Post Modern Investment: Facts and Fallacies of Growing Wealth in a Multi-Asset World

Chapter 6

Private Equity

Its True Value?

The first private equity (PE) transaction was probably initiated with the advancement of seed for some percentage of a crop to be grown, or some similar event. At its modern core, PE is a broad category that includes a range of direct investments that are made generally through structured general-partner and limited-partner governance vehicles. In past chapters, we have described the evolution of the modern investment management business and traced its origins to Markowitz and his work some 60 years ago. The inception of modern PE can be traced back to this period as well. While there is no single definition of PE, for many, modern PE began in the mid-1940s (e.g., American Research and Development Corporation and J.H. Whitney & Co.). However, it was not until the 1960s that PE began to be commonly formed as limited partnerships, consisting of a general managing partner and passive limited partners, who provide much of the capital. Also introduced was the compensation structure for the general partner (i.e., an annual management fee of 1 to 2 percent and a performance fee typically representing up to 20 percent of the profits).

As in any maturing asset class, the road to the current forms and use of PE has not been smooth. The 1980s gave rise to management and leverage buyouts and the terms corporate raiders and hostile takeovers. In the 1980s, it was estimated that there were nearly 2,000 leveraged buyouts valued in excess of USD 250 million. ...