| History of private equity and venture capital |
|---|
| Early history |
| (origins of modernprivate equity) |
| The 1980s |
| (leveraged buyout boom) |
| The 1990s |
| (leveraged buyout and the venture capital bubble) |
| The 2000s |
| (dot-com bubble to thecredit crunch) |
| The 2010s |
| (expansion) |
| The 2020s |
| (COVID-19 recession) |
Private equity in the 1980s relates to one of the major periods in thehistory of private equity and venture capital. Within the broaderprivate equity industry, two distinct sub-industries,leveraged buyouts andventure capital experienced growth along parallel although interrelated tracks.
The development of theprivate equity andventure capital asset classes has occurred through a series ofboom and bust cycles since the middle of the 20th century. The 1980s saw the first major boom and bust cycle in private equity. The cycle which is typically marked by the 1982 acquisition ofGibson Greetings and ending just over a decade later was characterized by a dramatic surge inleveraged buyout (LBO) activity financed byjunk bonds. The period culminated in the massive buyout ofRJR Nabisco before the near collapse of the leveraged buyout industry in the late 1980s and early 1990s marked by the collapse ofDrexel Burnham Lambert and thehigh-yield debt market.
The beginning of the first boom period in private equity would be marked by the well-publicized success of the Gibson Greetings acquisition in 1982 and would roar ahead through 1983 and 1984 with the soaring stock market driving profitable exits for private equity investors.
In January 1982, former USSecretary of the TreasuryWilliam E. Simon,Ray Chambers and a group of investors, which would later come to be known asWesray Capital Corporation, acquiredGibson Greetings, a producer of greeting cards. The purchase price for Gibson was $80 million, of which only $1 million was rumored to have been contributed by the investors. By mid-1983, just sixteen months after the original deal, Gibson completed a $290 million IPO and Simon made approximately $66 million.[1] Simon and Wesray would later complete the $71.6 million acquisition ofAtlas Van Lines. The success of the Gibson Greetings investment attracted the attention of the wider media to the nascent boom in leveraged buyouts.
Between 1979 and 1989, it was estimated that there were over 2,000 leveraged buyouts valued in excess of $250 billion[2] Notable buyouts of this period (not described elsewhere in this article) include:
Because of the high leverage on many of the transactions of the 1980s, failed deals occurred regularly, however the promise of attractive returns on successful investments attracted more capital. With the increased leveraged buyout activity and investor interest, the mid-1980s saw a major proliferation of private equity firms. Among the major firms founded in this period were:
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 acquiringsecondary market interests in existingprivate equity funds was founded and then, two years later in 1984,First Reserve Corporation, the first private equity firm focused on the energy sector, was founded.
The public successes of the venture capital industry in the 1970s and early 1980s (e.g., DEC, Apple, Genentech) gave rise to a major proliferation of venture capital investment firms. From just a few dozen firms at the start of the decade, there were over 650 firms by the end of the 1980s, each searching for the next major "home run". While the number of firms multiplied, the capital managed by these firms increased only 11% from $28 billion to $31 billion over the course of the decade.[24]
The growth the industry was hampered by sharply declining returns and certain venture firms began posting losses for the first time. In addition to the increased competition among firms, several other factors impacted returns. The market for initial public offerings cooled in the mid-1980s before collapsing after the stock market crash in 1987 and foreign corporations, particularly from Japan and Korea, flooded early stage companies with capital.[24]
In response to the changing conditions, corporations that had sponsored in-house venture investment arms, includingGeneral Electric andPaine Webber either sold off or closed these venture capital units. Additionally, venture capital units withinChemical Bank (todayCCMP Capital),Citicorp (todayCourt Square Capital Partners andCVC Capital Partners,First Chicago Bank (the predecessor ofGTCR andMadison Dearborn Partners) andContinental Illinois National Bank (todayCIVC Partners), among others, began shifting their focus from funding early stage companies toward investments in more mature companies. Even industry foundersJ.H. Whitney & Company andWarburg Pincus began to transition toward leveraged buyouts and growth capital investments.[24][25][26] Many of these venture capital firms attempted to stay close to their areas of expertise in the technology industry by acquiring companies in the industry that had reached certain levels of maturity. In 1989,Prime Computer was acquired in a $1.3 billion leveraged buyout byJ.H. Whitney & Company in what would prove to be a disastrous transaction. Whitney's investment in Prime proved to be nearly a total loss with the bulk of the proceeds from the company's liquidation paid to the company's creditors.[27]
Although lower profile than their buyout counterparts, new leading venture capital firms were also formed includingInstitutional Venture Partners (IVP) in 1980,Draper Fisher Jurvetson (originally Draper Associates) in 1985 andCanaan Partners in 1987 among others.
Although the "corporate raider" moniker is rarely applied to contemporary private equity investors, there is no formal distinction between a "corporate raid" and other private equity investments acquisitions of existing businesses.[citation needed] 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 ahostile takeover of the company, perceivedasset stripping, major layoffs or other significant corporate restructuring activities. Management of many largepublicly tradedcorporations reacted negatively to the threat of potential hostile takeover or corporate raid and pursued drastic defensive measures includingpoison pills,golden parachutes and increasingdebt levels on the company'sbalance sheet. Additionally, the threat of the corporate raid would lead to the practice of "greenmail", where a corporate raider or other party would acquire a significant stake in the stock of a company and receive an incentive payment (effectively a bribe) from the company in order to avoid pursuing a hostile takeover of the company. Greenmail represented a transfer payment from a company's existing shareholders to a third-party investor and provided no value to existing shareholders but did benefit existing managers. The practice of greenmail is not typically considered a tactic of private equity investors and is not condoned by market participants.
Among the most notable corporate raiders of the 1980s wereCarl Icahn,Victor Posner,Nelson Peltz,Robert M. Bass,T. Boone Pickens,Harold Clark Simmons,Kirk Kerkorian,Sir James Goldsmith,Saul Steinberg andAsher Edelman. Icahn developed a reputation as a ruthless corporate raider after his hostile takeover ofTWA in 1985.[28] The result of that takeover was Icahn systematically selling TWA's assets to repay the debt he used to purchase the company, which was described as asset stripping.[29] In later years, many of the corporate raiders would be re-characterized as "Activist shareholders".
Many of the corporate raiders were onetime clients ofMichael Milken, whoseinvestment banking firm,Drexel Burnham Lambert, helped raise blind pools of capital with which corporate raiders could make a legitimate attempt to take over a company and providedhigh-yield debt financing of the buyouts.
Drexel Burnham raised a $100 million blind pool in 1984 for Peltz and his holding company Triangle Industries (laterTriarc) to give credibility for takeovers, representing the first major blind pool raised for this purpose. Two years later, in 1986, Wickes Companies, aholding company run bySanford C. Sigoloff, raised a $1.2 billion blind pool.[30]
In 1985, Milken raised $750 million for a similar blind pool forRonald Perelman which would ultimately prove instrumental in acquiring his biggest target: TheRevlon Corporation. In 1980, Ronald Perelman, the son of a wealthy Philadelphia businessman, and future "corporate raider" having made several small but successful buyouts, acquiredMacAndrews & Forbes, a distributor of licorice extract and chocolate, that Perelman's father had tried and failed to acquire 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 andRevlon. Using the Pantry Pride subsidiary of his holding company MacAndrews & Forbes Holdings, Perelman's overtures were rebuffed. Repeatedly rejected by the company's board and management, Perelman continued to press forward with a hostile takeover, raising his offer from an initial bid of $47.50 per share until it reached $53.00 per share. After receiving a higher offer from awhite knight, private equity firmForstmann Little & Company, Perelman's Pantry Pride made a successful bid for Revlon, valuing the company at $2.7 billion.[32] The buyout proved troubling, burdened by a heavy debt load.[33][34][35] Under Perelman's control, Revlon sold four divisions: two of them were sold for $1 billion, its vision care division was sold for $574 million, and its National Health Laboratories division was spun out to the public market in 1988. Revlon also made acquisitions includingMax Factor in 1987 andBetrix in 1989, later selling them toProcter & Gamble in 1991.[36] Perelman exited the bulk of his holdings in Revlon through an IPO in 1996 and subsequent sales of stock. As of December 31, 2007, Perelman still retains a minority ownership interest in Revlon. The Revlon takeover, because of its well-known brand, was profiled widely by the media and brought new attention to the emerging boom in leveraged buyout activity.
In later years, Milken and Drexel would shy away from certain of the more "notorious" corporate raiders as Drexel and the private equity industry attempted to move upscale.[citation needed]
Leveraged buyouts in the 1980s including Perelman's takeover ofRevlon came to epitomize the "ruthless capitalism" and "greed" popularly seen to be pervading Wall Street at the time. One of the final major buyouts of the 1980s proved to be its most ambitious and marked both a high-water mark and a sign of the beginning of the end of the boom that had begun nearly a decade earlier. In 1989,KKR closed on a $31.1 billion takeover ofRJR Nabisco. It was, at that time and for over 17 years, the largest leveraged buyout in history. The event was chronicled in the book,Barbarians at the Gate: The Fall of RJR Nabisco, and later made into a television movie starringJames Garner.
F. Ross Johnson was the President andCEO ofRJR Nabisco at the time of the leveraged buyout and Henry Kravis was a general partner atKohlberg Kravis Roberts. The leveraged buyout was in the amount of $25 billion (plus assumed debt), and the battle for control took place in October and November 1988.KKR would eventually prevail 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 and horse-trading ensued which pittedKKR againstShearson Lehman Hutton and laterForstmann Little & Co. Many of the major banking players of the day, includingMorgan Stanley,Goldman Sachs,Salomon Brothers, andMerrill Lynch were actively involved in advising and financing the parties.
After Shearson Lehman's original bid,KKR quickly introduced a tender offer to obtain RJR Nabisco for $90 per share—a price that enabled it to proceed without the approval of RJR Nabisco's management. RJR's management team, working with Shearson Lehman and Salomon Brothers, submitted a bid of $112, a figure they felt certain would enable them to outflank any response by Kravis's team. KKR's final bid of $109, while a lower dollar figure, was ultimately accepted by the board of directors of RJR Nabisco. KKR's offer was guaranteed, whereas the management offer (backed by Shearson Lehman and Salomon) lacked a "reset", meaning that the final share price might have been lower than their stated $112 per share. Additionally, many in RJR's board of directors had grown concerned at recent disclosures of Ross Johnson' unprecedented golden parachute deal.TIME magazine featured Ross Johnson on the cover of their December 1988 issue along with the headline, "A Game of Greed: This man could pocket $100 million from the largest corporate takeover in history. Has the buyout craze gone too far?".[37] KKR's offer was welcomed by the board, and, to some observers, it appeared that their elevation of the reset issue as a deal-breaker in KKR's favor was little more than an excuse to reject Ross Johnson's higher payout of $112 per share. F. Ross Johnson received $53 million from the buyout.
At $31.1 billion of transaction value, RJR Nabisco was by far the largest leveraged buyout in history. In 2006 and 2007, a number of leveraged buyout transactions were completed that for the first time surpassed the RJR Nabisco leveraged buyout in terms of nominal purchase price. However, adjusted for inflation, none of the leveraged buyouts of the 2006 – 2007 period would surpass RJR Nabisco. Unfortunately for KKR, size would not equate with success as the high purchase price and debt load would burden the performance of the investment.
Two years earlier, in 1987,Jerome Kohlberg, Jr. resigned fromKohlberg Kravis Roberts & Co. over differences in strategy. Kohlberg did not favor the larger buyouts (includingBeatrice Companies (1985) andSafeway (1986) and would later likely have included the 1989 takeover ofRJR Nabisco), highlyleveraged transactions orhostile takeovers being pursued increasingly byKKR.[38] The split would ultimately prove acrimonious as Kohlberg sued Kravis and Roberts for what he alleged were improper business tactics. The case was later settled out of court.[39] Instead, Kohlberg chose to return to his roots, acquiring smaller,middle-market companies and in 1987, he would found a new private equity firmKohlberg & Company along with his son James A. Kohlberg, at the time a KKR executive.Jerome Kohlberg would continue investing successfully for another seven years before retiring fromKohlberg & Company in 1994 and turning his firm over to his son.[40]
As the market reached its peak in 1988 and 1989, new private equity firms were founded which would emerge as major investors in the years to follow, including:
By the end of the 1980s the excesses of the buyout market were beginning to show, with thebankruptcy of several large buyouts includingRobert Campeau's 1988 buyout ofFederated Department Stores, the 1986 buyout of theRevco drug stores, Walter Industries, FEB Trucking and Eaton Leonard. Additionally, the RJR Nabisco deal was showing signs of strain, leading to a recapitalization in 1990 that involved the contribution of $1.7 billion of new equity from KKR.[44] Additionally, in response to the threat of unwelcome LBOs, certain companies adopted a number of techniques, such as thepoison pill, to protect them against hostile takeovers by effectively self-destructing the company if it were to be taken over.
Although private equity rarely received a thorough treatment in popular culture, several films did feature stereotypical "corporate raiders" prominently. Among the most notable examples of private equity featured in motion pictures included:
