Part 1: Industry Overview
Chapter 1: The Power of Private
Equity
Private equity was a cottage industry 30 years ago when I started in the
investment business. A small number of institutional investors
understood the investment strategy and committed to funds in their
portfolios. Most others perceived private equity as a risky, illiquid strategy
that fell beyond the comfortable confines of a 60/40 portfolio consistent
with the Prudent Man Rule.
Leveraged purchases of privately owned, cash-flowing businesses run by
founders dominated private equity deal activity back then. The first
spotlight shined on leveraged buyouts came from two books published in
1989: The Predator’s Ball, which told the story of Michael Milken’s high-
yield bond financing revolution; and Barbarians at the Gate, which
described KKR’s purchase of RJR Nabisco for an astonishing $24 billion. A
year later, Milken’s Drexel Burnham Lambert filed for bankruptcy. The
combination of the extravagance in the ebullient times and the controversy
around Drexel’s collapse kept institutions at bay for a decade.
That all changed over the last 20 years. Private equity went from a small
allocation from a few thought leaders to a massive, powerful juggernaut
desired by all. It went from hiding in a corner of the private business world
to touching every corner of the global economy in plain sight.
The Yale story
The inflection point for the industry may have been when the late David
Swensen published Pioneering Portfolio Management in 2000. Swensen
was the long-time Chief Investment Officer for the Yale University
Investments Office and my first mentor. His book included a description
and rationale for each asset class in Yale’s policy portfolio. He described the
role of private equity as the following:
Properly selected investments in leveraged buyouts and venture capital
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