The Craze
The Boston Sunday Globe, February 20, 2000
Economic Principals David Warsh
So why the craze for private equity? The term is more or less synonymous with "venture capital" around the world, though in the United States it encompasses a significant "buyout" industry, too, devoted to the restructuring of large and well-established companies.
Yet the first true venture firm, American Research and Development, was formed only in 1946 – as a closed-end publicity traded fund marketed mainly to individuals. Private partnerships followed only once the concept was proven. And it wasn’t until 1979, when the US Labor Department interpreted the Employee Retirement Income Security Act as permitting pension managers to invest broadly in higher-risk enterprises, that the money really started to pour in.
Since then, the venture industry has been or a rolled coaster: down in the late 1980s, but almost entirely up since then. Private equity funds has grown from $5 billion in 1980 to more than $175 billion in 1999.
Some of the fascination has to do with the fact that venture and buyout firms are among the foremost architects of the New Economy. Their principals behave with the verve we have come to expect of architects everywhere.
Some of the Interest has to do with the alchemy of personal wealth, of course.
Quite aside form the relentless hoopla in the business magazines, three serious books about the startup industry have appeared in the last month or so. Each casts light on the process from its own perspective. (A gripping account of an e-commerce startup by a journalist-turned-entrepreneur-"The Leap," by Thomas Ashbrook – is to appear in May.)
Joseph W. Bartlett a wise lawyer old enough to have worked on his first fund in 1963. He spent his first night at the printer overseeing an offering prospectus not long thereafter. A former law clerk to Chief Justice Earl Warren, former undersecretary of commerce, and a past president of the Boston Bar Association, Barlett "Fundamentals of Venture Capital" as a practical guide for those starting out to form a company – or thinking of investing in one.
The book takes readers through "the rules, the customs, the norms, the financial technology, the myths (if you like,) [and] the conventional wisdom" of the industry, including a most edifying discussion (for nonlawyers) of minimizing taxes in the early stages. He’s seen it all and come to the conclusion that the cyclical imperative to cash out in timely fashion is a little too strong for healthy corporate development.
"We continue to have an unbridgeable chasm separating public companies form private companies," writes "A sensible regulation would suggest, in my view, that there be comfort stations along the way, places in which adolescent firms could reside on their journey from the embryo to the IPO." Yet regulators gripped by tradition aren’t even studying the possibility, he says.