Limited partner, Kohlberg & Co.,
Mount Kisco, N.Y.
Jerome Kohlberg mentored Henry Kravis and George Roberts when the three were at Bear Stearns Inc., New York. The three investment bankers worked together at Bear Stearns for eight years, developing the leveraged buyout model in which they bought well-established private companies with predictable revenue and cash flow; borrowed nearly all the money they needed; streamlined the companies' expenses; used the profits to pay down the debt; and sold the companies at a profit within five to seven years. They left Bear Stearns 1976 and formed Kohlberg, Kravis, Roberts & Co., New York, to solicit banks and investors to buy small companies with debt. In essence, they developed the leveraged buyout, and the firm became a Wall Street powerhouse. When the threesome started the firm, Mr. Kohlberg was the senior member, holding 40% of the shares and investing most of the $120,000 it took to start KKR.
The leveraged buyout of Fred Meyer Inc. in 1982 was done in conjunction with the Oregon Public Employees' Retirement System, Salem. Oregon invested about $178 million in the $304 million Meyer deal, one of the first LBOs that used pension fund money. That investment brought in returns of 400%, and LBOs attracted some $12 billion in pension fund money by 1985.
KKR itself is best known for the $31.4 billion buyout of RJR Nabisco Inc. in 1988. But Mr. Kohlberg left before that deal was done, starting Kohlberg & Co., which focuses on middle market management buyouts, with his son James A. Kohlberg in 1987.
"He was one of the founders of the private equity industry that we know today. It took a lot of vision and bravery to leave Bear Stearns and raise a buyout fund when no one knew what they were," said Gary Robertson, vice president, head of private markets, at Callan Associates Inc., San Francisco. "He was the senior person who launched KKR and who brought Kravis and Roberts along as the junior partners. He was the one who developed the bootstrapping, which is what it was called before they called them leveraged buyouts. He was the founder and the senior statesman of the firm for a long, long time."
Jerome Kohlberg now does philanthropy work through his $264 million foundation.