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 The craze

 By David Warsh, 2/20/2000 

 Most of us will never write a business plan, much less sign a term sheet, celebrate a letter of
 intent, or, perish the thought, ''go public.'' 

 So why the craze for private equity? The term is more or less synonymous with ''venture capital''
 around the world, though in the United States it encompasses a significant ''buyout'' industry, too,
 devoted to the restructuring of large and well-established companies. 

 Yet the first true venture firm, American Research and Development, was formed only in 1946 - as a
 closed-end publicly traded fund marketed mainly to individuals. Private partnerships followed only
 once the concept was proven. And it wasn't until 1979, when the US Labor Department interpreted
 the Employee Retirement Income Security Act as permitting pension managers to invest broadly in
 higher-risk enterprises, that the money really started to pour in.

 Since then, the venture industry has been on a roller coaster: down in the late 1980s, but almost
 entirely up since then. Private equity funds have grown from $5 billion in 1980 to more than $175
 billion in 1999.

 Some of the fascination has to do with the fact that venture and buy-out firms are among the
 foremost architects of the New Economy. Their principals behave with the verve we have come to
 expect of architects everywhere.

 Some of the interest has to do with the alchemy of personal wealth, of course.

 Quite aside from the relentless hoopla in the business magazines, three serious books about the
 start-up industry have appeared in the last month or so. Each casts light on the process from its own
 perspective. (A gripping account of an e-commerce start-up by a journalist-turned-entrepreneur -
 ''The Leap,'' by Thomas Ashbrook - is to appear in May.) 

 Joseph W. Barlett is a wise lawyer old enough to have worked on his first fund in 1963. He spent his
 first night at the printer overseeing an offering prospectus not long thereafter. A former law clerk to
 Chief Justice Earl Warren, former undersecretary of commerce, and a past president of the Boston
 Bar Association, Barlett wrote ''Fundamentals of Venture Capital'' as a practical guide for those
 starting out to form a company - or thinking of investing in one.

 The book takes readers through ''the rules, the customs, the norms, the financial technology, the myths
 (if you like,) [and] the conventional wisdom'' of the industry, including a most edifying discussion (for
 nonlawyers) of minimizing taxes in the early stages. He's seen it all and come to the conclusion that
 the the cyclical imperative to cash out in timely fashion is a little too strong for healthy corporate

 ''We continue to have an unbridgeable chasm separating public companies from private companies,''
 writes Barlett. ''A sensible regulation would suggest, in my view, that there be comfort stations along
 the way, places in which adolescent firms could reside on their journey from the embryo to the IPO.''
 Yet regulators gripped by tradition aren't even studying the possibility, he says.

 Josh Lerner, too, is interested in the effect of financing decisions on the life cycle of particular
 businesses. A professor at Harvard Business school, Lerner is among the nation's foremost experts
 on the economics of the industry.

 ''Venture Capital and Private Equity: A Casebook'' grew out of a course first offered at the school in
 1993. Its 29 cases take you as close to business school as you can get without forking over tuition. It
 amounts to a guide to investment styles of the rich and famous.

 There's an awful lot of background knowledge packed in these essentially journalistic treatments of
 particular investment opportunites: why wealthy families have historically taken the lead in private
 equity investing; how funds' high-powered compensation schemes are designed to tie investors to the
 firms they monitor as tightly as possible; and what the thicket of specialized terms endemic to the
 industry actually mean.

 Despite a certain tendency to boom and bust, Lerner is optimistic about the industry. A ''virtuous
 circle'' may be at work, he says. More private equity has meant better conditions for new
 investments, which in turn have led to greater capital formation. And now perhaps the US model will
 be adapted successfully overseas.

Amar V. Bhide is an old-fashioned scholar, Harvard Business School-trained and now teaching at the University of Chicago, who is determined to follow in the paths of Joseph Schumpeter and Alfred
Chandler. A former McKinsey consultant and E. F. Hutton trader, Bhide wrote ''The Origin and
Evolution of Small Businesses,'' on the nature of promising start-ups and their evolution into successful businesses. 

 The effects of accident and personality can be found on every page - as well as a salutary taste for
 business journalism and memoirs. ''The theory of the firm has little room for company picnics (an
 account of which takes up two pages in Hewlett-Packard's `The H-P Way,') Sam Walton's hula
 dances, hiring practices that trade off talent for personality `fit,' or unilateral gift-giving to firm
 members to create reciprocal obligations and loyalty,'' he writes. Yet such personal touches are often
 hallmarks of success.

 There are some questions these books can't answer - such as when the efflorescence of which they
 are a part will fade and give way to some new investing enthusiasm. Bhide's book, in particular, is a
 reminder that it was not always thus. In the 1950s and 1960s, for instance, the conventional wisdom
 was that giant corporations were required to bring new businesses into existence. 

 Indeed, the Treasury Department's decision to pay down the national debt over the next 13 years by
 purchasing $3.6 trillion in government obligations now held by private investors may fundamentally
 change the calculus.

 What happens to the risky end of the investment pool when the least risky, most liquid end
 disappears? It's one more reason to expect private equity is here to stay.

 This story ran on page G01 of the Boston Globe on 2/20/2000.

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