A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

RETOUR SOMMAIRE

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2010

INDUSTRY OVERVIEW

E arly private equity and the growth of S ilicon V alley (1960 s and 1970 s ) During the 1960s and 1970s, venture capital firms focused their investment activity prima- rily on starting and expanding companies. These companies were often exploiting break- throughs in electronic, medical or data-processing technology. As a result, venture capital came to be almost synonymous with technology finance. It was also in the 1960s that the common form of private equity funds still in use today emerged and in 1964, KKR had the revolutionary idea to use the first official leveraged buyout (LBO) 2 . T he first private equity boom (1980 s ) The decade of the 1980s is associated with the LBO boom, culminating in 1989 with the largest operation in history only surpassed 16 years later, a $31.1 billion takeover of RJR Na- bisco, closed by KKR. With the increased LBO activity and investor interest, the mid-1980s witnessed a major proliferation of private equity firms, such as the Blackstone or Carlyle groups. The collapse of the junk bonds market in 1989 and 1990 announced the end of the LBO boom. The 1980s also saw a proliferation of venture capital investment firms; From just a few dozen firms at the start of the decade, there were over 650 venture capital firms by the end of the 1980s. T he second venture capital & private equity boom and the internet bubble (1990 s ) Beginning roughly in 1992 after a 3-year decline and continuing through the end of the dec- ade, the private equity industry once again experienced a tremendous boom, both in ven- ture capital and LBOs with the emergence of big name players managing multi-billion dollar sized funds. Although in the 1980s, many of the acquisitions made were unsolicited and unwelcome, private equity firms in the 1990s focused on making buyouts attractive proposi- tions for management and shareholders. At that time, “Big companies that would once have turned up their noses at an approach from a private-equity firm were now pleased to do business with them.” 3 The late 1990s were a boom time for venture capital as firms in Sand Hill Road in Menlo Park and Silicon Valley benefited from a huge surge of interest and mas- sive capital investment in the nascent internet and other computer technologies, resulting in a situation of overstated valuations. T he burst of the internet bubble (2000 to 2003) The internet bubble burst in March 2000, as a consequence of the irrational exuberance and over-optimism that pushed the private and public company market valuations to an unsustainable level. By mid-2003, the venture capital industry had shrivelled to about half its 2001 capacity. Meanwhile, as the venture sector collapsed, the activity in the LBO market also declined significantly. T he third private equity boom and the golden age of private equity (2003-2007) From 2003, the combination of decreasing interest rates, loosening lending standards and regulatory changes for publicly traded companies set the stage for the largest boom private equity had seen. By 2004 and 2005, major buyouts were once again becoming common. In 2006, USA Today reported retrospectively on the revival of private equity, with the following words: “LBOs are back, only they’ve rebranded themselves private equity and vow a hap- pier ending. The firms say this time it’s completely different. Instead of buying companies

1.1

2 This concept is explained in section 1.2.2 3 Source: The Economist, “The new kings of capitalism, survey on the private equity industry”, November, 25, 2004

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