"The Eclipse of the Public Corporation?"

This paper explores the origins of the private equity industry amidst the leveraged buyout (LBO) movement of the 1980s. In popular memory LBOs are most often associated with the worst excesses of the 1980s and over-the-top deals such as the purchase of RJR Nabisco as chronicled in Barbarians at the Gate. While the excesses of the LBO craze during the 1980s are undeniable, they too often obscure the fact that LBOs offered the potential to fundamentally redefine what a corporation was and what its place in society should be. While individual LBO artists may have been motivated primarily by opportunism, their work attracted the attention of a group of financial economists who argued that buyout associations like Kohlberg, Kravis, Roberts were the future of American capitalism. These economists, who were led by an iconoclastic finance professor named Michael Jensen, saw buyouts as the solution to many of the problems that had plagued the American economy since the managerial revolution of the early twentieth century. Specifically, economists like Jensen believed that buyouts solved the conflict of interest between shareholders and managers that dominated American business by allowing a small group of entrepreneurs purchase complete control of a company thus becoming the kind of manager-owners who dominated an earlier era of entrepreneurial capitalism. Though these economists’ dreams of LBOs eclipsing the public corporation entirely were dashed by the end of the 1980s bull market, the LBO itself managed to live on under the more gentile name of private equity. As this paper shows, the private equity giants of today still live out this commitment to an alternative version of corporation, often with deleterious effects for both workers and consumers.