity rarely received a thorough treatment in popular culture, several films did featurestereotypical "corporate raiders" prominently. Among the most notable examples of private equity featured in motionpictures 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 stockbrokerto takeover failing but decent airline. Although Gekko makes a pretense of caring about the airline, his intentionsprove to be to destroy the airline, strip its assets and lay off its employees before raiding the corporate pensionfund. 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 hissights on New England Wire and Cable, a small-town business run by family patriarch Gregory Peck who isprincipally 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 corporateraider who intends to destroy the hard work of a family-run business by acquiring the company in a hostiletakeover 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.

Private equity in the 1980s 41

See also• History of private equity and venture capital

• Early history of private equity• Private equity in the 1990s• Private equity in the 21st century

• Private equity firms (category)• Venture capital firms (category)• Private equity and venture capital investors (category)• Financial sponsor• Private equity firm• Private equity fund• Private equity secondary market• Mezzanine capital• Private investment in public equity• Taxation of Private Equity and Hedge Funds• Investment banking• Mergers and acquisitions

Notes[1] Taylor, Alexander L. " Buyout Binge (http:/ / www. time. com/ time/ magazine/ article/ 0,9171,951242,00. html)". TIME magazine, Jul. 16,

1984.[2] Opler, T. and Titman, S. "The determinants of leveraged buyout activity: Free cash flow vs. financial distress costs." Journal of Finance,

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.

Private equity in the 1980s 42

[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

[28] 10 Questions for Carl Icahn (http:/ / www. time. com/ time/ magazine/ article/ 0,9171,1590446,00. html) by Barbara Kiviat, TIMEmagazine, Feb. 15, 2007

[29] TWA - Death Of A Legend (http:/ / www. stlmag. com/ media/ St-Louis-Magazine/ October-2005/ TWA-Death-Of-A-Legend/ ) by ElaineX. Grant, St Louis Magazine, Oct 2005

[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.[37] Game of Greed (http:/ / www. time. com/ time/ magazine/ 0,9263,7601881205,00. html) (TIME magazine, 1988)[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.[44] Wallace, Anise C. " Nabisco Refinance Plan Set (http:/ / query. nytimes. com/ gst/ fullpage.

html?res=9C0CE2D91E31F935A25754C0A966958260)." The New York Times, July 16, 1990.

Private equity in the 1980s 43

References• Ante, Spencer. Creative capital : Georges Doriot and the birth of venture capital. Boston: Harvard Business

School Press, 2008• Bance, A. (2004). Why and how to invest in private equity (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.• 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

Development Corporation (http:/ / brie. berkeley. edu/ ~briewww/ publications/ WP163. pdf), 1946-1973.Working paper 163. Accessed May 22, 2008

• Littman, Jonathan. "The New Face of Venture Capital." Electronic Business, March 1998.• Loos, Nicolaus. Value Creation in Leveraged Buyouts (http:/ / www. unisg. ch/ www/ edis. nsf/

wwwDisplayIdentifier/ 3052/ $FILE/ dis3052. pdf). Dissertation of the University of St. Gallen. Lichtenstein:Guttenberg AG, 2005. Accessed May 22, 2008.

• National Venture Capital Association, 2005, The 2005 NVCA Yearbook.• Schell, James M. Private Equity Funds: Business Structure and Operations. New York: Law Journal Press, 1999.• Sharabura, S. (2002). Private Equity: past, present, and future (http:/ / media. www. chibus. com/ media/ storage/

paper408/ news/ 2002/ 02/ 18/ GsbBusiness/ Equity. Past. Present. And. Future-187504. shtml). GE CapitalSpeaker Discusses New Trends in Asset Class. Speech to GSB 2/13/2002. Accessed May 22, 2008.

• Trehan, R. (2006). The History Of Leveraged Buyouts (http:/ / www. 4hoteliers. com/ 4hots_fshw.php?mwi=1757). December 4, 2006. Accessed May 22, 2008.

• Cheffins, Brian. " THE ECLIPSE OF PRIVATE EQUITY (http:/ / www. cbr. cam. ac. uk/ pdf/ wp339. pdf)".Centre for Business Research, University Of Cambridge, 2007.

Private equity in the 1990s 44

Private equity in the 1990sPrivate equity in the 1990s relates to one of the major periods in the history of private equity and venturecapital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capitalexperienced growth along parallel although interrelated tracks.The development of the private equity and venture capital asset classes has occurred through a series of boom andbust cycles since the middle of the 20th century. Private equity emerged in the 1990s out of the ashes of the savingsand loan crisis, the insider trading scandals, the real estate market collapse and the recession of the early 1990swhich had culminated in the collapse of Drexel Burnham Lambert and had caused the shutdown of the high-yielddebt market. This period saw the emergence of more institutionalized private equity firms, ultimately culminating inthe massive Dot-com bubble in 1999 and 2000.

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 severallarge buyouts including Robert Campeau's 1988 buyout of Federated Department Stores, the 1986 buyout of theRevco drug stores, Walter Industries, FEB Trucking and Eaton Leonard. Additionally, the RJR Nabisco deal wasshowing signs of strain, leading to a recapitalization in 1990 that involved the contribution of $1.7 billion of newequity from KKR.[1] Additionally, in response to the threat of unwelcome LBOs, certain companies adopted anumber of techniques, such as the poison pill, to protect them against hostile takeovers by effectively self-destructingthe company if it were to be taken over (these practices are increasingly discredited).

The collapse of Drexel Burnham LambertDrexel Burnham Lambert was the investment bank most responsible for the boom in private equity during the 1980sdue to its leadership in the issuance of high-yield debt. The firm was first rocked by scandal on May 12, 1986, whenDennis Levine, a Drexel managing director and investment banker, was charged with insider trading. Levine pleadedguilty to four felonies, and implicated one of his recent partners, arbitrageur Ivan Boesky. Largely based oninformation Boesky promised to provide about his dealings with Milken, the Securities and Exchange Commissioninitiated an investigation of Drexel on November 17. Two days later, Rudy Giuliani, the United States Attorney forthe 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 basedalmost entirely on the statements of an admitted felon looking to reduce his sentence. However, it was not enough tokeep the SEC from suing Drexel in September 1988 for insider trading, stock manipulation, defrauding its clientsand stock parking (buying stocks for the benefit of another). All of the transactions involved Milken and hisdepartment. Giuliani began seriously considering indicting Drexel under the powerful Racketeer Influenced andCorrupt 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 $1billion in lieu of having its assets frozen, unnerved many at Drexel. Most of Drexel's capital was borrowed money, asis 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 survivea month at most.[3]

With literally minutes to go before being indicted, Drexel reached an agreement with the government in which itpleaded nolo contendere (no contest) to six felonies – three counts of stock parking and three counts of stockmanipulation.[2] It also agreed to pay a fine of $650 million – at the time, the largest fine ever levied under securitieslaws. Milken left the firm after his own indictment in March 1989.[3] [4] Effectively, Drexel was now a convictedfelon.

Private equity in the 1990s 45

In April 1989, Drexel settled with the SEC, agreeing to stricter safeguards on its oversight procedures. Later thatmonth, 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. OnFebruary 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 ReserveSystem, Drexel Burnham Lambert officially filed for Chapter 11 bankruptcy protection.[3]

S&L and the shutdown of the Junk Bond MarketIn the 1980s, the boom in private equity transactions, specifically leveraged buyouts, was driven by the availabilityof financing, particularly high-yield debt, also known as "junk bonds". The collapse of the high yield market in 1989and 1990 would signal the end of the LBO boom. At that time, many market observers were pronouncing the junkbond 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 increaseddramatically to 4.3% of the then $190 billion market and an additional 2.6% of issuance defaulted in the first halfof 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 thecost of debt in the high yield market significantly more expensive than it had been previously.[5] [6] The marketshut down altogether for lower rated issuers.

• The mandated withdrawal of savings and loans from the high yield market. In August 1989, the U.S. Congressenacted the Financial Institutions Reform, Recovery and Enforcement Act of 1989 as a response to the savingsand loan crisis of the 1980s. Under the law, savings and loans (S&Ls) could no longer invest in bonds that wererated below investment grade. Additionally, S&Ls were mandated to sell their holdings by the end of 1993creating 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 periodincluding:• 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 equityBeginning roughly in 1992, three years after the RJR Nabisco buyout, and continuing through the end of the decadethe private equity industry once again experienced a tremendous boom, both in venture capital (as will be discussedbelow) 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, outpacingthe growth of almost every other asset class.[8]

Private equity in the 1990s 46

Resurgence of leveraged buyoutsPrivate 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 itbegan to earn a new degree of legitimacy and respectability. Although in the 1980s, many of the acquisitions madewere unsolicited and unwelcome, private equity firms in the 1990s focused on making buyouts attractivepropositions for management and shareholders. According to The Economist, “[B]ig companies that would oncehave 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 theyacquired, using less leverage in the acquisition. This was in part due to the lack of leverage available for buyoutsduring this period. In the 1980s leverage would routinely represent 85% to 95% of the purchase price of a companyas compared to average debt levels between 20% and 40% in leveraged buyouts in the 1990s and the first decade ofthe 21st century. KKR's 1986 acquisition of Safeway, for example, was completed with 97% leverage and 3% equitycontributed by KKR, whereas KKR's acquisition of TXU in 2007 was completed with approximately 19% equitycontributed ($8.5 billion of equity out of a total purchase price of $45 billion). Additionally, private equity firms aremore likely to make investments in capital expenditures and provide incentives for management to build long-termvalue.The Thomas H. Lee Partners acquisition of Snapple Beverages, in 1992, is often described as the deal that markedthe resurrection of the leveraged buyout after several dormant years.[10] Only eight months after buying thecompany, Lee took Snapple Beverages public and in 1994, only two years after the original acquisition, Lee sold thecompany to Quaker Oats for $1.7 billion. Lee was estimated to have made $900 million for himself and his investorsfrom 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, whohad begun investing in private equity in 1974, would find new prominence in the private equity industry and catapulthis 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 underthe 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 ofleveraged buyouts. Lee built a syndicated leveraged finance business and related advisory businesses including thefirst dedicated financial sponsor coverage group, which covered private equity firms in much the same way thatinvestment 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 TexasPacific Group, (today TPG Capital). TPG was virtually alone in its conviction that there was an investmentopportunity with the airline. The plan included bringing in a new management team, improving aircraft utilizationand focusing on lucrative routes. By 1998, TPG had generated an annual internal rate of return of 55% on itsinvestment. Unlike Carl Icahn's hostile takeover of TWA in 1985.[13] , Bonderman and Texas Pacific Group werewidely hailed as saviors of the airline, marking the change in tone from the 1980s. The buyout of ContinentalAirlines 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, BainCapital then sold the chain to DLJ Merchant Banking Partners[14] Duane Reade completed its initial publicoffering (IPO) on February 10, 1998

• Sealy Corporation, 1997

Private equity in the 1990s 47

Bain Capital and a team of Sealy's senior executives acquired the mattress company through a managementbuyout[15]

• KinderCare Learning Centers, 1997Kohlberg Kravis Roberts and Hicks, Muse, Tate & Furst

• J. Crew, 1997Texas Pacific Group acquired an 88% stake in the retailer for approximately $500 million,[16] however theinvestment struggled due to the relatively high purchase price paid relative to the company's earnings.[17] Thecompany was able to complete a turnaround beginning in 2002 and complete an initial public offering in2006[18]

• Domino's Pizza, 1998Bain Capital acquired a 49% interest in the second-largest pizza-chain in the US from its founder[19] andwould successfully take the company public on the New York Stock Exchange (NYSE:DPZ) in 2004.[20]

• Regal Entertainment Group, 1998Kohlberg Kravis Roberts and Hicks, Muse, Tate & Furst acquired the largest chain of movie theaters for $1.49billion, including assumed debt.[21] The buyers originally announced plans to acquire Regal, then merge itwith United Artists (owned by Merrill Lynch at the time) and Act III (controlled by KKR), however theacquisition of United Artists fell through due to issues around the price of the deal and the projectedperformance of the company.[22] Regal, along with the rest of the industry would encounter significant issuesdue to overbuilding of new multiplex theaters[23] and would declare bankruptcy in 2001. Billionaire PhilipAnschutz would take control of the company and later take the company public.[24]

• Oxford Health Plans, 1998An investor group led by Texas Pacific Group invested $350 million in a convertible preferred stock that canbe converted into 22.1% of Oxford.[25] The company completed a buyback of the TPG's PIPE convertible in2000 and would ultimately be acquired by UnitedHealth Group in 2004.[26]

• Petco, 2000TPG Capital and Leonard Green & Partners invested $200 million to acquire the pet supplies retailer as part ofa $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 again 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 Associationwas initially founded as an informal networking group for limited partner investors in private equity funds in theearly 1990s. However the organization would evolve into an advocacy organization for private equity investors withmore than 200 member organizations from 10 countries. As of the end of 2007, ILPA members had total assets undermanagement in excess of $5 trillion with more than $850 billion of capital commitments to private equityinvestments.

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 hotstartups, excess supply of IPOs and the inexperience of many venture capital fund managers. Unlike the leveragedbuyout industry, after total capital raised increased to $3 billion in 1983, growth in the venture capital industryremained limited through the 1980s and the first half of the 1990s increasing to just over $4 billion more than adecade later in 1994.

Private equity in the 1990s 48

After a shakeout of venture capital mangers, the more successful firms retrenched, focusing increasingly onimproving operations at their portfolio companies rather than continuously making new investments. Results wouldbegin to turn very attractive, successful and would ultimately generate the venture capital boom of the 1990s. FormerWharton Professor Andrew Metrick refers to these first 15 years of the modern venture capital industry beginning in1980 as the "pre-boom period" in anticipation of the boom that would begin in 1995 and last through the bursting ofthe 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 SiliconValley benefited from a huge surge of interest in the nascent Internet and other computer technologies. Initial publicofferings of stock for technology and other growth companies were in abundance and venture firms were reapinglarge 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)

The technology-heavy NASDAQ Composite index peaked at 5,048 in March2000, reflecting the high point of the dot-com bubble.

The Nasdaq crash and technology slump thatstarted in March 2000 shook virtually the entireventure capital industry as valuations for startuptechnology companies collapsed. Over the nexttwo years, many venture firms had been forcedto write-off their large proportions of theirinvestments and many funds were significantly"under water" (the values of the fund'sinvestments were below the amount of capitalinvested). Venture capital investors sought toreduce size of commitments they had made toventure capital funds and in numerous instances,investors sought to unload existing commitmentsfor cents on the dollar in the secondary market.By mid-2003, the venture capital industry hadshriveled to about half its 2001 capacity.Nevertheless, PricewaterhouseCoopers' MoneyTree Survey [59] shows that total venture capital investments heldsteady 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 in2000, 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 rangedfrom 0.164% to 0.182 % in 2003 and 2004. The revival of an Internet-driven environment (thanks to deals such aseBay's purchase of Skype, the News Corporation's purchase of MySpace.com, and the very successful Google.comand Salesforce.com IPOs) have helped to revive the venture capital environment. However, as a percentage of theoverall private equity market, venture capital has still not reached its mid-1990s level, let alone its peak in 2000.

Private equity in the 1990s 49

See also• History of private equity and venture capital

• Early history of private equity• Private equity in the 1980s• Private equity in the 21st century

• Private equity firms (category)• Venture capital firms (category)• Private equity and venture capital investors (category)• Financial sponsor• Private equity firm• Private equity fund• Private equity secondary market• Mezzanine capital• Private investment in public equity• Taxation of Private Equity and Hedge Funds• Investment banking• Mergers and acquisitions

Notes[1] Wallace, Anise C. " Nabisco Refinance Plan Set (http:/ / query. nytimes. com/ gst/ fullpage.

html?res=9C0CE2D91E31F935A25754C0A966958260)." The New York Times, July 16, 1990.[2] Stone, Dan G. (1990). April Fools: An Insider's Account of the Rise and Collapse of Drexel Burnham. New York City: Donald I. Fine.

ISBN 1556112289.[3] Den of Thieves. Stewart, J. B. New York: Simon & Schuster, 1991. ISBN 0-671-63802-5.[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[8] Source: Thomson Financial's VentureXpert (http:/ / vx. thomsonib. com/ ) database for Commitments. Searching "All Private Equity Funds"

(Venture Capital, Buyout and Mezzanine).[9] 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[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.

Private equity in the 1990s 50

[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'tWork Out (http:/ / query. nytimes. com/ gst/ fullpage. html?res=9805E6D9153EF936A15751C0A96E958260)." New York Times, February25, 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• 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. The Predators' Ball. New York: Simon and Schuster, 1988.• Burrill, G. Steven, and Craig T. Norback. The Arthur Young Guide to Raising Venture Capital. Billings, MT:

Liberty House, 1988.• Burrough, Bryan. Barbarians at the Gate. New York : Harper & Row, 1990.• Craig. Valentine V. Merchant Banking: Past and Present (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

Development Corporation (http:/ / brie. berkeley. edu/ ~briewww/ publications/ WP163. pdf), 1946-1973.Working paper 163. Accessed May 22, 2008

• Littman, Jonathan. "The New Face of Venture Capital." Electronic Business, March 1998.• Loos, Nicolaus. Value Creation in Leveraged Buyouts (http:/ / www. unisg. ch/ www/ edis. nsf/

wwwDisplayIdentifier/ 3052/ $FILE/ dis3052. pdf). Dissertation of the University of St. Gallen. Lichtenstein:Guttenberg AG, 2005. Accessed May 22, 2008.

• National Venture Capital Association, 2005, The 2005 NVCA Yearbook.• Schell, James M. Private Equity Funds: Business Structure and Operations. New York: Law Journal Press, 1999.• Sharabura, S. (2002). Private Equity: past, present, and future (http:/ / media. www. chibus. com/ media/ storage/

paper408/ news/ 2002/ 02/ 18/ GsbBusiness/ Equity. Past. Present. And. Future-187504. shtml). GE CapitalSpeaker Discusses New Trends in Asset Class. Speech to GSB 2/13/2002. Accessed May 22, 2008.

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• Trehan, R. (2006). The History Of Leveraged Buyouts (http:/ / www. 4hoteliers. com/ 4hots_fshw.php?mwi=1757). December 4, 2006. Accessed May 22, 2008.

• Cheffins, Brian. " THE ECLIPSE OF PRIVATE EQUITY (http:/ / www. cbr. cam. ac. uk/ pdf/ wp339. pdf)".Centre for Business Research, University Of Cambridge, 2007.

Private equity in the 2000sPrivate equity in the 2000s relates to one of the major periods in the history of private equity and venturecapital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capitalexperienced growth along parallel although interrelated tracks.The development of the private equity and venture capital asset classes has occurred through a series of boom andbust cycles since the middle of the 20th century. As the 20th century ended, so, too, did the dot-com bubble and thetremendous growth in venture capital that had marked the previous five years. In the wake of the collapse of thedot-com bubble, a new "Golden Age" of private equity ensued, as leveraged buyouts reach unparalleled size and theprivate equity firms achieved new levels of scale and institutionalization, exemplified by the initial public offering ofthe Blackstone Group in 2007.

Bursting the Internet Bubble and the private equity crash (2000–2003)

The technology-heavy NASDAQ Composite index peaked at 5,048 in March2000, reflecting the high point of the dot-com bubble.

The Nasdaq crash and technology slump thatstarted in March 2000 shook virtually the entireventure capital industry as valuations for startuptechnology companies collapsed. Over the nexttwo years, many venture firms had been forcedto write-off large proportions of theirinvestments and many funds were significantly"under water" (the values of the fund'sinvestments were below the amount of capitalinvested). Venture capital investors sought toreduce size of commitments they had made toventure capital funds and in numerous instances,investors sought to unload existing commitmentsfor cents on the dollar in the secondary market.By mid-2003, the venture capital industry hadshriveled to about half its 2001 capacity.Nevertheless, PricewaterhouseCoopers' MoneyTree Survey [59] shows that total venture capital investments heldsteady 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 in2000, 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 rangedfrom 0.164% to 0.182 % in 2003 and 2004. The revival of an Internet-driven environment (thanks to deals such aseBay's purchase of Skype, the News Corporation's purchase of MySpace.com, and the very successful Google.comand Salesforce.com IPOs) have helped to revive the venture capital environment. However, as a percentage of theoverall private equity market, venture capital has still not reached its mid-1990s level, let alone its peak in 2000.

Private equity in the 2000s 52

Stagnation in the LBO marketMeanwhile, 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 fromthe 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 largeportion of the overall high yield universe of issuers, dragged down the entire high yield market. Overall corporatedefault rates surged to levels unseen since the 1990 market collapse rising to 6.3% of high yield issuance in 2000 and8.9% of issuance in 2001. Default rates on junk bonds peaked at 10.7 percent in January 2002 according toMoody's.[1] [2] As a result, leveraged buyout activity ground to a halt.[3] [4] The major collapses of former high-fliersincluding WorldCom, Adelphia Communications, Global Crossing and Winstar Communications were among themost notable defaults in the market. In addition to the high rate of default, many investors lamented the low recoveryrates 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 activeprivate 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 intechnology and telecommunications companies.[5] Hicks Muse's reputation and market position were both damagedby the loss of over $1 billion from minority investments in six telecommunications and 13 Internet companies at thepeak of the 1990s stock market bubble.[6] [7] [8] Similarly, Forstmann suffered major losses from investments inMcLeodUSA and XO Communications.[9] [10] Tom Hicks resigned from Hicks Muse at the end of 2004 andForstmann Little was unable to raise a new fund. The treasure of the State of Connecticut, sued Forstmann Little toreturn the state's $96 million investment to that point and to cancel the commitment it made to take its totalinvestment to $200 million.[11] The humbling of these private equity titans could hardly have been predicted by theirinvestors in the 1990s and forced fund investors to conduct due diligence on fund managers more carefully andinclude 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 higherequity contributions than had been seen. Private equity firms benefited from the lower valuation multiples. As aresult, despite the relatively limited activity, those funds that invested during the adverse market conditions deliveredattractive returns to investors. Meanwhile, in Europe LBO activity began to increase as the market continued tomature. In 2001, for the first time, European buyout activity exceeded US activity with $44 billion of dealscompleted in Europe as compared with just $10.7 billion of deals completed in the US. This was a function of thefact 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 wasincreasingly active in these years was the nascent secondary market for private equity interests. Secondarytransaction volume increased from historical levels of 2% or 3% of private equity commitments to 5% of theaddressable 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 portfoliosthat were typically used as a means to gain entry to lucrative leveraged finance and mergers and acquisitionsassignments 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 aconsortium of secondary investors, in 2003.

Private equity in the 2000s 53

• Abbey National completed the sale of £748 million ($1.33 billion) of LP interests in 41 private equity funds and16 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 frommajor losses in telecommunications and technology companies and had been severely constrained by tight creditmarkets. As 2003 got underway, private equity began a five year resurgence that would ultimately result in thecompletion of 13 of the 15 largest leveraged buyout transactions in history, unprecedented levels of investmentactivity 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 tradedcompanies 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 ofcorporate 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 focuson short term earnings rather than long term value creation, many public company executives lamented the extra costand bureaucracy associated with Sarbanes-Oxley compliance. For the first time, many large corporations saw privateequity ownership as potentially more attractive than remaining public. Sarbanes-Oxley would have the oppositeeffect on the venture capital industry. The increased compliance costs would make it nearly impossible for venturecapitalists to bring young companies to the public markets and dramatically reduced the opportunities for exits viaIPO. Instead, venture capitalists have been forced increasingly to rely on sales to strategic buyers for an exit of theirinvestment.[18]

Interest rates, which began a major series of decreases in 2002 would reduce the cost of borrowing and increase theability of private equity firms to finance large acquisitions. Lower interest rates would encourage investors to returnto relatively dormant high-yield debt and leveraged loan markets, making debt more readily available to financebuyouts. Additionally, alternative investments also became increasingly important as investors sough yield despiteincreases in risk. This search for higher yielding investments would fuel larger funds and in turn larger deals, neverthought possible, became reality.Certain buyouts were completed in 2001 and early 2002, particularly in Europe where financing was more readilyavailable. In 2001, for example, BT Group agreed to sell its international yellow pages directories business (YellGroup) 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 publisherMcLeodUSA for about $600 million, and floated on London's FTSE in 2003.

Resurgence of the large buyoutMarked by the two-stage buyout of Dex Media at the end of 2002 and 2003, large multi-billion dollar U.S. buyoutscould once again obtain significant high yield debt financing and larger transactions could be completed. The CarlyleGroup, Welsh, Carson, Anderson & Stowe, along with other private investors, led a $7.5 billion buyout ofQwestDex. The buyout was the third largest corporate buyout since 1989. QwestDex's purchase occurred in twostages: a $2.75 billion acquisition of assets known as Dex Media East in November 2002 and a $4.30 billionacquisition 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 wasunderway. 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 TRWAutomotive by the Blackstone Group.

Private equity in the 2000s 54

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 thistime 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 akinder, gentler version, one thing remains clear: private equity is now enjoying a "Golden Age." And withreturns 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 theleverage levels and financing terms obtained by financial sponsors in their buyouts. Some of the notable buyouts ofthis period include:• Dollarama, 2004

The U.S. chain of "dollar stores" was sold for $850 million to Bain Capital.[23]

• Toys "R" Us, 2004A consortium of Bain Capital, Kohlberg Kravis Roberts and real estate development company Vornado RealtyTrust announced the $6.6 billion acquisition of the toy retailer. A month earlier, Cerberus CapitalManagement, made a $5.5 billion offer for both the toy and baby supplies businesses.[24]

• The Hertz Corporation, 2005Carlyle Group, Clayton Dubilier & Rice and Merrill Lynch completed the $15.0 billion leveraged buyout ofthe largest car rental agency from Ford.[25] [26]

• Metro-Goldwyn-Mayer, 2005A consortium led by Sony and TPG Capital completed the $4.81 billion buyout of the film studio. Theconsortium also included media-focused firms Providence Equity Partners and Quadrangle Group as well asDLJ Merchant Banking Partners.[27]

• SunGard, 2005SunGard 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 BainCapital, the Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts, Providence EquityPartners, and Texas Pacific Group. This represented the largest leveraged buyout completed since the takeoverof 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 thebuyout of Freescale Semiconductor. The SunGard transaction is also notable in the number of firms involvedin the transaction. The involvement of seven firms in the consortium was criticized by investors in privateequity who considered cross-holdings among firms to be generally unattractive.[28]

Private equity in the 2000s 55

Age of the mega-buyout

David Rubinstein, the head of the Carlyle Group, the largestprivate equity firm (by investor commitments) during the

2006-07 buyout boom.[29]

As 2005 ended and 2006 began, new "largest buyout"records were set and surpassed several times with nine ofthe top ten buyouts at the end of 2007 having beenannounced in an 18-month window from the beginning of2006 through the middle of 2007. Additionally, the buyoutboom was not limited to the United States as industrializedcountries in Europe and the Asia-Pacific region also sawnew records set. In 2006, private equity firms bought 654U.S. companies for $375 billion, representing 18 times thelevel of transactions closed in 2003.[30] Additionally, U.S.based private equity firms raised $215.4 billion in investorcommitments to 322 funds, surpassing the previous recordset in 2000 by 22% and 33% higher than the 2005fundraising total.[31] However, venture capital funds, whichwere 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, 2005In 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 firstbuyout in excess of $20 billion and largest buyout overall since RJR Nabisco and pushed Koch Industriesahead of Cargill as the largest privately-held company in the US, based on revenue.[35]

• Albertson's, 2006Albertson'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 CVSacquired 700 stand-alone Sav-On and Osco pharmacies and a distribution center, and a group includingCerberus Capital Management and the Kimco Realty Corporation acquired some 655 underperforming grocerystores and a number of distribution centers.[36]

• Equity Office Properties, 2006 – Blackstone Group completes the $37.7 billion[37] acquisition of one of thelargest owners of commercial office properties in the US. At the time of its announcement, the Equity Officebuyout became the largest in history, surpassing the buyout of HCA. It would later be surpassed by the buyouts ofTXU and BCE (announced but as of the end of the first quarter of 2008 not yet completed).

• Freescale Semiconductor, 2006A consortium led by the Blackstone Group and including the Carlyle Group, Permira and the TPG Capitalcompleted 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 ofSunGard.[38]

• GMAC, 2006General 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

Private equity in the 2000s 56

$1.5 billion deal. In June 2008, GMAC completed a $60 billion refinancing aimed at improving the liquidityof its struggling mortgage subsidiary, Residential Capital (ResCap) including $1.4 billion of additional equitycontributions from the parent and Cerberus.[40] [41]

• HCA, 2006Kohlberg Kravis Roberts and Bain Capital, together with Merrill Lynch and the Frist family (which hadfounded the company) completed a $31.6 billion acquisition of the hospital company, 17 years after it wastaken private for the first time in a management buyout. At the time of its announcement, the HCA buyoutwould be the first of several to set new records for the largest buyout, eclipsing the 1989 buyout of RJRNabisco. It would later be surpassed by the buyouts of Equity Office Properties, TXU and BCE (announcedbut as of the end of the first quarter of 2008 not yet completed).[42]

• Kinder Morgan, 2006A consortium of private equity firms including Goldman Sachs Capital Partners , Carlyle Group andRiverstone Holdings completed a $27.5 billion (including assumed debt) acquisition of one of the largestpipeline operators in the US. The buyout was backed by Richard Kinder, the company's co-founder and aformer president of Enron who was ousted after a dispute with Enron’s founder, Kenneth L. Lay.[43]

• Harrah's Entertainment, 2006Apollo Management and TPG Capital completed the $27.39 billion[37] (including purchase of the outstandingequity for $16.7 billion and assumption of $10.7 billion of outstanding debt) acquisition of the gamingcompany.[44]

• TDC A/S, 2006The Danish phone company was acquired by Kohlberg Kravis Roberts, Apax Partners, Providence EquityPartners and Permira for €12.2 billion ($15.3 billion), which at the time made it the second largest Europeanbuyout in history.[45] [46]

• Sabre Holdings, 2006TPG 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 assumptionof $550 million in debt.[47] Earlier in the year, Blackstone acquired Sabre's chief competitor Travelport.

• Travelport, 2006Travelport, which owns Worldspan and Galileo as well as approximately 48% of Orbitz Worldwide wasacquired from Cendant by The Blackstone Group, One Equity Partners and Technology Crossover Ventures ina deal valued at $4.3 billion. The sale of Travelport followed the spin-offs of Cendant's real estate andhospitality businesses, Realogy Corporation and Wyndham Worldwide Corporation, respectively, in July2006.[48] [49] Later in the year, TPG and Silver Lake would acquire Travelport's chief competitor SabreHoldings.

• Alliance Boots, 2007Kohlberg 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 increasingtheir 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 UniChemplc.[50]

• Biomet, 2007The Blackstone Group, Kohlberg Kravis Roberts, TPG Capital and Goldman Sachs Capital Partners acquiredthe medical devices company for $11.6 billion.[51]

• Chrysler, 2007

Private equity in the 2000s 57

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 millionof cash Daimler agreed to invest in Chrysler.[52] With the company struggling, Cerberus brought in formerHome Depot CEO, Robert Nardelli as the new chief executive of Chrysler to execute a turnaround of thecompany.[53]

• First Data, 2007Kohlberg Kravis Roberts and TPG Capital completed the $29 billion buyout of the credit and debit cardpayment processor and former parent of Western Union[54] Michael Capellas, previously the CEO of MCICommunications and Compaq was named CEO of the privately held company.

• TXU, 2007An investor group led by KKR and TPG Capital and together with Goldman Sachs Capital Partners completedthe $44.37 billion[37] buyout of the regulated utility and power producer. The investor group had to workclosely with ERCOT regulators to gain approval of the transaction but had significant experience with theregulators 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, withall financing in place, and Michael Sabia left BCE, with George Cope assuming the position of CEO on July11. 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. Thedeal was canceled when the results of the test were released.

Publicly traded private equityAlthough there had previously been certain instances of publicly traded private equity vehicles, the convergence ofprivate equity and the public equity markets attracted significantly greater attention when several of the largestprivate equity firms pursued various options through the public markets. Taking private equity firms and privateequity funds public appeared an unusual move since private equity funds often buy public companies listed onexchange and then take them private. Private equity firms are rarely subject to the quarterly reporting requirementsof 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 publicmarkets. 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 privateequity 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 toinvest in a traditional private equity limited partnership to gain exposure to a portfolio of private equityinvestments.

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

Private equity in the 2000s 58

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 certainKKR-managed funds in order to generate liquidity and repay borrowings.[59]

Schwarzman's Blackstone Group completed the first major IPO of aprivate equity firm in June 2007.[29]

On March 22, 2007, the Blackstone Group filed withthe SEC[60] to raise $4 billion in an initial publicoffering. On June 21, Blackstone swapped a 12.3%stake in its ownership for $4.13 billion in the largestU.S. IPO since 2002. Traded on the New York StockExchange under the ticker symbol BX, Blackstonepriced 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 theSEC[63] in July 2007 to raise $1.25 billion by sellingan ownership interest in its managementcompany.[64] KKR had previously listed its KKRPrivate Equity Investors (KPE) private equity fundvehicle in 2006. The onset of the credit crunch and the shutdown of the IPO market would dampen the prospects ofobtaining 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. InSeptember 2007, the Carlyle Group sold a 7.5% interest in its management company to Mubadala DevelopmentCompany, which is owned by the Abu Dhabi Investment Authority (ADIA) for $1.35 billion, which valued Carlyleat approximately $20 billion.[65] Similarly, in January 2008, Silver Lake Partners sold a 9.9% stake in itsmanagement 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 July2007. By pursuing a private placement rather than a public offering, Apollo would be able to avoid much of thepublic scrutiny applied to Blackstone and KKR.[67] [68] In April 2008, Apollo filed with the SEC[69] to permit someholders of its privately traded stock to sell their shares on the New York Stock Exchange.[70] In April 2004, Apolloraised $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 asby making direct equity investments in companies. The Company also invests in the securities of publiccompanies.[71]

Historically, in the United States, there had been a group of publicly traded private equity firms that were registeredas business development companies (BDCs) under the Investment Company Act of 1940.[72] Typically, BDCs arestructured similar to real estate investment trusts (REITs) in that the BDC structure reduces or eliminates corporateincome 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, discussedearlier) are: American Capital Strategies (NASDAQ: ACAS), Allied Capital Corp((NASDAQ:ALD), Ares CapitalCorporation (NASDAQ:ARCC), Gladstone Investment Corp (NASDAQ:GAIN) and Kohlberg Capital Corp(NASDAQ:KCAP).

Private equity in the 2000s 59

Secondary market and the evolution of the private equity asset classIn the wake of the collapse of the equity markets in 2000, many investors in private equity sought an early exit fromtheir outstanding commitments.[73] The surge in activity in the secondary market, which had previously been arelatively small niche of the private equity industry, prompted new entrants to the market, however the market wasstill characterized by limited liquidity and distressed prices with private equity funds trading at significant discountsto fair value.Beginning in 2004 and extending through 2007, the secondary market transformed into a more efficient market inwhich 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 sellerswere distressed to an active market with ample supply of assets and numerous market participants.[74] By 2006active portfolio management had become far more common in the increasingly developed secondary market and anincreasing number of investors had begun to pursue secondary sales to rebalance their private equity portfolios. Thecontinued evolution of the private equity secondary market reflected the maturation and evolution of the largerprivate equity industry. Among the most notable publicly disclosed secondary transactions (it is estimated that overtwo-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 privateequity 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, whichwas 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 secondarybuyers.[79] [80] [81]

• Bank of America, in 2006, completes the spin-out of BA Capital Europe to form Argan Capital, which was fundedby 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 ofsecondary 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)In July 2007, turmoil that had been affecting the mortgage markets, spilled over into the leveraged finance and 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

Private equity in the 2000s 60

from pricing. By the end of September, the full extent of the credit situation became obvious as major lendersincluding Citigroup and UBS AG announced major writedowns due to credit losses. The leveraged finance marketscame to a near standstill.[88] As a result of the sudden change in the market, buyers would begin to withdraw from orrenegotiate 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 offeredHarman shareholders a chance to retain up to a 27% stake in the newly private company and share in anyprofit made if the company is later sold or taken public as a concession to shareholders. However, inSeptember 2007 the buyers withdrew from the deal, saying that the company’s financial health had sufferedfrom 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 aconsortium 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, thebuyout of Sallie Mae encountered difficulty.[94]

• Clear Channel Communications, 2007After pursuing the company for over six months Bain Capital and Thomas H. Lee Partners finally won thesupport of shareholders to complete a $26.7 billion[37] (including assumed debt) buyout of the radio stationoperator. The buyout had the support of the founding Mays family but the buyers were required initially topush for a proxy vote before raising their offer several times.[95] As a result of the credit crunch, the bankssought to pull their commitments to finance the acquisition of Clear Channel. The buyers filed suit against thebank group (including Citigroup, Morgan Stanley, Deutsche Bank, Credit Suisse, the Royal Bank of Scotlandand Wachovia) to force them to fund the transaction. Ultimately, the buyers and the banks were able torenegotiate the transaction, reducing the purchase price paid to the shareholders and increasing the interest rateon the loans.[96]

• BCE, 2007The Ontario Teachers' Pension Plan, Providence Equity Partners and Madison Dearborn announced aC$51.7 billion (including debt) buyout of BCE in July 2007, which would constitute the largest leveragedbuyout 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 deploytheir 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 thesetransactions 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 theBlackstone Group completed the acquisition of $12.5 billion of bank loans from Citigroup. The portfolio wascomprised primarily of senior secured leveraged loans that had been made to finance leveraged buyouttransactions at the peak of the market. Citigroup had been unable to syndicate the loans before the onset of thecredit crunch. The loans were believed to have been sold in the "mid-80 cents on the dollar" relative to facevalue.[101]

• Washington Mutual, 2008An investment group led by TPG Capital invested $7 billion—of which TPG committed $1.5 billion—in newcapital in the struggling savings and loan to shore up the company's finances.[102] [103]

Private equity in the 2000s 61

Contemporary reflections of private equity and private equity controversiesCarlyle group featured prominently in Michael Moore's 2003 film Fahrenheit 9-11. The film suggested that TheCarlyle Group exerted tremendous influence on U.S. government policy and contracts through their relationship withthe president’s father, George H. W. Bush, a former senior adviser to the Carlyle Group. Additionally, Moore citedrelationships 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 billionCrusader artillery rocket system developed for the U.S. Army is one of the few weapons systems canceled by theBush administration.[104]

Over the next few years, attention intensified on private equity as the size of transactions and profile of thecompanies increased. The attention would increase significantly following a series of events involving TheBlackstone Group: the firm's initial public offering and the birthday celebration of its CEO. The Wall Street Journalobserving Blackstone Group's Steve Schwarzman's 60th birthday celebration in February 2007 described the event asfollows:[105]

The Armory's entrance hung with banners painted to replicate Mr. Schwarzman's sprawling Park Avenueapartment. 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 anumber from "A Chorus Line." Singer Patti LaBelle led the Abyssinian Baptist Church choir in a tune aboutMr. Schwarzman. Attendees included Colin Powell and New York Mayor Michael Bloomberg. The menuincluded 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 inprivate equity. The lavish event which reminded many of the excesses of notorious executives including BernieEbbers (WorldCom) and Dennis Kozlowski (Tyco International). David Rubinstein, the founder of The CarlyleGroup remarked, "We have all wanted to be private – at least until now. When Steve Schwarzman's biography withall 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 RodStewart."[105]

Rubinstein's fears would be confirmed when in 2007, the Service Employees International Union launched acampaign against private equity firms, specifically the largest buyout firms through public events, protests as well asleafleting and web campaigns.[106] [107] [108] A number of leading private equity executives were targeted by theunion members[109] however the SEIU's campaign was not nearly as effective at slowing the buyout boom as thecredit 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 highlightingthe role of sovereign wealth funds in private equity. The SEIU pushed legislation in California that would disallowinvestments by state agencies (particularly CalPERS and CalSTRS) in firms with ties to certain sovereign wealthfunds.[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 majorityof their income is derived from carried interest, payments received from the profits on a private equity fund'sinvestments) 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 theOntario Securities Commission. [112]

Private equity in the 2000s 62

See also• History of private equity and venture capital

• Early history of private equity• Private equity in the 1980s• Private equity in the 1990s

• 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] 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.

Private equity in the 2000s 63

[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)USA Today, March 16, 2006.

[23] "Dollarama undergoes major transformation" (http:/ / www. canada. com/ nationalpost/ financialpost/ story.html?id=7dcebed2-ab61-413f-bf93-19b08cd945d9). National Post. June 1, 2006. .

[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.[30] Samuelson, Robert J. " The Private Equity Boom (http:/ / www. washingtonpost. com/ wp-dyn/ content/ article/ 2007/ 03/ 14/

AR2007031402177. html)". The Washington Post, March 15, 2007.[31] Dow Jones Private Equity Analyst as referenced in U.S. private-equity funds break record (http:/ / www. boston. com/ business/ articles/

2007/ 01/ 11/ us_private_equity_funds_break_record/ ) Associated Press, January 11, 2007.[32] Dow Jones Private Equity Analyst as referenced in Taub, Stephen. Record Year for Private Equity Fundraising (http:/ / www. cfo. com/

article. cfm/ 8537972/ c_8519925?f=home_todayinfinance). CFO.com, January 11, 2007.[33] Dow Jones Private Equity Analyst as referenced in Private equity fund raising up in 2007: report (http:/ / www. reuters. com/ article/

idUSBNG14655120080108), Reuters, January 8, 2008.[34] Wayne, Leslie. " Koch Industries and Georgia-Pacific May Be a Perfect Fit (http:/ / www. nytimes. com/ 2005/ 11/ 15/ business/ 15place.

html)." New York Times, November 15, 2005.[35] America's Largest Private Companies (http:/ / www. forbes. com/ lists/ 2007/ 21/

biz_privates07_Americas-Largest-Private-Companies_Rank. html) Forbes, November 8, 2007.[36] " Albertson's Buyout by SuperValu Approved (http:/ / www. nytimes. com/ 2006/ 05/ 31/ business/ 31grocer. html)." New York Times, May

31, 2006.[37] Source: Thomson Financial[38] SORKIN, ANDREW ROSS and FLYNN, LAURIE J. " Blackstone Alliance to Buy Chip Maker for $17.6 Billion (http:/ / www. nytimes.

com/ 2006/ 09/ 16/ business/ 16freescale. html)." New York Times, September 16, 2006[39] SORKIN, ANDREW ROSS and MAYNARD, MICHELINE " G.M. to Sell Majority Stake in Finance Unit (http:/ / www. nytimes. com/

2006/ 04/ 03/ business/ 03auto. html)." New York Times, April 3, 2006[40] " $60 Billion Refinance Package for GMAC’s Mortgage Lender (http:/ / www. nytimes. com/ 2008/ 06/ 05/ business/ 05gmac. html)."

Associated Press, June 5, 2008[41] " Lender Gets $1.4 Billion Cash Infusion (http:/ / www. nytimes. com/ 2008/ 06/ 04/ business/ 04lend. html)." Reuters, June 4, 2008[42] 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.[43] MOUAWAD, JAD. " Kinder Morgan Agrees to an Improved Buyout Offer Led by Its Chairman (http:/ / www. nytimes. com/ 2006/ 08/ 29/

business/ 29kinder. html)." New York Times, August 29, 2006.[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/

18casino. html)." New York Times, December 18, 2006.[45] " Takeover firms will pay $15.3b to buy Danish phone giant TDC (http:/ / www. boston. com/ business/ technology/ articles/ 2005/ 12/ 01/

takeover_firms_will_pay_153b_to_buy_danish_phone_giant_tdc/ )." Bloomberg L.P., December 1, 2005[46] " TDC-One year on (http:/ / www. penews. com/ today/ supplements/ casestudies/ content/ 1047758801/ container/ 2449030860/ )." Dow

Jones Private Equity News, January 22, 2007.[47] Sorkin, Andrew Ross. " 2 Firms Pay $4.3 Billion for Sabre (http:/ / travel. nytimes. com/ 2006/ 12/ 12/ business/ 12deal. html)." New York

Times, December 12, 2006.[48] Sachdev, Ameet. " Orbitz travels to 4th owner: Blackstone Group to buy from Cendant." (http:/ / www. highbeam. com/ doc/

1G1-147699028. html), Chicago Tribune, July 1, 2006. Accessed September 15, 2007.[49] Fineman, Josh. "Cendant to sell Orbitz to Blackstone for $4.3 Bln" (http:/ / www. bloomberg. com/ apps/ news?pid=20601087&

sid=a5zd1iiOoP5g& refer=home), Bloomberg.com, June 30, 2006. Accessed September 15, 2007.[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

Private equity in the 2000s 64

[51] de la MERCED, MICHAEL J. " Biomet Accepts Sweetened Takeover Offer (http:/ / www. nytimes. com/ 2007/ 06/ 08/ business/ 08biomet.html)." New York Times, June 8, 2007.

[52] MAYNARD, MICHELINE and LANDLER, MARK. " Chrysler Group to Be Sold for $7.4 Billion (http:/ / query. nytimes. com/ gst/fullpage. html?res=990CE5DD1331F937A25756C0A9619C8B63)." The New York Times, May 14, 2007.

[53] Maynard, Michelle. " Will Nardelli Be Chrysler’s Mr. Fix-It? (http:/ / www. nytimes. com/ 2008/ 01/ 13/ business/ 13bob. html)." New YorkTimes, 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, April3, 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.html)." New York Times, June 23, 2006.

[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.htm), SECURITIES AND EXCHANGE COMMISSION, March 22, 2007

[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.html)." New York Times, June 12, 2007.

[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), ProbitasPartners

[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)

Private equity in the 2000s 65

[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[86] 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[87] 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.[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)."

New York Times, September 22, 2007[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, June13, 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.

Private equity in the 2000s 66

References• Ante, Spencer. Creative capital : Georges Doriot and the birth of venture capital. Boston: Harvard Business

School Press, 2008• Bance, A. (2004). Why and how to invest in private equity (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.• 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

Development Corporation (http:/ / brie. berkeley. edu/ ~briewww/ publications/ WP163. pdf), 1946-1973.Working paper 163. Accessed May 22, 2008

• Littman, Jonathan. "The New Face of Venture Capital." Electronic Business, March 1998.• Loos, Nicolaus. Value Creation in Leveraged Buyouts (http:/ / www. unisg. ch/ www/ edis. nsf/

wwwDisplayIdentifier/ 3052/ $FILE/ dis3052. pdf). Dissertation of the University of St. Gallen. Lichtenstein:Guttenberg AG, 2005. Accessed May 22, 2008.

• National Venture Capital Association, 2005, The 2005 NVCA Yearbook.• Schell, James M. Private Equity Funds: Business Structure and Operations. New York: Law Journal Press, 1999.• Sharabura, S. (2002). Private Equity: past, present, and future (http:/ / media. www. chibus. com/ media/ storage/

paper408/ news/ 2002/ 02/ 18/ GsbBusiness/ Equity. Past. Present. And. Future-187504. shtml). GE CapitalSpeaker Discusses New Trends in Asset Class. Speech to GSB 2/13/2002. Accessed May 22, 2008.

• Trehan, R. (2006). The History Of Leveraged Buyouts (http:/ / www. 4hoteliers. com/ 4hots_fshw.php?mwi=1757). December 4, 2006. Accessed May 22, 2008.

• Cheffins, Brian. " THE ECLIPSE OF PRIVATE EQUITY (http:/ / www. cbr. cam. ac. uk/ pdf/ wp339. pdf)".Centre for Business Research, University Of Cambridge, 2007.

Envy ratio 67

Envy ratioEnvy ratio in finance is the ratio of the price paid by investors to that paid by the management team for theirrespective 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 personalfinancial incentive for them to approve the buyout and to work diligently towards the success of the investment. Theenvy ratio is somewhat similar to the concept of financial leverage, for managers can increase returns on theirinvestments by using other investors's money.

Basic formulaER = (investment by investors / % of equity) / (investment by management / % of equity)[1]

ExampleIf 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, thebetter 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 todemonstrate 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 buyoutA leveraged buyout (or LBO, or highly-leveraged transaction (HLT), or "bootstrap" transaction) occurs when aninvestor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significantpercentage of the purchase price is financed through leverage (borrowing). The assets of the acquired company areused as collateral for the borrowed capital, sometimes with assets of the acquiring company. Typically, leveragedbuyout uses a combination of various debt instruments from bank and debt capital markets. The bonds or other paperissued for leveraged buyouts are commonly considered not to be investment grade because of the significant risksinvolved.[1]

Companies of all sizes and industries have been the target of leveraged buyout transactions, although because of theimportance of debt and the ability of the acquired firm to make regular loan payments after the completion of aleveraged 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

Diagram of the basic structure of a generic leveraged buyout transaction

Leveraged buyouts involve an investor,financial sponsors or private equityfirms making large acquisitionswithout committing all the capitalrequired for the acquisition. To do this,a financial sponsor will raiseacquisition debt which is ultimatelysecured upon the acquisition target andalso looks to the cash flows of theacquisition target to make interest andprincipal payments. Acquisition debt inan LBO is therefore usuallynon-recourse to the financial sponsorand to the equity fund that the financialsponsor manages. Furthermore, unlikein 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, allowingthem 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 itselfonly needs to provide a fraction of the capital for the acquisition, and (2) assuming the economic internal rate ofreturn on the investment (taking into account expected exit proceeds) exceeds the weighted average interest rate onthe 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 financialsponsors "co-investing" to come up with the needed equity for a purchase. Likewise, multiple lenders may bandtogether in a "syndicate" to jointly provide the debt required to fund the transaction. Today, larger transactions aredominated 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 transactionvaries according to the financial condition and history of the acquisition target, market conditions, the willingness oflenders to extend credit (both to the LBO's financial sponsors and the company to be acquired) as well as the interestcosts 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 2000-2005debt 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 fundmanagers, such as mutual funds, hedge funds, credit opportunity investors and structured finance vehicles. Thecommercial banks typically provide revolving credits that provide issuers with liquidity and cash flow while fundmanagers generally provided funded term loans that are used to finance the LBO. These loans tend to be seniorsecured, floating-rate instruments pegged to the London Interbank Offered Rate (LIBOR). They are typicallypre-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 institutionalcredit 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 seniorsecured 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 duringthe 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 tofacilitate the transaction.

History

Origins of the leveraged buyoutsThe first leveraged buyout may have been the purchase by McLean Industries, Inc. of Pan-Atlantic SteamshipCompany in January 1955 and Waterman Steamship Corporation in May 1955.[4] Under the terms of thattransaction, 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]

Similar to the approach employed in the McLean transaction, the use of publicly traded holding companies asinvestment 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 lateradopted 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 moretraditional leveraged buyouts and in many ways could be considered a forerunner of the later private equity firms. Infact 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) aswell as Thompson Wire, Eagle Motors and Barrows through their investment in Stern Metals.[8] By 1976, tensionshad built up between Bear Stearns and Kohlberg, Kravis and Roberts leading to their departure and the formation ofKohlberg Kravis Roberts in that year.

Leveraged buyouts in the 1980sIn January 1982, former US Secretary of the Treasury William Simon and a group of investors acquired GibsonGreetings, a producer of greeting cards, for $80 million, of which only $1 million was rumored to have beencontributed by the investors. By mid-1983, just sixteen months after the original deal, Gibson completed a $290million IPO and Simon made approximately $66 million.[9] The success of the Gibson Greetings investmentattracted the attention of the wider media to the nascent boom in leveraged buyouts. Between 1979 and 1989, it wasestimated 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 tomany private equity investments, particularly those that featured a hostile takeover of the company, perceived assetstripping, major layoffs or other significant corporate restructuring activities. Among the most notable investors to belabeled corporate raiders in the 1980s included Carl Icahn, Victor Posner, Nelson Peltz, Robert M. Bass, T. BoonePickens, Harold Clark Simmons, Kirk Kerkorian, Sir James Goldsmith, Saul Steinberg and Asher Edelman. CarlIcahn developed a reputation as a ruthless corporate raider after his hostile takeover of TWA in 1985.[11] [12] Manyof the corporate raiders were onetime clients of Michael Milken, whose investment banking firm, Drexel BurnhamLambert helped raise blind pools of capital with which corporate raiders could make a legitimate attempt to take overa 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 anda 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 inhistory. The event was chronicled in the book (and later the movie), Barbarians at the Gate: The Fall of RJRNabisco. KKR would eventually prevail in acquiring RJR Nabisco at $109 per share marking a dramatic increasefrom the original announcement that Shearson Lehman Hutton would take RJR Nabisco private at $75 per share. Afierce series of negotiations and horse-trading ensued which pitted KKR against Shearson Lehman Hutton and laterForstmann 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 ShearsonLehman's original bid, KKR quickly introduced a tender offer to obtain RJR Nabisco for $90 per share—a price thatenabled it to proceed without the approval of RJR Nabisco's management. RJR's management team, working withShearson Lehman and Salomon Brothers, submitted a bid of $112, a figure they felt certain would enable them tooutflank any response by Kravis's team. KKR's final bid of $109, while a lower dollar figure, was ultimatelyaccepted by the board of directors of RJR Nabisco.[13] At $31.1 billion of transaction value, RJR Nabisco was by farthe largest leveraged buyout in history. In 2006 and 2007, a number of leveraged buyout transactions werecompleted 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.By the end of the 1980s the excesses of the buyout market were beginning to show, with the bankruptcy of severallarge buyouts including Robert Campeau's 1988 buyout of Federated Department Stores, the 1986 buyout of theRevco drug stores, Walter Industries, FEB Trucking and Eaton Leonard. Additionally, the RJR Nabisco deal wasshowing signs of strain, leading to a recapitalization in 1990 that involved the contribution of $1.7 billion of newequity from KKR.[14]

Leveraged buyout 71

Drexel Burnham Lambert was the investment bank most responsible for the boom in private equity during the 1980sdue 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 sixfelonies—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 ownindictment in March 1989.[16] On February 13, 1990 after being advised by United States Secretary of the TreasuryNicholas F. Brady, the U.S. Securities and Exchange Commission (SEC), the New York Stock Exchange, and theFederal Reserve, Drexel Burnham Lambert officially filed for Chapter 11 bankruptcy protection.[16]

Age of the mega-buyout 2005-2007The combination of decreasing interest rates, loosening lending standards and regulatory changes for publicly tradedcompanies (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 obtainsignificant high yield debt financing and larger transactions could be completed. By 2004 and 2005, major buyoutswere 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 thetop ten buyouts at the end of 2007 having been announced in an 18-month window from the beginning of 2006through the middle of 2007. In 2006, private equity firms bought 654 U.S. companies for $375 billion, representing18 times the level of transactions closed in 2003.[22] Additionally, U.S. based private equity firms raised $215.4billion in investor commitments to 322 funds, surpassing the previous record set in 2000 by 22% and 33% higherthan the 2005 fundraising total[23] The following year, despite the onset of turmoil in the credit markets in thesummer, 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] .In July 2007, turmoil that had been affecting the mortgage markets, spilled over into the leveraged finance andhigh-yield debt markets.[28] [29] The markets had been highly robust during the first six months of 2007, with highlyissuer friendly developments including PIK and PIK Toggle (interest is "Payable In Kind") and covenant light debtwidely available to finance large leveraged buyouts. July and August saw a notable slowdown in issuance levels inthe high yield and leveraged loan markets with only few issuers accessing the market. Uncertain market conditionsled to a significant widening of yield spreads, which coupled with the typical summer slowdown led to manycompanies and investment banks to put their plans to issue debt on hold until the autumn. However, the expectedrebound in the market after Labor Day 2007 did not materialize and the lack of market confidence prevented dealsfrom pricing. By the end of September, the full extent of the credit situation became obvious as major lendersincluding Citigroup and UBS AG announced major writedowns due to credit losses. The leveraged finance marketscame to a near standstill.[30] As 2007 ended and 2008 began, it was clear that lending standards had tightened and theera of "mega-buyouts" had come to an end. Nevertheless, private equity continues to be a large and active asset classand the private equity firms, with hundreds of billions of dollars of committed capital from investors are looking todeploy capital in new and different transactions.

Leveraged buyout 72

RationaleThe 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 strictrestrictive assumptions, is unaffected by the structure of its financing. As the debt in an LBO has a relativelyfixed, 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 valueof 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 valueof 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. Themotivation 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 managerswhose interests were not aligned with shareholders. After a major corporate restructuring, which may involve sellingoff portions of the company and severe staff reductions, the entity would likely be producing a higher incomestream. Because this type of management arbitrage and easy restructuring has largely been accomplished, LBOstoday focus more on growth and complicated financial engineering to achieve their returns. Most leveraged buyoutfirms look to achieve an internal rate of return in excess of 20%.

Management buyoutsA special case of a leveraged acquisition is a management buyout (MBO), which occurs when a company's managersbuy or acquire a large part of the company. The goal of an MBO may be to strengthen the managers' interest in thesuccess of the company. In most cases when the company is initially listed, the management will then make itprivate. MBOs have assumed an important role in corporate restructurings beside mergers and acquisitions. Keyconsiderations in an MBO are fairness to shareholders, price, the future business plan, and legal and tax issues. Onerecent criticism of MBOs is that they create a conflict of interest—an incentive is created for managers tomismanage (or not manage as efficiently) a company, thereby depressing its stock price, and profiting handsomelyby implementing effective management after the successful MBO, as Paul Newman's character attempted in theCoen 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 offbalance sheet transactions to make the company's profitability appear temporarily poorer, or simply promote andreport severely conservative (e.g. pessimistic) estimates of future earnings. Such seemingly adverse earnings newswill be likely to (at least temporarily) reduce share price. (This is again due to information asymmetries since it ismore 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 takenprivate) - at a dramatically lower price - the takeover artist gains a windfall from the former top executive's actions tosurreptitiously reduce share price. This can represent 10s of billions of dollars (questionably) transferred fromprevious shareholders to the takeover artist. The former top executive is then rewarded with a golden parachute forpresiding 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 areputation 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 - thisreduces 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 thepolitical will to sell of public assets.Again, due to asymmetric information, policy makers and the general public see a government owned firm that was afinancial '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 forother forms of takeovers or LBOs.

FailuresSome LBOs in the 1980s and 1990s resulted in corporate bankruptcy, such as Robert Campeau's 1988 buyout ofFederated Department Stores and the 1986 buyout of the Revco drug stores. The failure of the Federated buyout wasa result of excessive debt financing, comprising about 97% of the total consideration, which led to large interestpayments that exceeded the company's operating cash flow. In response to the threat of LBOs, certain companiesadopted a number of techniques, such as the poison pill, to protect them against hostile takeovers by effectivelyself-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 orselling underperforming business units, the bought-out firm may face insolvency as depleted operating revenuesbecome insufficient to repay the debt. Over-optimistic forecasts of the revenues of the target company may also leadto financial distress after acquisition. Some courts have found that LBO debt constitutes a fraudulent transfer underU.S. insolvency law if it is determined to be the cause of the acquired firm's failure. [32] However, the BankruptcyCode includes a so-called "safe harbor" provision, preventing bankruptcy trustees from recovering settlementpayments to the bought-out shareholders.[33] In 2009, the U.S. Court of Appeals for the Sixth Circuit held that suchsettlement payments could not be avoided, irrespective of whether they occurred in an LBO of a public or privatecompany.[34]

Secondary buyoutsA secondary buyout is a form of leveraged buyout where both the buyer and the seller are private equity firms orfinancial sponsors (i.e. a leveraged buyout of a company that was acquired through a leveraged buyout). A secondarybuyout 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, wereconsidered 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 leveragedbuyout 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 ordesirable to sell rather than hold the investment further or where the investment had already generated significantvalue for the selling firm.Secondary buyouts differ from secondaries or secondary market purchases which typically involve the acquisition ofportfolios of private equity assets including limited partnership stakes and direct investments in corporate securities.

Leveraged buyout 74

LBO AnalysisAn LBO analysis is designed to estimate the current value of a company to a financial buyer, based on the company'sforecasted financial performance. LBO analysis typically builds upon a medium-term forecast (typical investmenthorizon 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 repaidby the company during the forecast period and make assumptions about the multiple of earnings at which thebusiness will be sold after a period of time. By targeting returns consistent with historical targets for private equityfirms, the LBO analysis will provide an estimate of what purchase price a buyer would be willing to pay to achievethose returns.

In ArtLBOs form the basis of several cultural works. In addition to the aforementioned Barbarians at the Gate: The Fall ofRJR Nabisco and the film adaptation, based on actual events, a fictional LBO is the basis of the 1963 Japanese filmHigh and Low.

See also• Private equity• Bootstrap funding• Divisional buyout• Management buyout• Private equity firm• History of private equity and venture capital• 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[4] 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 ofWaterman Steamship Corporation from its founders and other stockholders.

[5] 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 AmericanSteamship Corporation--Investigation of Control, July 8, 1957.

[6] Trehan, R. (2006). The History Of Leveraged Buyouts (http:/ / www. 4hoteliers. com/ 4hots_fshw. php?mwi=1757). December 4, 2006.Accessed May 22, 2008

[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[9] Taylor, Alexander L. " Buyout Binge (http:/ / www. time. com/ time/ magazine/ article/ 0,9171,951242,00. html)". TIME magazine, Jul. 16,

1984.[10] Opler, T. and Titman, S. "The determinants of leveraged buyout activity: Free cash flow vs. financial distress costs." Journal of Finance,

1993.[11] 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[12] TWA - Death Of A Legend (http:/ / www. stlmag. com/ media/ St-Louis-Magazine/ October-2005/ TWA-Death-Of-A-Legend/ ) by Elaine

X. Grant, St Louis Magazine, Oct 2005[13] Game of Greed (http:/ / www. time. com/ time/ magazine/ 0,9263,7601881205,00. html) (TIME magazine, 1988)[14] Wallace, Anise C. " Nabisco Refinance Plan Set (http:/ / query. nytimes. com/ gst/ fullpage.

html?res=9C0CE2D91E31F935A25754C0A966958260)." The New York Times, July 16, 1990.

Leveraged buyout 75

[15] Stone, Dan G. (1990). April Fools: An Insider's Account of the Rise and Collapse of Drexel Burnham. New York City: Donald I. Fine.ISBN 1556112289.

[16] Den of Thieves. Stewart, J. B. New York: Simon & Schuster, 1991. ISBN 0-671-63802-5.[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)."

New York Times, September 13, 2005[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[22] Samuelson, Robert J. " The Private Equity Boom (http:/ / www. washingtonpost. com/ wp-dyn/ content/ article/ 2007/ 03/ 14/

AR2007031402177. html)". The Washington Post, March 15, 2007.[23] Dow Jones Private Equity Analyst as referenced in U.S. private-equity funds break record (http:/ / www. boston. com/ business/ articles/

2007/ 01/ 11/ us_private_equity_funds_break_record/ ) Associated Press, January 11, 2007.[24] Dow Jones Private Equity Analyst as referenced in Private equity fund raising up in 2007: report (http:/ / www. reuters. com/ article/

idUSBNG14655120080108), Reuters, January 8, 2008.[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.[28] 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[29] 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.[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 76

Management buyoutA management buyout (MBO) is a form of acquisition where a company's existing managers acquire a large part orall of the company.

OverviewManagement buyouts are similar in all major legal aspects to any other acquisition of a company. The particularnature of the MBO lies in the position of the buyers as managers of the company, and the practical consequences thatfollow from that. In particular, the due diligence process is likely to be limited as the buyers already have fullknowledge of the company available to them. The seller is also unlikely to give any but the most basic warranties tothe management, on the basis that the management know more about the company than the sellers do and thereforethe 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 itprivate.Some concerns about management buyouts are that the asymmetric information possessed by management may offerthem unfair advantage relative to current owners. The impending possibility of an MBO may lead to principal-agentproblems, moral hazard, and perhaps even the subtle downward manipulation of the stock price prior to sale viaadverse information disclosure - including accelerated and aggressive loss recognition, public launching ofquestionable projects and adverse earning surprises. Naturally, such corporate governance concerns also existwhenever current senior management is able to benefit personally from the sale of their company or its assets. Thiswould 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 heavilyinfluenced by asymmetric or inside information, some question the validity of MBOs and consider them topotentially 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 reducethe efficiency of a wide range of firms - even if they remain as public companies. This represents a substantialpotential negative externality.

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

Financing a Management Buyout

Debt FinancingThe 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 buyoutsare frequently seen as too risky for a bank to finance the purchase through a loan. Management teams are typicallyasked to invest an amount of capital that is significant to them personally, depending on the funding source/banksdetermination of the personal wealth of the management team. The bank then loans the company the remainingportion of the amount paid to the owner. Companies that proactively shop aggressive funding sources should qualifyfor total debt financing of at least four times (4X) cash flow.

Management buyout 77

Private Equity FinancingIf a bank is unwilling to lend, the management will commonly look to private equity investors to fund the majority ofbuyout. A high proportion of management buyouts are financed in this way. The private equity investors will investmoney 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 beingless risky but less profitable than capital investment.Although the management may not have resources to buy the company, private equity houses will require that themanagers each make as large an investment as they can afford in order to ensure that the management are locked inby an overwhelming vested interest in the success of the company. It is common for the management to re-mortgagetheir 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 tomaximise their return and make an exit after 3–5 years while minimising risk to themselves, whereas themanagement 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. Thebackers will invariably impose the same warranties on the management in relation to the company that the sellerswill have refused to give the management. This "warranty gap" means that the management will bear all the risk ofany 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 theway that the company is run. The purpose is to ensure that the management run the company in a way that willmaximise the returns during the term of the backers' investment, whereas the management might have hoped to buildthe company for long-term gains. Though the two aims are not always incompatible, the management may feelrestricted.The European buyout market was worth €43.9bn in 2008, a 60 per cent fall on the €108.2bn of deals in 2007. Thelast time the buyout market was at this level was in 2001 when it reached just €34bn.[1]

Seller FinancingIn certain circumstances it may be possible for the management and the original owner of the company to agree adeal whereby the seller finances the buyout. The price paid at the time of sale will be nominal, with the real pricebeing paid over the following years out of the profits of the company. The timescale for the payment is typically 3–7years.This represents a disadvantage for the selling party, which must wait to receive its money after it has lost control ofthe company. It is also dependent on the returned profits being increased significantly following the acquisition, inorder for the deal to represent a gain to the seller in comparison to the situation pre-sale. This will usually onlyhappen in very particular circumstances.The vendor may nevertheless agree to vendor financing for tax reasons, as the consideration will be classified ascapital gain rather than as income. It may also receive some other benefit such as a higher overall purchase price thanwould 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 andwill be left in control of the company once the consideration has been paid.

Management buyout 78

Examples of MBOsA 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 tooutside 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 companywho had floated it in 1998. He was backed by private equity houses Apax and Permira, who now own 60% of thecompany. An earlier example of this in the UK was the management buyout of Virgin Interactive from Viacomwhich was led by Mark DyneThe Virgin Group has undergone several management buyouts in recent years. On September 17, 2007, Sir RichardBranson announced that the UK arm of Virgin Megastores was to be sold off as part of a management buyout, andfrom November 2007, will be known by a new name, Zavvi. On September 24, 2008, another part of the Virgingroup, Virgin Comics underwent a management buyout and changed its name to Liquid Comics. In the UK andIreland, 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

Article Sources and ContributorsHistory of private equity and venture capital Source: http://en.wikipedia.org/w/index.php?oldid=388564125 Contributors: 96Barolo, Arjayay, Arsenikk, Barek, CalSGWorker, Chongalulu,Eastlaw, Fratrep, Grafen, Ground Zero, Hmains, John Vandenberg, Kdajani, Koavf, Lattefever, Majorclanger, Malleus Fatuorum, Meco, Michael Devore, Mild Bill Hiccup, Orlady, Peter Isotalo,Pindari, Pmussler, Prezbo, Seedless Maple, ShelfSkewed, Sluzzelin, TEB728, Tony1, Urbanrenewal, Vegaswikian, Venture Capital in Pakistan, Wiff&Hoos, Wikidea, YUL89YYZ, 15anonymous edits

Early history of private equity Source: http://en.wikipedia.org/w/index.php?oldid=384577687 Contributors: Bender235, Chris the speller, Rachelskit, Urbanrenewal, Vegaswikian,Woohookitty, 1 anonymous edits

Private equity in the 1980s Source: http://en.wikipedia.org/w/index.php?oldid=377217589 Contributors: Bender235, Elysdir, Jaraalbe, Meco, Rachelskit, Rich Farmbrough, ShelfSkewed,TEB728, Urbanrenewal, Vegaswikian, 1 anonymous edits

Private equity in the 1990s Source: http://en.wikipedia.org/w/index.php?oldid=390158731 Contributors: Bender235, Brasseye, Fortdj33, Ground Zero, Jaraalbe, LilHelpa, Meco, Rachelskit,Seedless Maple, Sluzzelin, TEB728, Urbanrenewal, Vegaswikian, YUL89YYZ

Private equity in the 2000s Source: http://en.wikipedia.org/w/index.php?oldid=377202495 Contributors: Bender235, CalSGWorker, Chongalulu, Dancter, EagleFan, Elakhna, Eric1985,Fortdj33, Fratrep, Hmains, JMW64, Jaraalbe, Kazkaskazkasako, Lattefever, Meco, Mike Linksvayer, Pitchbook, Rjwilmsi, Seedless Maple, The Monster, TheAllSeeingEye, Urbanrenewal,Vegaswikian, Woohookitty, 9 anonymous edits

Envy ratio Source: http://en.wikipedia.org/w/index.php?oldid=389311116 Contributors: Echarp, Lamro

Leveraged buyout Source: http://en.wikipedia.org/w/index.php?oldid=389711395 Contributors: 1122334455, Aarp, Acorncreationgroup, Affi83, Amitch, Andrewericoleman, Anoneditor,Arjan1071, Arthena, Athaenara, Bender235, Biblbroks, Bobbyi, Boing! said Zebedee, Bombastus, Bonás, Bungofpot, CBooch10, Canterbury Tail, Chimpex, Chrism, David Haslam,David.lijin.zhang, Dbrandon30, Deiz, Dfranke, DocendoDiscimus, Dondepam, EagleOne, Edcolins, Elonka, Empoor, Escape Orbit, EvoL88Hate, Eyu100, Faderrattnerb, FinanceGuy2006,Flawiki, Flowanda, Gene Wood, Gkklein, Gogo Dodo, Ground Zero, Gwernol, HarrisonScott, Herbertxu, Hitanshu D, Hu12, Imf980, Jerryseinfeld, Jheald, JoeSmack, John.L.Kramer, Judicatus,Jugger90, Kelvintsang, Kered1954, Ktpartridge, LAMooney, Lamro, Larry laptop, Linkracer, Livajo, Marcok, Maurreen, Maury Markowitz, Mcenedella, Meco, Mgeorg, Mild Bill Hiccup,Monkey Bounce, Mrwojo, Mtpruitt, Mwanner, N328KF, Narendrachokshi, Nbarth, Neilclasper, Netalarm, Ohnoitsjamie, Olivier, PEC123, Patroiz, Plek, Pselcke, RainbowOfLight, Riceman1974,Rich Farmbrough, Rigadoun, Ronz, Rossami, Rossp, Saihtam, SchuminWeb, Sfahey, Sfpcxn, ShaunMacPherson, SiobhanHansa, Smoothsails, Sofra, SquarePeg, Stevencmiller, Stuarthill, SuisseBanker, SunCreator, TEB728, The Anome, Twaz, Tysto, Ulric1313, Urbanrenewal, Verne Equinox, VodkaJazz, WikiPedant, Wikidemon, Wikiwikiwiki01, Woohookitty, Ymegahed, 238anonymous edits

Management buyout Source: http://en.wikipedia.org/w/index.php?oldid=390091662 Contributors: Acorncreationgroup, Am dying, Antandrus, Arthur Markham, Damian Yerrick, Dondepam,El C, EmanWilm, Hu12, Hussein Allam, JaneGJanson, Japanese Searobin, Jerryseinfeld, Johnteslade, Jones2, KuRiZu, LAMooney, Lamro, Lucyloomagoo, Marcok, MementoVivere,Mhardwicke, Mwanner, Paul W, Rjwilmsi, Romanm, RoySmith, Sasidhar N, Sicherlich, SpaceyHopper, Standardset, Stoomagoo, TastyPoutine, Triskaideka, TubularWorld, Urbanrenewal,Wikiwikiwiki01, 55 anonymous edits

Image Sources, Licenses and Contributors 80

Image Sources, Licenses and ContributorsImage:JP Morgan.jpg Source: http://en.wikipedia.org/w/index.php?title=File:JP_Morgan.jpg License: Public Domain Contributors: Edward SteichenImage:Andrew Carnegie, three-quarter length portrait, seated, facing slightly left, 1913.jpg Source:http://en.wikipedia.org/w/index.php?title=File:Andrew_Carnegie,_three-quarter_length_portrait,_seated,_facing_slightly_left,_1913.jpg License: Public Domain Contributors: Frank C. Müller,Herbythyme, Howcheng, Infrogmation, Juiced lemon, Scewing, Tom, 3 anonymous editsImage:SandHillRoad.jpg Source: http://en.wikipedia.org/w/index.php?title=File:SandHillRoad.jpg License: Creative Commons Attribution 2.0 Contributors: Mark Coggins from SanFranciscoImage:Michael Milken 1.jpg Source: http://en.wikipedia.org/w/index.php?title=File:Michael_Milken_1.jpg License: Public Domain Contributors: US GovernmentImage:Nasdaq2.png Source: http://en.wikipedia.org/w/index.php?title=File:Nasdaq2.png License: Public Domain Contributors: User:Little ProfessorImage:David M. Rubenstein.jpg Source: http://en.wikipedia.org/w/index.php?title=File:David_M._Rubenstein.jpg License: Creative Commons Attribution-Sharealike 2.0 Contributors: RemySteinegger, World Economic Forum from Cologny, SwitzerlandImage:StephenSchwarzman.jpg Source: http://en.wikipedia.org/w/index.php?title=File:StephenSchwarzman.jpg License: Creative Commons Attribution-Sharealike 2.0 Contributors:Copyright World Economic Forum (www.weforum.org), swiss-image.ch/Photo by Remy SteineggerFile:Leveraged Buyout Diagram.png Source: http://en.wikipedia.org/w/index.php?title=File:Leveraged_Buyout_Diagram.png License: Creative Commons Attribution 3.0 Contributors:User:Urbanrenewal

License 81

LicenseCreative Commons Attribution-Share Alike 3.0 Unportedhttp:/ / creativecommons. org/ licenses/ by-sa/ 3. 0/