DealLawyers.com Blog

If you’ve been reading this blog for a while, you know I’ve got a soft spot for M&A history.  That’s why this CLS Blue Sky Blog discussing a new article on the history of private equity caught my eye. The blog says that although most M&A professionals would probably say that PE really began in the mid-1970s with the birth of LBO shops like KKR, it actually goes back a lot further in time than that:

Private equity’s effective origination can, if fact, be traced back to the 1870s rather than 1970s. Indeed, in many ways, the great U.S. investment banking pioneer John Pierpont (JP) Morgan could arguably lay claim to being America’s (if not the world’s) original private equity trailblazer in the late-nineteenth and early-20th century. Although fundamentally a transactional intermediary (rather than principal) in the orthodox investment banking sense, JP Morgan was nonetheless known to make significant personal equity investments in especially promising ventures which his banking firms underwrote.

The most notable example of this was Morgan’s personal funding of Thomas Edison’s pioneering Electric Light Company, in 1878, which included providing 50 percent of the principal capital for the construction of a new power station for the company in New York. Moreover, as early as the 1880s, Morgan – via his original banking firm Drexel, Morgan & Co – was accustomed to buying significant blocks of equity in underperforming companies, which his banking firm would subsequently reorganize with a view to making a capital gain in addition to professional fees for their services. This arguably made Drexel, Morgan & Co something of a prototype for the LBO boutiques that would come to inhabit the same Manhattan streets almost a century later.

The article also says that the perception that PE is a uniquely American invention is also incorrect, and that PE-like activity was also going on in the UK long before the rise of the LBO in the 1970s and 1980s.

– John Jenkins