History of Private Equity

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The Brief History of Private Equity

The history of private equity can be traced back to 1901 when J.P. Morgan and Co bought out Carnegie Steel Corporation for $480 million. After merging the corporation’s assets with other companies, J.P. Morgan became the largest company in the world. 

Merchant banks like Morgan were forced out of such deals later by legislations that required such institutions to choose between being a depository bank or an investment bank. This also limited the funds available to them. It was only after World Ward II that private equity firms began to actively take part in private investments. The first two venture capital firms were set up in 1946 – American Research and Development Corporation (ARDC) and JH Whitney & Company. ARDC was founded by Georges Dorlot, the former dean of Harvard Business School, who is now known as the father of venture capitalism. Other founders of ARDC included Ralph Flanders and Karl Compton (former president of MIT). Together, they worked towards encouraging private investments in businesses run by soldiers returning home from the war. ARDC went on to invest till 1971. In 1972 ARDC merged with Textron after having investing in 150 companies. 

KH Whitney & Company was founded by John Hay Whitney and his partner Benno Schmidt. Whitney had investments dating back to 1930. He also founded Pioneer Pictures in 1933, acquiring a 15% interest in Technicolor Corporation. His most notable investment included Florida Foods Corporation. This was the company that developed an innovative method to deliver nutrition to American soldiers. They later went on to be known as Minute Maid orange juice, which was sold out to the Coca-Cola Company in 1960. JH Whitney & Company continued to make investments till 1971 and later went on to raise $750 million for its sixth private equity fund in 2005. 

In the 1960s and 1970s, venture capital firms put their money on starting and expanding companies. These companies were into electronics or medical or date processing technology. This made venture capital synonymous with ‘technology finance’. 

By the 1980s, the public had become aware of the potential private equity holds. And because private equity was most leveraged for buyouts in the decade, people began to refer to these institutions as ‘corporate raiders’ and ‘hostile takeovers’. The ‘80s also saw the private equity industry raise about $2.4 billion in annual investor commitments. By 1989 this figure had touched $21.9 billion. 

In India, the financial ecosystem began to change post-1990. With the IT boom, venture capitalists started making investments in start-ups and early-stage companies. They began investing in India, across sectors, to diversify and mitigate risks.

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