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Jerome Kohlberg Jr: The world’s greatest investors
Jerome Kohlberg Jr started out focusing on “bootstrap” deals, whereby he’d set up a shell company to buy a firm from a retiring owner.
(Image credit: Credit: ZUMA Press, Inc. / Alamy Stock Photo)
Kohlberg was born in New Rochelle, New York, and graduated with a law degree from Columbia. He joined Bear Stearns in 1955. After two decades at Bear Stearns, he founded Kohlberg, Kravis and Roberts (KKR) in 1976 with Henry Kravis and George Roberts. He would resign in 1987 to form Kohlberg & Co, before retiring in 1995. He died in July 2015.
What was his strategy?
Initially Kohlberg focused on "bootstrap" deals, whereby he'd set up a shell company to buy a firm from a retiring owner. The deal would be funded with a combination of debt and equity. The hope was the new owner would be able to push the management harder than in a public company, helping boost profits. Later, KKR would help managers take control of ailing listed firms in leveraged buyouts. As well as a 20% share of any profits, KKR would also make money from consulting fees.
Did this work?
Leveraged buyouts are controversial because they rely on debt, thus increasing the chances of bankruptcy. Indeed, Kohlberg would break with Kravis and Roberts because he felt that they were taking on too much debt and engaging in bidding wars, driving down potential returns. However, both KKR and Kohlberg & Co were successful in generating large returns of around 40%-50% for investors during the 1980s. While they have declined since then, KKR now has $71bn of assets under management. By the time of his death, Kohlberg would have a personal fortune of $1.5bn.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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One of KKR's biggest successes was the 1986 purchase of the supermarket chain Safeway Stores. While the acquisition was for $4.3bn, KKR would only have to invest $130m in equity, the rest being debt. Not only did it make $5bn in profits after the chain was floated, but its remaining stake in the company would by valued at $7.4bn 15 years later (though by then Kohlberg had left KKR).
It is difficult for ordinary investors to invest directly in private equity (unless they are extremely wealthy). Still, KKR's success shows that investing with borrowed money can boost returns (though it also increases risk). The fact that private-equity returns have dramatically declined over the past 20 years as more firms have entered the industry shows that even the best investment strategy will eventually go stale.
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