Few areas of finance have been quite as buoyant recently as private equity, which has seen record levels of fundraising and a rapidly expanding amount of deal making. From 2004 to 2005 the number of acquisitions by private equity firms globally nearly doubled, from 1,125 to 2,191, while the cost of those transactions jumped by more than one third, to $350.1 billion, according to market research firm Dealogic. Today, J.P. Morgan estimates that U.S. buyout firms have $150 billion in cash to spend globally, up from $35 billion in 1997. With leverage, that translates into some $600 billion available for doing deals.
That's a lot of money -- and influence. And predictably, some market watchers are worrying about a bubble. Whether one is building, much less about to burst, is another matter: Lately, we've been cautioned by market scolds about incipient bubbles in hedge funds and housing, as well.
Managing this phenomenal growth poses a striking challenge. In this month's cover story, we take a look at the changes under way at one of the most highly regarded -- though less well known -- private equity firms, San Franciscobased Hellman & Friedman. The shop has long been known for its quiet, collegial approach, its willingness to take noncontrolling investments and its fondness for businesses dependent on "human capital," like money management firms. That approach has paid the firm's limited partners well: Now disbursing its fifth and, at $3.5 billion, biggest fund, Hellman & Friedman has returned 30 percent annually and ranked in the top quartile of its peers every year.
But, as Senior Writer Loch Adamson relates in "New Powers," page 62, founding partner Warren Hellman has taken a backseat role at the firm, as will vice chairman and employee No. 3, Matthew Barger. Hellman & Friedman, under the guidance of CEO Brian Powers, faces the challenge of maintaining its disciplined approach while expanding globally and putting much bigger sums in play at a time of heightened competition.
In other words, can it gain the world without losing its soul?
Another institution that has been doing a lot of soul-searching of late is Harvard University, whose president, former U.S. Treasury secretary Larry Summers, resigned last month. In this issue (page 16), we provide a follow-up to our January cover story, "How Harvard Lost Russia," and show how the stir it produced inside Harvard Yard contributed, in many professors' minds, to Summers' departure.
