At the shareholders' meeting of Teldar Paper in 1987, things got heated. After the management clearly opposed a takeover attempt by an investor, the latter took the floor. This gentleman named Gordon Gekko then launched into a speech that ended with a drastic conclusion: "The point, ladies and gentlemen, is that greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit."

In reality, this meeting never took place. Gordon Gekko is as fictitious as Teldar Paper and is played by Oscar winner Michael Douglas. The film from which this scene is taken, Oliver Stone's "Wall Street", stands like no other for the image that the general public had of private equity investors in the 1980s.

They were seen as greedy "corporate raiders", barbarians at the gates of righteous companies who bought in, hollowed out the company and sold it at the end to pay off the debt with which they had financed the takeover. These so-called leveraged buyouts eventually became so unpopular that even the US Congress enacted measures to put an end to the phenomenon.

But today, the private equity business not only continues to exist, it has even been able to repair its reputation to a large extent. The so-called locusts rarely cause a stir any more, at most it is a former SPD chairman who takes up the issue during an election campaign. For example, when KKR, the mother of all private equity firms, became the majority shareholder in the German media group Axel Springer, there was no public outcry. But where did this change in image come from?

Highest railroad

The term private equity is not particularly precise. First of all, it includes all forms of investments that are not publicly traded on the stock exchange. Venture capital, which is essential for financing start-ups, is also generally included. However, when people talk about private equity, they usually mean the business that people associate with locusts. These are usually companies that collect money from private and institutional investors, invest it in established companies, develop them further - and then sell them at a profit.

It is not entirely clear when this concept was first used. The US businessman Jay Gould invested in railroad companies as early as the 19th century, splitting them up or merging them. However, J. P. Morgan's (the man, not the bank) investment in Carnegie Steel in 1901 is often cited as the first private equity investment in the modern sense. Morgan paid the owners of Carnegie 480 million US dollars for the company, the first buyout in history. Morgan also set the tone for the first half of the 20th century, because at that time it was rarely companies that pooled capital and launched takeovers, but mostly wealthy individuals from the major US business dynasties, such as the Rockefellers and the Vanderbilts. In the end, it took a German immigrant to turn this idea into a company. The Jewish banker Eric Warburg, who had fled the Nazis in 1938, founded E.M. Warburg & Co., probably the world's first private equity firm.

Three men, one idea

Only one crucial ingredient was still missing to trigger the private equity boom: debt. This is because the early private investors mostly used their own money and refrained from financing their investments with loans. The first to come up with this idea was Malcolm McLean. The transport entrepreneur, who is considered the inventor of the modern container ship trade among other things, wanted to take over the Pan-Atlantic Steamship Company and the Waterman Steamship Company in 1955. In both cases, however, McLean only provided a small part of the wealth himself and borrowed the majority of the purchase price.

So McLean had provided the final ingredient, now all that was needed was people to stir it all together and create the modern private equity business. In the end, it was two bankers from the investment house Bear Stearns who triggered the first big buyout wave in the 1960s: Jerome Kohlberg Jr. and Henry Kravis. Together with Kravis' cousin George Roberts, they bought Stern Metals, Incom and Cobblers Industries, among others, with the help of investors and bank loans.

In 1976, the three men finally founded their own company: Kohlberg Kravis Roberts, or KKR for short. Inspired by their success, a number of other private equity firms were launched in the late 1970s. In combination with a number of legislative changes brought about by US President Ronald Reagan, who took office in 1981, this triggered the buyout boom of the 1980s.

Best regards, we have bought you

The boom started with greeting cards, of all things. Wesray Capital Corporation acquired a stake in card manufacturer Gibson Greetings in 1982. The takeover cost 80 million US dollars, only one million of which allegedly came from Wesray and his investors themselves, the rest were loans. Less than a year and a half later, Wesray floated Gibson on the stock market, raising 290 million US dollars. There were several success stories like this in the years that followed, such as Wometco Enterprises and Sterling Jewelers.

However, these years also gave private equity firms a bad reputation. Some of them were accused of "asset stripping", i.e. selling off all valuable parts of the company in order to pay off the debt required for the takeover and make a profit themselves. The best of these "corporate raiders" was Carl Icahn, one of the inspirations for the character of Gordon Gekko in the movie "Wall Street". He became famous for his hostile takeover of Trans World Airlines in 1985, which resulted in TWA filing for bankruptcy three times over the next 16 years before the company was taken over by American Airlines in 2001.

Jerome Kohlberg Jr. of all people, one of the fathers of the boom, did not agree with these aggressive tactics at all. Furious about the debt-financed buyouts and hostile takeovers, which KKR also increasingly used, he left the company in 1987. Accordingly, he missed out when his ex-partners pulled off what was then the largest leveraged buyout in history. KKR invested a total of 31.1 billion US dollars in debt and equity to take over the tobacco and food producer RJR Nabisco. It was a legendary takeover battle in which KKR clashed with the bank Shearson Lehman Hutton (SLH) and the then CEO of RJR, F. Ross Johnson. The bidding war between KKR and SLH was financed by pretty much all the big banks on Wall Street. The battle was so gripping and volatile that investigative journalists Bryan Burrough and John Helyar turned it into a bestseller called "Barbarians at the Gate".

The party is over and therefore just getting started

As gigantic as the RJR deal was, it also signaled the end of the first private equity boom. At the end of the 1980s, the flow of money with which companies had financed their ever larger takeovers began to dry up. First, in 1989, Congress banned banks that relied mainly on savings accounts and mortgages from investing in low-rated bonds. This affected many of the bonds that private equity firms used to finance their takeovers. Although these bonds offered high potential returns, they also carried very high risks. In 1990, the investment bank Drexel Burnham Lambert (DBL) had to file for bankruptcy after several executives were involved in insider trading and share price manipulation. DBL had been one of the main banks for private equity entrepreneurs.

Although investors did not disappear in the nineties, it took almost 14 years before private equity firms and their takeovers once again dominated the economy as they had in the eighties. From 2004 onwards, record buyouts followed one another. The car rental company Hertz, the film studio Metro-Goldwyn-Mayer, the car manufacturer Chrysler: all were taken over by private equity firms and later sold again.

Today, the wording has changed, as has the approach. Often, "activist investors" no longer engage in asset stripping, but demand a strategic realignment of the companies in which they invest. Sometimes they even work together - at least indirectly - with the state. Last summer, for example, it was the private equity investor Cerberus Capital that caused the departure of CEO Martin Zielke and Supervisory Board Chairman Stefan Schmittmann at Commerzbank; Cerberus was allegedly in line with the German government, which is also a shareholder in Commerzbank.

Leading representatives of the industry have long been making efforts to appear more transparent and responsible. Many of the large private equity firms are now listed on the stock exchange. Stephen A. Schwarzman, CEO of Blackstone, is publicly calling for a shift towards a sustainable economy. And in people's minds? In the movies, investment bankers have now replaced private equity investors as the villains. And compared to characters like Jordan Belfort, who made millions with penny stocks and is the main character in "The Wolf of Wall Street", Michael Douglas' ice-cold Gordon Gekko seems almost tame today.