The evolution of the private equity industry

- This is an audio course. Thank you for listening. - You broke into the world of private equity in 1981, right after graduating law school and right as the private equity boom was about to take place. Can you take listeners back to the early days of your career? What attracted you to a nascent industry, and what best lessons you learned early on in your professional journey? - Yes, thank you. Yeah, I went to law school and business school, and finished both of them in 1981. And if you think back with the macro economy, the stock market was lower in 1981 than it had been 1968. There had been 13 years of stagflation, and interest rates were close to 20%, companies were selling at four or five times net income. So it was a much different, much more depressed in value time when I joined on the Street. And the whole idea of taking a company private was a totally new idea. So the first public company to be bought as a leveraged buyout was in 1979, when KKR bought Houdaille Industries. That was the first time anyone bought a company off the stock exchange. And I actually wrote my thesis, my law and business school thesis, about the idea. I thought it was so interesting. It's such a potentially a good, new idea, or interesting, new idea. So when I came to Goldman Sachs, I said, "I want to be your leverage buyout guy". They said, "We've never done a leveraged buyout. You can be the leverage buyout guy." It's like I wanted to be the wheat farmer around the moon, and there was no competition. There were maybe 15 or 20 private equity funds in the entire world, there's now 5,000 of them. And it was a great time to begin, and I can talk about how it evolved, but that was the entry point. - Yeah, I'd actually love to ask you about that. How has the private equity industry evolved since you've been in it? I mean, it's obviously very different today than in 1981. - Yeah, well, what I say, and 'cause I'm the chairman of the industry and I speak for my own firm, private equity's evolved from a form of finance into a form of business. So in 1981, it was a form of finance, and the idea was there's very low value companies. There's lots of inflation. If you could just borrow money and buy a company cheap, inflation alone could help make money. So let's say you bought a company with 95 parts of debt, five parts of equity, and had 10% inflation. You could triple your money in a year. That was kind of the mindset, that values were going to go up and leverage would increase that value creation. It's totally about, it's now over 40 years later when we talk about private equity today, it's all about owning companies and being better at building them than bringing skill and capital to main street companies as top, top business builders. But it was, what I would say, four investment bankers in the room borrowing as much as they could back in 1981. And you know, the stock market, I was walking on the trading floor of Goldman Sachs when the Dow broke 1,000. I think it's now over 30,000. So I mean, or the S&P, it's just been a growth market for 40 years and a great time to own companies.