The Emergence of Private Equity Finance in the US: Leveraged Buyouts, Institutional Investment, Junk Bonds and the Thrifts

Abstract

In this chapter I begin the process of placing private equity finance (PEF) in context. Specialist firms owned and operated by general partners who act as professional intermediaries between business organisations and sources of finance emerged in the US in response to a particular set of conditions. A growing proportion of investment capital in the US was accumulating in the hands of institutions. The state was initially concerned that a failure to create a system able to effectively access this source of investment capital would be detrimental to small business growth, innovation, and ultimately economic growth. Various policies and legislative changes were instituted to address this problem. These changes, though mainly focused on PEF venture capital also provided the conditions within which PEF with a focus on leveraged buyouts (LBOs) could grow. PEF LBOs were in a sense an unintended beneficiary of these changes. Thereafter, PEF LBOs grew far more rapidly in the 1980s than venture capital because of other factors. The rise of conglomeration in the 1960s and the economic conditions of the 1970s and early 1980s provided numerous targets for PEF LBOs. Changes in the structure of investment banking and its practices and the rise of forms of financial instrument, particularly junk bonds, provided access to investors and sources for increasingly large and complex debt structures.