Leverage Creates Value: 200x Return on Capital
The acquisition of Gibson Greeting Cards Inc. (Gibson) is one of the best examples of using leverage to make money in private equity. In 1982 a private equity firm purchased Gibson, which, and this may not be a surprise, published greeting cards. The firm paid $80 million, but borrowed $79 million to make the acquisition. The transaction closed with only $1 million of equity invested, $660,000 of which was split between two of the partners of the firm.
The private equity firm took the company public in a stock offering that valued it at $290 million sixteen months later. The two partners realized a return of 200 times their invested capital, turning an initial investment of $330,000 into $65 million each. This transaction instantly became legend and is credited as one of the variables that convinced Steve Schwarzman to pursue a career in private equity.
It should be noted that this amount of leverage would be difficult to secure today, but it is a tremendous example of how returns can be enhanced when an investment performs. The counter is what happens when leverage is aggressively applied in the wrong scenario.