The world of financial investment has come a long way since its early beginnings in the industrial revolution, when it was the province of merchant bankers like Jay Gould and Jay Cooke, who poured their money into telegraph companies and railroads, seeking to build a new world. J.P. Morgan, Andrew Carnegie and others continued this trend of investing in railroads and heavy industry, but it was not until the 1940s that private equity became available to anyone beyond big companies and independently wealthy families, such as the Vanderbilts, Warburgs and Rockefellers. With the foundation of the American Research and Development Corporation in 1946, modern private equity was born, and people like you and me acquired the opportunity to throw capital into emerging and established businesses, seeking a significant return.
In these early days of investment, everything was built on communication. Communication with a financial advisor built up trust and encouraged higher and higher investments, with clients often remaining loyal to one bank over the entire course of a lifetime. By the 1950s, with the early development of computer industries and Silicon Valley companies on the rise, it became increasingly possible, and increasingly attractive, for smaller companies to be drawn into the investment market by the promise of high returns, lured in many cases by their own financial managers. In the 1960s and 70s, accordingly, a huge number of brokerage firms emerged to keep up with demand for investment. But it was not until the 1980s that a so-called “private equity boom” took place, with the public becoming fully aware, for the first time, of their own ability to affect how major companies functioned and flourished — or not, as the case might be.
In 1989, RJR Nabisco was bought out in a huge leveraged buyout that marked the culmination of a decade of private investment that changed the course of the industry entirely. It was the word of mouth and media around the success of Gibson Greetings, a greeting card manufacturer, that truly sparked the investment boom in the first place. Between 1982 and mid-1983, Gibson Greetings had turned an $80 million investment into a $290 million sale. This caught the attention of many, hoping to replicate the success of these investors. Many of those who rushed to invest in other companies were inexperienced and placed their money in the wrong places: but this was where private equity firms came in. In the 1980s, a number of major firms were founded, hoping to capitalize on the rising desire to invest in venture capital. These included The Carlyle Group, Bain capital, BC Partners, Chemical Venture Partners, Hicks and Haas, Hellman and Friedman and the Blackstone Group. Other massive public successes in the industry included such giants as Apple, and by the end of the decade, there were almost 700 investment firms hoping to get in on the next massive investment success.
Investment in 90’s
In the early 90s, a minor decline occurred in venture capital and investment, but by the mid-90s, something else had become big news and had changed the course of investment — the internet.
The so-called Internet Bubble drove private equity investment from 1995 until the turn of the millennium, with new technologies and the emerging internet spurring a boom in investment in Silicon Valley and similar areas. Amazon.com, E-Bay and Yahoo! were among the many companies that received private equity investment in this period of time.
Equity had truly become a market for public consumption, and financial advisors were continually multiplying. In the days before the internet, they were practically gods in the eyes of those looking for smart investment advice: they knew what the stock market was doing, they knew what was likely to do well and what was a calculated risk, and they knew what was the financial equivalent of throwing money into a black hole.
Continued in part 2…