Darren Herft: Exploring the history of Private Equity

According to McKinsey & Company, private equity firms saw a 12.2 percent increase from the previous year and assets worth $3.9 trillion were held by private equity firms as of 2019. While the alternative investment category has gained considerable media attention over the last few years, Darren Herft thinks that the tactics used by private equity have been around for much longer.

“Some would say that JP Morgan’s buyout of the Carnegie Steel Corp and its amalgamation into United States Steel was the first leveraged buyout in modern finance,” says Darren Herft.

While US Steel became the world’s largest company, the Glass Steagall Act (1933) effectively ended such bank-brokered consolidations. The act separated commercial banking from investment banking and was one the most hotly legislative initiatives of the Roosevelt administration.

According to Darren Herft, “Private Equity took a backseat up until the boom in technological advancements in the 1970s with the funding obtained by firms such as Apple, Intel and Microsoft to expand into the market coming from California’s swelling venture capital.”

While the deals of that era generated much controversy and intrigue, they also generated profits and that led to an increased awareness as well as interest in private equity. With time, the number of investors as well as the availability of funds multiplied exponentially.

“Although notable transactions such as RJR Nabisco’s acquisition by Kohlberg, Kravis and Roberts (KKR) in 1988 took place, private equity really experienced a boom between the years 2005 and 2007,” opines Darren Herft.

While studies including one by the prestigious Harvard University found that companies backed by Private Equity generally perform better than their publicly funded counterparts, Darren Herft thinks that it is not a sure shot guarantee of success.

“Even Warren Buffet, one of history’s most successful investors has had to learn this lesson the hard way,” says Herft. 

Buffet had bought in around $2 billion worth of shares of TXU energy after it was acquired by KKR, Goldman Sachs and TPG Capital in 2007 for a whopping $25.1 billion. The company eventually went bankrupt.

Herft thinks that private equity’s rise as a preferred way for many start-ups as well as smaller companies looking to scale is unsurprising. Not only do private equity firms provide capital to their acquisitions and investments but also a high level of expertise. This helps the companies to hit their goals and targets in a shorter amount of time.

“Companies looking at aggressive growth over the short term have much to benefit from private equity as firms are looking for just such businesses to get involved with.”

He thinks that the reason firms can adopt new and riskier growth models is due to the lack of accountability that companies beholden to the public are encumbered by.

Herft believes that private equity has become a lucrative funding opportunity for investors and companies alike.

“Private equity is bound to grow by leaps and bounds for the foreseeable future.”