Jerome Kohlberg

Jerome Kohlberg (1925-2015) was a trailblazing American financier and the widely acknowledged “father” of the Leveraged Buyout (LBO). As the senior founding partner of the legendary Private Equity firm Kohlberg Kravis Roberts (KKR), he revolutionized corporate finance by pioneering a method to acquire companies using a significant amount of borrowed money. Kohlberg's initial vision was to partner with the management of strong, family-owned businesses in “friendly” deals, using debt as a tool to unlock value and incentivize managers with ownership stakes. However, as the LBO craze of the 1980s spiraled into a frenzy of ever-larger, more aggressive, and often Hostile Takeover bids, Kohlberg grew deeply disillusioned. He famously broke away from the firm he built over profound ethical disagreements concerning the size and predatory nature of modern deals, famously stating, “Greed is all right, but I think we're at a speculative peak.” His career serves as a powerful cautionary tale about the difference between smart financial engineering and reckless speculation.

Kohlberg's journey began at the investment bank Bear Stearns, where he headed the corporate finance department. It was here in the 1960s and early 1970s that he, along with his young protégés Henry Kravis and George R. Roberts, began experimenting with what they termed “bootstrap” investments. The concept was simple yet revolutionary. They targeted stable, mature companies with predictable cash flows, often family-owned businesses whose founders were looking to retire. The classic Kohlberg deal involved:

• A “friendly” acquisition, not a hostile one.
• Keeping the existing, competent management team in place.
• Giving that management team a significant equity stake to align their interests with the new owners.
• Using the company's own assets as collateral to borrow the money needed for the purchase.
• Using the company's cash flow to pay down the debt over time.

This was not about asset stripping; it was about improving operations and creating long-term value by giving managers the motivation of ownership. In 1976, the trio left Bear Stearns to form KKR, a firm that would become synonymous with the LBO.

The 1980s changed everything. Wall Street embraced the LBO with ferocious enthusiasm, and KKR was at the forefront. Deals grew exponentially in size and aggression. The focus shifted from partnering with management to conquering corporations. The term Corporate Raider entered the public lexicon as firms began targeting massive public companies, often with the intention of breaking them up and selling the pieces for a quick profit. This evolution troubled Kohlberg deeply. He saw the LBO morphing from a tool for building better businesses into a weapon of financial speculation. The new model often led to mass layoffs, heavy debt burdens that crippled otherwise healthy companies, and an obsession with short-term gains at the expense of long-term stability. He felt the industry, and his own firm, was losing its moral compass.

The tipping point came in 1988 with the monumental battle for RJR Nabisco, a story immortalized in the book Barbarians at the Gate. While Kohlberg had already formally left KKR in 1987 due to his growing concerns (and a health scare), the RJR Nabisco deal represented everything he had come to oppose. It was a gargantuan, hostile, and publicity-drenched war that epitomized the excesses of the era. Kohlberg believed that paying such an astronomical price ($25 billion, a record at the time) was reckless and that the deal relied more on financial maneuvering than on any sound business strategy. He had long preached that “one of the great sins is to overpay for a good company.” Watching his former partners pursue this deal confirmed his decision to leave was the right one.

For the ordinary investor, Jerome Kohlberg's story is far more than a historical footnote; it's a masterclass in investment discipline and integrity.

After leaving KKR, Kohlberg founded a new, smaller firm, Kohlberg & Company, returning to his original principles. He focused on sensible, middle-market deals where he could add genuine value rather than just leverage. This echoes the core philosophy of Benjamin Graham: the first rule of investing is to not overpay. Kohlberg's career demonstrates that the most exciting or largest deal is rarely the best one. True value is found in solid businesses bought at a reasonable price.

Perhaps the most powerful lesson from Kohlberg is knowing when to say no. At the absolute peak of his industry's power and profitability, he walked away because his principles would not allow him to continue. For individual investors tempted to chase a hot stock or a speculative frenzy, Kohlberg’s example is a stark reminder: Discipline is the ultimate long-term advantage. True investment success is not just about making money; it’s about having a sound philosophy and the integrity to stick to it, even when “greed is good” is the mantra of the day.