NEW FINANCE Essay

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REV: JULY 15, 2013

MATTHEW RHODES-KROPF
JOSH LERNER
ANN LEAMON

Iris Running Crane: December 2009
Iris Running Crane, HBS Class of 2010, shook the rain and soggy snow off her umbrella as she entered the lobby of Soldiers Field Park on a dark December night in 2009. “Oh the weather outside is frightful,” she whistled as she took the elevator to her apartment.
Back home on the Blackfeet reservation in East Glacier, Montana, the wind would be howling down from Canada, driving temperatures well below zero. Tonight, though, Iris had more important things to think about than comparative climatology. Through a combination of preparation, experience, hard work, and, she admitted, sheer
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While LBO returns had outpaced those to venture capital during the 1980s, the pattern reversed itself in the ‘90s, only to change again in 2000 and in
2007.
Starting in the early 2000s, LBO firms had enjoyed ready access to low-priced debt and had generated average returns of 15.6% between 2003 and 2006, compared to 9.9% for the Standard &
Poor’s index and single digits for VC.3 Accordingly, LPs flocked to invest in LBOs, which raised $344 billion in 2008, while VC funds raised only $63 billion.4 Records fell for largest LBO deal (the acquisition of Texas utility TXU by Texas Pacific Group, Kohlberg Kravis Roberts, and Goldman
Sachs for $45 billion)5 and largest fund raised (Blackstone’s $21 billion Corporate Private Equity Fund
V). In fact, the co-founder of the Carlyle Group lamented, “We should have done every single deal everywhere in the world [in 2005 and 2006]. Every deal worked.”6
VC firms, which had spent the first few years of the 2000s recovering from the telecom and
Internet bubbles, had little to crow about despite such high-profile successes as Google’s 2004 initial public offering (IPO). Fundraising recovered from 2002’s nadir of $12 billion, but comparisons to the anomalous activity of 1999 and 2000 made for a sobering return to reality.
Figures for LBO activity in 2008 indicated the peak of a cycle, and the bust followed shortly thereafter, as the global financial crisis shut off the supply of cheap debt for LBO deals. Such loans
that
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