Forstmann to ‘call it quits’

In an extraordinary interview with the New York Times, investment legend Ted Forstmann criticised the private equity industry and vowed to shutter the private equity firm he founded.

In an interview with the New York Times published Sunday, private equity pioneer Theodore Forstmann pledged to shut down his firm, Forstmann Little, as soon as 2006, and to possibly release investors of their remaining capital commitments before then.

Forstmann also bemoaned the modern private equity industry, saying it has become too institutionalised and is vulnerable to lawsuits by public pensions.

New York-based Forstmann Little recently paid the state pension of Connecticut $15 million to settle a lawsuit against the firm. The state’s elected treasurer, Denise Nappier, charged that Forstmann Little had breached its partnership agreement with the state by making two ill-fated investments in telecommunications companies XO Communications and McLeodUSA.

Those investments resulted in losses to Forstmann Little-managed funds of more than $1.5 billion – the largest private equity losses in recent history.

The interview, conducted by Times reporter Andrew Ross Sorkin at Forstmann’s Fifth Avenue penthouse overlooking Central Park, was apparently arranged at the invitation of Forstmann, who said he wanted to “set the record straight” with Sorkin about his recent difficulties.

While dining on lobster and sipping 1983-vintage Bordeaux, according to the report, Forstmann revealed that his firm, founded in 1978, would not raise another fund and might return capital to investors before June 2006, when the partnership is contractually obliged to cease operations.

Forstmann complained that the private equity industry had become too institutional and that firms, including his own, had raised too much money without having appropriate investments to pursue. Regarding the other partners at his firm, who he said pressured him into doing the off-style deals, he said, “All of a sudden they are talking about merging or making deals with venture capital firms and opening offices in Europe.”

He said he agreed to the telecom deals in part because he was worried “the world had passed me by.” Forstmann admitted he didn’t understand the sector and that to this day he does not use a computer.

In the interview, Forstmann sounded a sour note about his struggle with Connecticut's Nappier, saying of a meeting the two had to resolve the lawsuit: “[A] lot of the words she used started with the letter ‘F’”.

Forstmann indicated that the involvement of pension money in private equity would lead to further lawsuits. He said: “If I thought all I was good for was to invest money for pension funds, I think I would put a gun in my ear. I hope to Christ that’s not why I was put on this earth. Man, I hope I have other interesting and fun things to do.”

Forstmann also described his much-reported rivalry with Kohlberg Kravis Roberts co-founder Henry Kravis as vastly overblown. Of KKR he said: “These guys have built big, enduring institutional organizations. I take my hat off to the Kravises of the world. But I will say to you in total candor that I have no desire to do that.”