Private Equity's Rise: Doriot's GI Startups to Nursing Home Mortality

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Private equity funds buy private companies or take public ones private, restructure them and sell within about four to seven years. General partners raise money from limited partners such as pension funds, endowments and insurers, then pull four levers: revenue growth, margin expansion, debt paydown and a higher valuation multiple. A leveraged buyout funds most of a purchase with debt placed on the target company, and the interest is tax deductible; debt made up about 70 percent of a typical buyout before 2005 and closer to 50 percent today. The industry traces to 1946, when Georges Doriot founded the American Research and Development Corporation to back businesses run by returning World War II soldiers.

ARDC's $70,000 stake in Digital Equipment Corporation in 1957 was worth over $355 million by 1968. The 1980s brought raiders such as Carl Icahn, Michael Milken's junk bonds at Drexel Burnham Lambert and KKR's $31.1 billion RJR Nabisco buyout, then Drexel's 1990 bankruptcy. Sarbanes-Oxley compliance costs helped spark the 2005 to 2007 mega buyouts of Toys R Us and Hertz, and today companies stay private longer. The episode weighs the carried interest tax debate, dividend recapitalizations, health care outcomes and Oren Cass's critique of wealth capture.

• Private equity spent 63 billion pounds buying British businesses in 2024, including the Royal Mail's parent and Darktrace.
• Goldman Sachs research found the London Stock Exchange shrank at its fastest pace in over a decade.
• Moody's Ratings found companies backed by large private equity firms were twice as likely to default.
• A University of Chicago study linked private equity ownership of nursing homes to a 10 percent rise in short-term Medicare patient mortality.
• A 2024 study of 51 acquired hospitals found a 25 percent increase in hospital-acquired conditions.