Three waves of change unleashed by the GFC

The short, medium and long-term effects of the collapse of Lehman Brothers a decade ago.

“Plenty for you to write about” was the understatement proffered by the contacts we met in September 2008. Plenty indeed: in those rapidly developing – and at times unbelievable – events, seeds were sown that would shape the next decade of growth in private markets.

The first wave of stories involved the private equity implications of institutions at risk of collapse. What would become of the private equity units at Lehman, Merrill Lynch and AIG? At RBS and Lloyds? The answer only unfolded over months and years as a new generation of firms emerged. “We come out of this process independent, but with substantially more humility than when we went in,” was how former AIG alternatives head Bob Thomson described the spin-out of PineBridge Investments to Private Equity International back in 2010.

The second industry-shaping wave came in the form of the regulatory backlash that either directly affected or indirectly influenced private equity investors and firms. More stringent capital adequacy requirements for banks and insurers made them less of a force in fund investing and in many cases led them to spin out their captive units, while closer scrutiny of the managers themselves would raise the cost of doing business.

But the most important set of stories emanating from the crisis, in terms of how the industry was shaped over the subsequent decade, were about performance. Dramatic write-downs across buyout portfolios looked at times like they would prove terminal for their general partners and chastening for the limited partners that had backed them. Fears of widespread leveraged buyout blow-ups abounded, but ultimately gave way to stories of how patient capital was proving an effective form of ownership – and source of returns – in times of distress.

This last point, more than any other, has shaped the subsequent growth of the industry.

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