Barbarians at the Gate or Turnaround Gurus? Private Equity and the Rise of the LBO

By: John Masko and Tom Nicholas

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Synopsis: During the 1980s, leveraged buyouts (LBOs) and the private equity (PE) firms responsible for carrying them out revolutionized both investment and management in the U.S. Between 1980 and 1989, buyout activity in the U.S. surged from $1 billion per year to $60 billion. There was widespread agreement that the PE industry created enormous value, but who exactly was it creating that value for? PE firms claimed that LBOs not only benefitted investors, but also the target companies, which became leaner and more focused as PE firms turned them around. But critics argued that on balance, the PE industry left target companies foundering under mountains of debt as investors realized huge returns. In this case study, students will grapple with PE's complex legacy while learning its history. The case will trace PE's two main ingredients (the limited partnership and the LBO), examine the auspicious conditions of the 1980s that brought them together, and discuss the experiences of two very different early players in the PE field-KKR and Bain Capital.