Entrepreneurs venture capital and private equity

When Harvard professor Georges Doriot and his partners founded American Research and Development Corporation in 1946, raising $3.5m to back startups, they planted the seed of what is now a $3.3tn private equity industry, financing everything from entrepreneurs to infrastructure projects and property.

Doriot was the first to create a way to pool capital from institutions such as insurers and endowments to fund financially risky innovations in exchange for a stake in their futures.

The same year, also in the US, John Hay Whitney and his partner Benno Schmidt started JH Whitney & Company, providing money for new companies on the assumption that the failure of most would be compensated for by the great success of a handful.

Before this new breed of investors appeared, entrepreneurs had to turn to wealthy individuals to fund their ideas. Doriot paved the way for the professionalisation and growth of the venture capital and, later, the private equity industries on a grander scale.

As public pension plans, insurers and endowments poured more and more cash into the asset class the industry’s impact grew.

Investment firms started targeting bigger, more established companies, using cheap credit to maximise their returns. Leveraged buyouts – which now represent $1.3tn of total private equity assets – included the $30bn takeover of RJR Nabisco by Kohlberg Kravis Roberts in 1988. But private equity also became a synonym for cost-cutting, layoffs and break-up. The large levels of debt made some companies vulnerable to downturns. And managers’ rising fees have irked investors, while the fortunes they made in a short time combined with their favourable fiscal treatment have led governments to tax them more.

Anne-Sylvaine Chassany