A Brief History of Private Equity

May 2, 2014 by wilsonneelynyc




In its simplest form, private equity refers to the use of debt and securities to finance companies outside of the public market, and while it has become an increasingly prominent part of modern business, its roots are as old as capitalism itself. While experts agree that the first private equity firms appeared in the 1940s, with the creation of J. H. Whitney & Co. and the American Research and Development Corporation, the actual practice of investing via private equity has been a longstanding part of the market. Indeed, in many ways, the history of the United States is a tale of a marvelously successful private equity investment.

The British colonists who would go on to establish the United States were often funded via joint ventures, and the businessmen who stayed behind were largely counting on profits from the New World. These early “venture capitalists” were not hugely successful in turning a profit, though they did provide the capital support for the British Empire’s colonies. More lucrative were the receivership programs put in place to handle the volatility of the railroad industry in the late 1800s, an early example of the “leveraged buyout” strategy; the banks who received the railroad companies sought to improve their investment by assisting with management and strategy. The Glass-Steagall Act of 1933 put an end to most bank activity in investing, and in the Post-War boom, the private equity firm rose to its current prominence.

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