A Long Time In Finance Barbarians at the Gate: A Short History of Private Equity
Nov 7, 2025
Peter Morris, a seasoned banker and buyout expert, dives into the $7 trillion private equity industry. He traces its origins from the 1970s and discusses how pension funds became deeply invested. Morris elaborates on the 'two-and-twenty' fund model, the implications of deregulation, and why massive fees are a norm. The conversation also touches on the industry's adaptability after economic downturns and its future convergence with public markets. Insights into the challenges posed by high leverage and agency problems provide a thought-provoking look at this financial realm.
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Limited Partnerships Turned PE Into An Industry
- Early private equity used deal-by-deal financing before limited partnership funds became the standard to attract pension capital.
- Big headline wins (e.g., Wesray's Gibson Greetings) drew institutional investors to pooled funds.
Big Deals Fueled By Fees And Cheap Debt
- Bigger deals became attractive because they generated much larger fees for sponsors as much as for efficiency gains.
- Availability of cheap debt and junk-bond financing enabled ever larger buyouts.
RJR Nabisco: Fees Won, Returns Lost
- The RJR Nabisco buyout produced poor returns for KKR despite its scale and huge fees.
- The deal's timing into recession left equity returns minimal while fees still paid handsomely.