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KKR Founder Jerome Kohlberg Dies at 90

Financier was an architect of the leveraged buyout and built a leading private-equity firm with Henry Kravis and George Roberts

Jerome Kohlberg, an architect of the leveraged buyout and co-founder of private-equity giant KKR & Co., has died. He was 90.Jerome Kohlberg, an architect of the leveraged buyout and co-founder of private-equity giant KKR & Co., has died. He was 90.

Mr. Kohlberg died at his Martha’s Vineyard home on Thursday after a long battle with cancer, according to Kohlberg & Co., the firm he founded after he left KKR in 1987.

“Jerry led an amazing life and leaves a tremendous legacy in business, philanthropy and family,” Samuel P. Frieder, Kohlberg & Co.’s managing partner, said in a note to the firm’s investors on Friday.

Mr. Kohlberg died at his Martha’s Vineyard home on Thursday after a long battle with cancer, according to Kohlberg & Co., the firm he founded after he left KKR in 1987.

“Jerry led an amazing life and leaves a tremendous legacy in business, philanthropy and family,” Samuel P. Frieder, Kohlberg & Co.’s managing partner, said in a note to the firm’s investors on Friday. 

Mr. Kohlberg founded Kohlberg Kravis Roberts & Co. in 1976 with Henry Kravis and George Roberts. The three men, who worked together in Bear, Stearns & Co.’s corporate-finance division, launched the firm with just $120,000 in capital, according to the book “Merchants of Debt: KKR and the Mortgaging of American Business,” by former Wall Street Journal reporter George Anders.

“Jerry was a real visionary, having played an important role in developing the private equity model in the 1960s, and he was a true mentor to George Roberts and me,” Mr. Kravis said in a statement emailed on Saturday.

In the early 1970s, Mr. Kohlberg expanded the bootstrap deal to buy the unwanted units of old-line industrial companies that made products like bricks and wires, a history chronicled in the 1990 book “Barbarians at the Gate: The Fall of RJR Nabisco.” He used banks loans to cover a large portion of the purchase price, much the same way a family would use a mortgage to buy a house.

After its founding, KKR began targeting bigger fish. The firm completed the first buyout of a major publicly traded company in 1979.

KKR grew rapidly in its first 10 years amid the takeover boom of the 1980s. By 1985, it accounted for about a third of the entire leveraged buyout business, the Journal reported in 1986. It did $6 billion worth of deals that year, including the buyouts of broadcaster Storer Communications Inc. and Union Texas Petroleum, the firm’s first foray into the energy industry.

The next year, KKR completed the largest leveraged buyout then on record: the $6.2 billion acquisition of Chicago-based food and consumer products company Beatrice Cos.

As KKR’s star climbed, Mr. Kohlberg grew uneasy with his partners’ desire to pursue companies more aggressively, according to a 1988 Journal article. A champion of friendly deals, he also was wary of Mr. Kravis’s plan to begin quietly buying small stakes in target companies.

Mr. Kohlberg left the firm in 1987. “It was a divorce,” a friend of all three men told the Journal. Their disagreements “just caused them to grow apart.”

Mr. Roberts in a statement emailed on Saturday said he and Mr. Kravis are “proud that our firm’s name is Kohlberg Kravis Roberts. Jerry will be missed and remembered by many.”

Mr. Kohlberg and his son, James Kohlberg, founded Kohlberg & Co., which went on to specialize in buying midsize companies. He also continued to invest in KKR’s deals, including the $25 billion RJR Nabisco buyout, according to “Merchants of Debt.”

In 1989, Mr. Kohlberg sued KKR, claiming Messrs. Kravis and Roberts illegally reduced his stake in four companies KKR bought between 1979 and 1985. The suit was later settled and terms weren’t revealed.

Mr. Kohlberg continued to keep a low profile after leaving KKR. A father of four, he was a “homebody” who “dressed simply, led a quiet family life, and spent his free time playing tennis or reading thick volumes of fiction or biography,” Bryan Burrough and John Helyar wrote in “Barbarians at the Gate.”

He retired from Kohlberg & Co. in 1994. His son, James, is the firm’s chairman but devotes most of his time to outside activities including venture capital investments, according to the firm’s website.

An active philanthropist, Mr. Kohlberg supported a broad array of causes with his wife, Nancy, but they shunned public announcements of their donations. “If you put your name on a building, you feel a little self-conscious, a little tasteless,” Mr. Kohlberg told the Journal for a 2008 story on anonymous giving.

Still, he was passionate about the causes he supported. In the aftermath of the financial crisis, Mr. Kohlberg took up the cause of people who were in danger of losing their homes to foreclosure and worked with banks to get troubled loans refinanced, he told the Vineyard Gazette, the Martha’s Vineyard newspaper he bought in 2010.

He also was a longtime supporter of an effort to change campaign finance laws.

Mr. Kohlberg, who served in the Navy during World War II, urged lawmakers to beef up the GI Bill to fully fund the education of veterans returning from the wars in Iraq and Afghanistan. In a 2008 Wall Street Journal op-ed, he credited the GI Bill with allowing him to earn a bachelor’s degree from Swarthmore College, a business degree from Harvard University and a law degree from Columbia University.

“I deeply believe that we have a moral responsibility to provide today’s returning veterans with the same educational opportunities that my generation received,” he wrote.

“Her proposal would have a devastating effect on capital formation. She is absolutely out to lunch,” says Arthur Laffer, a Reagan administration supply-side economist.

The Clinton plan calls for the tax rate on short-term capital gains — the sale of properties held for less than two years — from the current average of 28.6 percent to 39.6 percent on high-income earners.

“The mainstream of economists want growth. That means there should be less taxes on investments,” says Mark Bloomfield, president of the American Council for Capital Formation.

“This could create economic stagnation as some people decide to hold on to investments for longer periods,” says Scott Ehrenpreis, a principal with Friedman LLP, heading its tax controversy group.

But Ehrenpreis says the issue is whether the proposal would create jobs, while a market observer says it would create more money for the government.

Greg McBride, a financial analyst with Bankrate.com, says raising investment taxes will generate more revenue for the government but “won’t do much to change investor behavior.” He says investors will adjust and hold on to the securities longer.

The proposal, supporters note, would affect only the top 5 percent of wage-earners — those making about $464,000 a year for married couples and $413,000 for singles.

The Clinton rate would then go on a sliding scale, with the capital gains rate reduced to 24 percent over five years. After six years of holding a property before selling, taxpayers would pay what is today the highest tax — 20 percent.

Clinton lists another reason for higher taxes. In a briefing paper, she says her goal is to end the “tyranny” of the short-term investor. This is someone who frequently buys and sells. This investor speculates at the expense of long-term investing. That, she says, hurts workers who need higher pay.

“Corporate profits are at near-record highs, but they are not showing up in the wages of everyday Americans,” she wrote.

“That’s in part because too many pressures in our economy today are pushing businesses toward short-termism — a focus on the next earnings report or the short-term share price, rather than the sources of long-term growth and lasting value: workers and their skills, R&D and physical capital,” Clinton says.

She complains that today, about 75 percent of capital gains “go to those earning more than $1 million a year.”

Excerpted from Third Point LLC's letter to investors,

Lately, a varied chorus of powerful union bosses, politicians and candidates, an asset management company executive, and a few ivory tower types have asserted that activism is short term in nature, engaged in by “hit and run” investors who care only about making a quick buck while leaving a company and its employees in ruins.

They assert that activists blackmail their targets to choke off long-term growth initiatives like research and development in favor of financial gimmicks that artificially and temporarily inflate share prices.

It might surprise people to hear that we agree completely that the sort of activism they describe is abominable. Luckily, it does not really exist, and certainly not at Third Point.

Activists today are very different from corporate raiders of the ‘80’s (about whom these criticisms might have been leveled fairly). Our activist investments, which we consider to be those in which we seek to use our minority shareholding to obtain board seats, have been some of our most complex and have been held for well over the one year threshold identified as offensive by the critics. In almost every example – from Ligand to Yahoo to Sotheby’s – our influence has contributed meaningfully to the sustainability and growth of the companies in question. In each of the three investments above, for example, we brought in all-star CEOs and gave them extensive runway to implement ambitious turnaround plans that would take years to come to fruition. A strong CEO with a coherent operating plan can create value for shareholders along the way as their plans are implemented. Our investors have benefitted from our ability to install visionary leaders like John Higgins, Marissa Mayer, and Tad Smith.

Not every politician is a critic. As you may recall, the case we made for good governance, and implicitly activism, in Japan two years ago was later adopted by Prime Minister Abe and his policy makers to successfully encourage economic momentum and wage growth. His approach has been a success, as better corporate governance principles have led companies like Fanuc to adopt more shareholder friendly approaches and led to increased foreign investments in individual Japanese companies and the overall market.

We believe that activism serves an important function not only for our investors, but also for capital markets and society in general. The success of America’s large and robust capital markets – the greatest in the world – rests on a framework based on principles of democracy like freedom of speech, transparency, and rule of law. The reason that companies (with the exception of a few in the tech space) are able to raise capital so smoothly is because investors understand that a governance structure known as a board is in place to hold management accountable, be responsible for management’s fair compensation, and oversee important capital and strategic decisions. The fact that shareholders have the right to vote for or sometimes remove directors is critical to the ecosystem of the capital markets.

We are proud of the returns we have generated from being engaged, constructive, and sometimes “activist” investors, and even more so that our activities have led to more efficient organizations that are better able to compete, grow, and innovate. We hope the critics will educate themselves about how activists contribute to the American economy. Regardless, we believe the environment for constructive engagement with management teams is one of our more exciting areas of opportunity today and look forward to further successes in this strategy.

* * *

Thanks to our long and successful track record, we have a particular advantage in the area of shareholder activism. We are confident that opportunities will continue to exist to bring our owner’s perspective on capital allocation, profitability, and strategy to corporations.We will also continue to serve as an agent of change in extreme cases, when corporate boards are unable to make necessary management changes due to incompetence or unwillingness to take action.

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ValueAct, the US hedge fund that has become Rolls-Royce’s largest shareholder, is urging the engine manufacturer to accelerate cost cuts within its core aerospace business, according to people familiar with the fund’s thinking.

The San Francisco-based activist fund is also likely to encourage an eventual sale of Rolls-Royce’s non-aerospace divisions when the board conducts a strategic review, although this was not one of its immediate priorities. It is likely, too, that ValueAct, which is run by its founder Jeff Ubben, will push for a board seat for one of its representatives.

The fund, which disclosed a 5.4 per cent stake in the company on Friday, took the decision to invest after researching the career of new Rolls-Royce chief executive Warren East, who previously ran the chipmaker Arm Holdings.

In conversations between the two sides, the hedge fund has positioned itself as an ally for Mr East as he examines ways to improve margins and cash flows in the core aero-engines division, people familiar with those talks said. Mr East has said a strategic review of Rolls-Royce could come in the next 12-18 months.

ValueAct had traded in and out of Rolls-Royce for more than a year before a share price decline following profit warnings and the change of chief executive triggered its buying spree this summer.

Investors and analysts have expressed doubts about the value of Rolls-Royce’s diversification beyond civil aerospace into marine engines and other power systems, where results have been poor.

In its core aerospace division, Rolls-Royce is in the midst of a difficult transition from the Trent 700 engines that power Airbus’s A330 widebody aircraft to the Trent 7000 that will go on the remodelled version, the A330neo.

ValueAct believes that the market is undervaluing future maintenance contracts for the new engines, which deliver the bulk of profit.

The hedge fund has experience investing in the aerospace sector, having held a stake in Rockwell Collins, a supplier of aircraft electronics, since 2011. Mr Ubben, meanwhile, has connections to Rolls-Royce’s board: he and Rolls-Royce director John McAdam sat together on the board of Sara Lee for four years when ValueAct was pushing for a restructuring of that company.

Rolls-Royce said on Friday that it was familiar with ValueAct, having had “constructive conversations” with the fund last year when it first emerged as a shareholder. The fund is understood to have met last year with former chief executive John Rishton, who left at the start of July.

Mr Rishton came under fire from shareholders after presiding over several profit warnings. He struggled to impose his authority on the civil aerospace division, the biggest part of the group and a bastion of engineering expertise. Mr Rishton repeatedly expressed frustration at the division’s resistance to his cost-cutting measures.

Mr East has said he wanted to add “pace and simplicity” to the company and to the restructuring plan launched by Mr Rishton. He has begun an operational review aimed at delivering results “better and faster”, he said at the group’s interim results on Thursday.

In a sign that ValueAct’s support of Mr East could encounter difficulties, Mr East told the Financial Times last week that he believed the group’s diversification into marine and power systems was “broadly correct”. He also suggested that the marine division, which has been hard hit by the collapse in offshore oil and gas investment, could need more investment to be competitive.