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The concept
of alternative investing began in Europe in the 1800’s with the
idea of “pooling” money for investing purposes. This “pooling” concept came to the United States
in 1924 with the launch of the first official mutual fund
by Massachusetts Investors Trust. With just $50,000 in
assets to start, the concept of “pooling,” now
known as the $7 trillion mutual fund industry, quickly
became an accepted investment option, as evidenced by the
astonishing increase in assets under management in our
country’s first mutual fund by more than $300,000
in the first year.
Just five years later in 1929, the
crash of the stock market underscored the importance
of what has become one of the most essential investment
strategies today – diversification. At the time, mutual funds were one of the only investment
options that allowed investors to minimize risk by enabling
them to hold more than one equity at a time – for
the same initial investment.
After the crash in 1929, Congress passed a series of laws,
known as the Securities Acts of 1933 and 1934, to structure
the process and protect investors by requiring each fund
to register with the Securities Exchange Commission (SEC). Under these laws, each fund was required to provide potential
investors with what is now known as a prospectus. This
prospectus remains one of the most useful tools available
to investors today.
By 1969, the world’s first alternative
investment product – mutual funds – had gained traction
with 270 funds in the marketplace and more than $48 billion
in assets under management. Experts feared that the market
was becoming saturated and mutual fund returns had “peaked.”
Yet, seven years later, the nation welcomed a new type
of mutual fund when Vanguard launched the first index mutual
fund – the Vanguard 500 Index. Nearly three decades
later, in November of 2000, the Vanguard 500 was named
the country’s largest mutual fund with more than
$100 billion in assets under management.
It was in the early 1980’s that the
mutual fund industry received its most substantial validations. The Individual Retirement Account (IRA) was created and
Johnson & Johnson successfully persuaded the IRS to
allow part of the Revenue Act of 1978, called IRC Section
401(k), to be used as a benefit structure for individual
employees. In 1982, Johnson & Johnson employees were
the first to enjoy the freedom of a customized benefit
plan. The mutual fund industry has become a trusted investment
retirement vehicle for individual investors ever since.
Today, more than 83 million individual
investors have contributed $7 trillion to the nation’s
10,000 mutual funds.
With
mutual funds well underway, it was only a matter of
time before the next alternative investment idea was
developed. In 1949, former United States diplomat, financier,
and Fortune Magazine reporter Alfred Winslow Jones introduced
the concept of hedge funds – based on the theory of hedging
long stock positions by selling other short stock positions
to protect against market risk. With an initial investment
of $100,000, Winslow set out to prove that this new concept
of borrowing or leveraging to enhance the potential return
on partnership assets would produce high returns for
investors. The method that he called “speculative tools” is
known today as shorting.
In 1952, Mr. Jones transformed his
general partnership into a limited partnership and began
collecting management fees of 20%. In 1966, Fortune Magazine
featured its former colleague’s resounding hedge fund success when he
outperformed the leading mutual fund by 44% and beat the
best mutual fund five-year return by 85%. Returns like
these naturally garnered investor interest, thus validating
the concept of the world’s newest investment product – hedge
funds. Unlike mutual funds, hedge funds are classified
as “private investment vehicles” and are not
required to register with the SEC and are, therefore, unregulated
products. Today, hedge funds and private equity remain
among a small group of unregistered investment products.
The quest for superior returns always
has and always will remain the top priority for investors,
and this new hedge fund product seemed promising in helping
to achieve that goal. However, the unregulated nature
of hedge funds, coupled with high minimum investments
and fees, made this alternative investment product one
for institutions and high net worth individuals – leaving
the average individual investor behind.
The industry steadily progressed until
the early 1990’s. At that time the number of hedge
funds surged as many managers left long-time posts at
established investment firms to start or join hedge funds.
By the end of the decade investors were fleeing the stock
market after years of disappointing returns, primarily
due to the technology bubble, and hedge funds quickly
became the happy recipients of large amounts of capital.
With experienced managers on board and wealthy investors
lined up with capital, hedge funds were well poised for
success.
By the beginning of the millennium, there were more than
4,000 hedge funds. But the major validation for this asset
class happened in 2001 when long-only mutual funds lost
45% of their value sending hedge fund profits soaring.
Today, there are more than 8,000 hedge funds and assets
totaling more than $1 trillion. A steep increase in investor
demand and the resulting deployable capital have further
bolstered the status of the hedge fund industry. In the
interest of diversification, investors remain on the lookout
for another credible investment opportunity capable of
producing high returns with managed risk.
The concept of angel
investing or venture capital has been widely used in
the investment community for some time. Wealthy families
such as the Rockefellers and the Whitneys had long
practiced an early form of “private equity” by
buying shares in small or fast growing private companies
in hopes of selling them at a profit. Such wealthy investors
were dubbed angel investors, and their goal was to uncover
meagerly funded companies that exhibited strong and quick
growth potential.
However, venture capital did not become
a professionally managed industry until the late 1950’s with the passage
of the Small Business Investment Act (SBIA) of 1958. This
act allowed the government to license private "Small
Business Investment Companies" (SBICs) that would,
in turn, provide financing and management assistance to
small entrepreneurial businesses in the United States.
The SBIA helped to institutionalize the practice of venture
capital, extending the investment and business opportunities
to a broader group of investors and early stage companies. In addition to delivering high returns, venture capitalists
also worked toward the goal of stimulating the U.S. economy
in general by facilitating the flow of capital to pioneering
small concerns. Venture capital has grown to become a dominant
force in the U.S. economy, responsible for more than 10
million jobs in 2004 alone.
The alternative investment sector further evolved with
the introduction of the modern day private equity firm. In 1966, investment bank E.M. Warburg and venture capital
firm Lionel I. Pincus merged and focused on dealing with
securities of private vs. public companies.
As this concept was gaining ground
in the investment community, in 1976 there was a small
group of investment managers at Bear Stearns who believed
in a new breed of private equity in the form of an investment
transaction called leveraged buyouts (LBO). The idea
was considered too “alternative” for
the historically conservative firm Bear Stearns so the
group of investment managers formed what would soon become
one of the most successful private equity firms, Kohlberg
Kravis and Roberts (KKR).
Private Equity and LBOs certainly gained
the attention of several financial institutions and notable
individuals and in 1985, former Secretary of Commerce
Pete Peterson (under Richard Nixon) and Lehman Brothers
M&A specialist
Stephen Schwarzman founded the now renowned Blackstone
Group.
In the 1980’s KKR surprised the market
with several notable and historical deals such as: the
1984 completion of the company’s first billion dollar
LBO transaction with the purchase of Wometco Enterprises;
the 1986 purchase of Safeway supermarkets where it borrowed
97% of the $4.8 billion cost of the deal; and what is still
the largest and perhaps most famous buyout of all time,
the 1989 purchase of RJR Nabisco for $24.5 billion. During
this time, KKR also demonstrated that it could build up
companies and showed the industry the first established
leveraged buyout build-up with the success and turn around
of PRIMEDIA.
History shows us that new (and successful)
turnaround concepts typically incite competition within
the marketplace and the LBO transaction model was well
underway as evidenced by the formation of another formidable
competitor in 1987 – The Carlyle Group. Other well-established
companies like Forstmann Little and Texas Pacific began
to emulate the LBO transaction model. By the 1990’s,
the caliber of followers helped the industry to evolve
its image from the “buy and
bust” reputation of the 1980’s to the “buy
and build” success strategy of the 1990’s.
LBOs had finally become a vastly accepted alternative
investment transaction. Venture capitalists were commended
for the development of hugely successful start-ups like
Google and Intel and investors poured more than $10 billion
into private equity firms.
The LBO industry that was once seen
as a risky “alternative” investment
has evolved into a viable and well-respected business model
known today as private equity. Some of the world’s
most successful private equity companies like KKR and the
Carlyle Group continue to lead the industry they helped
establish in the 1980’s with the “buy and build” approach
perfected in the 1990’s. Furthermore, LBO funds are
now one of the most sought after hybrid investment models. The introduction of “mega funds” – billion
dollar LBO funds – is an indication of the continued
validation of this model.
2000 was a peak year for private equity when investors
committed more than $160 billion to various deals, and
private equity accounted for nearly 4% of all global merger
and acquisition activity. In 2004, that number increased
and private equity was responsible for more than 14% of
all global merger and acquisition activity.
In continuing their evolved resurgence, buyout
funds raised $54 billion in the first quarter of 2005. Currently, there are approximately 5,000 private equity
firms and in the first quarter of 2005 the average LBO
fund had nearly $750 million in assets under management. Ten funds are larger than $5 billion, and in May of 2005
the Carlyle Group broke the world record raising $10 billion
for two new buyout funds.
Private equity firms continue
to deliver much higher returns than the stock market. The three main pioneers of the private equity sector have
revenues in the billions (Carlyle, Blackstone, and KKR)
and have stated that they will continue to focus on the
private equity model. However, Carlyle and Blackstone will
add new areas of focus to their business such as property
funds and merger and acquisition advice.
Reflecting on the history of alternative
investing over the years, there are several key conclusions
that can be drawn:
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Alternative investments in high-growth
sectors have become a proven opportunity for superior
performance |
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A successful concept may bring healthy
competition which is always in the interest of investors |
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Investors follow returns, thus there
will be on-going investor demand for alternative investment
products |
The most innovative and effective investing concepts generally
build on preceding ones, but with new forms of returns
and risk management. Alternative investment options have
been an evolution rather than a revolution, and EquiBridge
represents another evolutionary stage in alternative investing.
Based on investment lessons from the
past and the ability to look to the future, EquiBridge
is a new breed of private equity and a new investment
model for the 21st century. EquiBridge’s unique
business model combines the best of private equity, fund-of-funds,
and asset classes to provide investors with a new level
of diversification to seek potential returns superior
to traditional alternative investment products. EquiBridge
invests in talented fund managers at the fund company
level which enables investors to profit the same way
fund managers do: through asset management fees and fund
performance.
| Mutual Funds |
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More than 10,000 funds in the U.S. |
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$7 trillion industry |
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83 million individual investors |
| Hedge
Funds |
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More than 8,000 funds in the U.S. |
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$1 trillion industry |
| Private
Equity |
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More than 5,000 private equity firms
in the U.S. |
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Responsible for more than 14%
of all global M& A activity |
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