Private Equity’s Neglected Pre-History: A Trans-Atlantic Perspective

Abstract

Large-scale private equity (“PE”) buyouts, and the increasingly gargantuan financial firms that spearhead them, are commonly regarded as staples of today’s financialised corporate economy. However, this has not always been the case and, up until recently, PE firms and funds were still being heralded as a novel and revolutionary force in corporate finance and governance. Many observers would regard PE’s effective “year dot” as being 1976, when the pioneering New York LBO boutique Kohlberg Kravis Roberts (“KKR”) came into existence. Whether by coincidence or otherwise, 1976 was also the year that Michael Jensen and William Meckling published their pathbreaking “Theory of the Firm” article in the Chicago-based Journal of Financial Economics, which is widely credited with inaugurating the popular “agency” paradigm through which PE’s social value to the world would come to be articulated and understood in succeeding decades. Largely due to agency theory’s narrative influence, PE has generally come to be understood not just as a US-originated phenomenon; but also, as an inherently functional, market-driven phenomenon geared to counteracting unsustainable structural deficiencies in the United States’ mid-to-late twentieth century industrial economy. In short, PE was – and arguably still is – perceived by most commentators as a thoroughly modern, American, and organic institution, with the late-1970s and 1980s widely cast as PE’s proverbial zeitgeist moment when it became a fundamental game-changer for corporate finance and governance both domestically and, to some extent, internationally. But to what extent were the times really, to quote Bob Dylan, “a changin’” during this era insofar as the growth of PE was concerned, at least in relation to earlier periods of Anglo-American business history?

In this Paper, I will argue not very much; or, at least, not nearly as much as most students and scholars of PE would like to believe. In particular, I will seek to demonstrate that, far from being a modern phenomenon that only emerged in the 1970s, PE has a considerably longer pedigree: in fact, its effective origination can be traced back a whole century earlier to the 1870s rather than 1970s. I will further demonstrate how the common perception of PE as a purely US-originated phenomenon – that only latterly made inroads in the UK and other jurisdictions from the 1980s onwards – is also an oversimplification, given that PE buyouts originated much earlier than this in the UK too, and were engendered by markedly different pressures and circumstances to those at play in the United States at the relevant points in time. Finally, I will show how, in contrast to PE’s typical intellectual rationalisation as an organic, market-driven phenomenon; the peculiar trajectory of the UK buyout sector demonstrates that PE is, in trans-Atlantic perspective at least, a heavily path-dependent institution driven at least equally by public (state) pressures as by private (market) forces.