Which empires are crumbling?

A look back at the largest private equity firms of 1998 provides a reminder that today's titans are not guaranteed to hold their positions forever. By David Snow

Looking at a list of the largest private equity firms, circa 1998, one is impressed by two things. The first is that eight of the ten endured and thrived over the subsequent decade. The second is that two of the largest three blew up.

The two tables (opposite page) were created using the methodology of the PEI 50, Private Equity International's annual proprietary ranking of private equity firms by size. The PEI 50 defines “size” as the amount of capital raised for direct private equity investment over a roughly five-year window. This method allows for the most consistent size comparison of private equity programmes. It captures capital raised for different funds targeting different geographies and closed at different times. In an industry in which every GP seems to have a different marker for denoting heft in the market, the five-year fundraising methodology provides an elegant, apples-to-apples measuring solution because it takes into account the buying power of recent years as well as capital commitments recently bestowed on GPs. It's also information that we can get usually get our hands on.

The top ten firms of 2008 were taken from the 2008 PEI 50, which appeared in last May's issue of Private Equity International. The creation of the 1998 rankings was done using the same method but with a different five-year window, in this case ending 31 December 1998. So, for example, this five-year window captured three Warburg Pincus private equity funds – the $5 billionWarburg Pincus Equity Partners closed in 1998; the $800 million Warburg Pincus Ventures International closed in 1997; and the $2 billion Warburg Pincus Ventures closed in 1994. That remarkable string of fundraising successes made Warburg Pincus the largest private equity firm in the world in 1998, based on the PEI 50 methodology. Forstmann Little's position was bolstered by the inclusion of two large mezzanine funds alongside its core private equity fund.

For the most part, the top ten firms of 1998 either continued investing in a similar deal space over the subsequent ten years (Welsh, Carson, Anderson & Stowe; Clayton, Dubilier & Rice) or greatly increased the size of their capital under management through larger funds and a proliferation of strategies (Kohlberg Kravis Roberts; Apollo Management). Two firms, however, saw their franchises atrophy following disastrous investments made near the top of the technology and telecommunications bubble. The most spectacular fall, of course, was that of Forstmann Little, the otherwise highly respected private equity investor that placed enormous bets on two “competitive local exchange car r ier s” (CLECs ) cal led XO Communications and McLeodUSA. The investments came in the form of securities convertible into common equity, but as the market for CLEC stocks collapsed, it became clear that Forstmann Little was not going to be able to convert into common equity, or even get back its principal investment. Both XO and McLeodUSA filed for bankruptcy, causing among the largest private equity losses in history. The firm has been winding down operations for several years.

By 1998, Hicks, Muse, Tate & Furst had grown its funds and its business lines. It managed a significant Latin America fund in addition to its major US buyout fund, and like Forstmann Little and many other large buyout firms at the time, Hicks Muse made a series of PIPE investments in telecom companies that went awry. The firm did not survive the aftermath in its current form. Co-founder Thomas Hicks left to focus on family office investments, and the European arm split to become Lion Capital. The remaining partners renamed the Dallas firm HM Capital and are now managing a $780 million fund with a strategy that takes the firm back to its pre-bubble sweet-spot in the mid-market.

Most of the firms in the top ten of 2008 were serious contenders in 1998, as well. However they grew their funds and platforms at an aggressive pace over the next 10 years. All have global operations and most offer limited partners a range of fund products, such as Asian vehicles, alongside core buyout funds. None of the firms are focused on any one industry, such as energy.

Considering the headwinds that private equity faces and will face over the next several years, one can't help but wonder how many of today's firms will go the way of Forstmann Little. Once formed, private equity firms tend to tenaciously cling to life with each new fund-raise. It usually takes not one, but several deal catastrophes to kill a buyout franchise. Unlike during the tech bubble, private equity firms investing through the most recent boom times were for the most part buying equity stakes in solid, proven companies, albeit with great helpings of leverage. But the recession that followed the bursting of the Internet bubble in 2002 was a cakewalk compared to what the economy is going through now. There will certainly be firms that have higher concentrations of portfolio bankruptcies than others. Significant losses tend to cause partners to seek careers under different roofs and limited partners to say no to the next fund. What's more, losses do not necessarily destroy firms, but they do allow nimble-footed rivals with cleaner records to gain greater momentum in the fundraising market.


Firm 5-year fundraising total*
1. Warburg Pincus $7.80 billion
2. Hicks Muse Tate&Furst** $7.52 billion
3. Forstmann Little & Co.** $6.53 billion
4. Kohlberg Kravis Roberts $6.01 billion
5. Welsh, Carson, Anderson & Stowe $5.70 billion
6. Goldman Sachs $5.63 billion
7. Apollo Management $5.10 billion
8. TheBlackstoneGroup $5.05 billion
9. Clayton Dubilier & Rice $5.00 billion
10. Thomas H. Lee Partners $4.70 billion


Firm 5-year fundraising total
1. The Carlyle Group $52.00 billion
2. Goldman Sachs* $49.05 billion
3. TPG $48.75 billion
4. Kohlberg Kravis Roberts* $39.67 billion
5. CVC Capital Partners $36.84 billion
6. Apollo Management* $32.82 billion
7. Bain Capital $31.71 billion
8. Permira $25.43 billion
9. Apax Partners $25.23 billion
10. The Blackstone Group* $23.30 billion