Kohlberg & Company

Kohlberg & Company is a leading American private equity firm with a fascinating origin story that offers a masterclass in investment principles. It was founded in 1987 by the legendary investor Jerome Kohlberg Jr. after his famous departure from Kohlberg Kravis Roberts & Co. (KKR), a private equity giant he had co-founded. The split was a matter of philosophy, not just finance. Kohlberg grew deeply uncomfortable with the increasingly aggressive, debt-heavy hostile takeovers that KKR was championing, a trend epitomized by the gargantuan battle for RJR Nabisco. He believed this “deal fever” strayed from the original vision of using a leveraged buyout to help good companies grow. He established Kohlberg & Company to return to these roots: pursuing smaller, more manageable deals, using more conservative levels of leverage, and, crucially, working with management teams as partners rather than ousting them as predators. This “friendly” approach carved out a unique and respected niche in the cutthroat world of finance.

The departure of Jerome Kohlberg Jr. from KKR in 1987 is a landmark event in financial history. In the firm's early days, the partners focused on acquiring divisions of large corporations, working closely with the existing management to improve the business. However, by the mid-1980s, the “LBO” craze was in full swing. KKR shifted its focus to massive, often unsolicited, takeovers of entire public companies, funded by astronomical amounts of debt. The tipping point for Kohlberg was the firm's pursuit of RJR Nabisco. He viewed the deal as emblematic of everything that had gone wrong: the price was too high, the debt was suffocating, and the approach was brutally aggressive. He famously called it “overreaching,” a violation of the prudent principles he championed. He felt the firm had become obsessed with the “deal” itself, losing sight of the underlying business value—a cardinal sin for any true value investor. Unwilling to compromise his principles, he walked away from the empire he helped build.

In 1987, Kohlberg, then 61, started anew, founding Kohlberg & Company with his son, James. The new firm was the antithesis of the 1980s corporate raider stereotype. Its mission was clear:

• Focus on the Middle Market: Instead of chasing corporate whales, the firm targeted middle market companies—solid, established businesses that were too small to attract the attention of giant buyout funds but had significant potential for growth.
• Use Conservative Leverage: The firm deliberately used less debt than its competitors, reducing risk and ensuring that portfolio companies had the financial flexibility to weather economic downturns and invest for the long term.
• Partner with Management: This was the cornerstone of the philosophy. Kohlberg & Company sought out deals where they could back the existing management team, providing capital and strategic guidance to help them succeed.

The firm's approach is grounded in partnership and a focus on fundamental business improvement, not just financial engineering.

In the world of mergers and acquisitions, a “White Knight” is a friendly investor who saves a company from a hostile takeover by a “Black Knight.” Kohlberg & Company built a stellar reputation as a go-to white knight. When a company was facing an unwanted acquisition, its board could turn to Kohlberg & Company for a friendly, alternative offer. This strategy gave them access to excellent companies on favorable terms, as they were welcomed in rather than having to fight their way in.

Unlike many buyout firms of the era that were known for sweeping layoffs and asset stripping, Kohlberg & Company's model was constructive. They believed that the existing managers knew their business best. The goal was to empower these teams, not replace them. By providing capital for expansion, acquisitions, or operational upgrades, the firm helped unlock value that was already there, creating a win-win situation for investors, managers, and employees.

The story of Jerome Kohlberg Jr. and his firm offers timeless wisdom for any ordinary investor committed to value investing principles.

1. Principle Over Profit: Kohlberg walked away from immense wealth at KKR because the firm's culture no longer aligned with his principles. For the value investor, it's a powerful reminder that how you make money is as important as how much you make. Sticking to your investment philosophy and ethical standards is the ultimate risk management tool.
2. Management Matters: The firm’s success validates a core tenet of Warren Buffett: always bet on honest and capable management. An investment in a company is an investment in its people. A great business run by a mediocre or untrustworthy team is often a poor investment.
3. Beware “Deal Fever” and Excessive Debt: The RJR Nabisco saga is a classic cautionary tale of what happens when ego and excitement trump sober analysis. As an investor, it’s vital to avoid getting swept up in market hype and to be deeply skeptical of any investment that relies on huge amounts of debt to make the numbers work.
4. Reputation is an Asset: Kohlberg & Company's reputation as a fair and constructive partner became its most valuable asset, granting it access to deals its more aggressive rivals could never hope to win. For individuals and firms alike, a good name built over time is a source of enduring competitive advantage.