In memoriam: Ted Forstmann

Ted Forstmann was a lot of things – a legendary investor who helped create the leveraged buyout industry in the 1980s; an outspoken critic of the use of junk bonds to fuel takeovers; a dedicated philanthropist.

He will be remembered in particular for founding and running Forstmann Little, one of the most influential firms in the early years of the buyout industry. He also proved to be fairly prophetic, lamenting the increasing use of high-yield bonds in the 1980s, and more recently warning about the scope of the financial crisis in 2008.

Forstmann Little, launched in 1978 by Forstmann, his brother Nick and friend Brian Little, took part in some of the industry’s marquee deals including bidding on the landmark RJR Nabisco deal, which was ultimately won by Kohlberg Kravis Roberts.

He also came out with one of the most memorable monikers for private equity investment groups, saying rivals over-reliant on junk bonds pursing large corporate takeovers were “barbarians at the gate” – a term that was later used as the title for the novel about KKR’s RJR Nabisco deal.

Forstmann Little’s investments over the years included private jet manufacturer Gulfstream Aerospace, cable TV company General Instrument, soft drink brand Dr Pepper, and baseball card-maker Topps. In 2004 however, the firm stopped doing deals after two portfolio companies, XO Communications and McLeodUSA, went bust, losing the firm and its investors about $1.5 billion.

Forstmann succumbed to brain cancer on 20 November at the age of 71. His passing sparked an outpouring of sympathy and remembrance from industry professionals.

“He was a brilliant investor, and taught me to think unconventionally and creatively when looking at new investment opportunities, as well as how to create real value by investing in growth and building great businesses such as Gulfstream, Yankee Candle and Community Health,” Sandra Horbach, managing director at The Carlyle Group, said in a statement.

KKR co-founder Henry Kravis also shared a statement full of praise: “No matter what he undertook, whether it be private equity or philanthropy or sports, it didn’t matter. He was passionate about it. He was extremely competitive. He did everything extremely well. He was a man who had a lot to be proud of,” Kravis said. “I have a lot of respect for him.”

His family has invited well-wishers to consider making donations to a charity Forstmann co-founded, the Children’s Scholarship Fund (www.scholarshipfund.org). 

“Ted Forstmann fervently believed junk bonds had perverted not only the LBO industry, but Wall Street itself…
 
To Forstmann the junk bond was a drug that enabled the puniest acquisitors to take on the titans of industry, and he held it responsible for twisting the buyout world’s priorities until they were unrecognisable. No longer, Forstmann believed, did buyout firms buy companies to work side-by-side with management, grow their businesses, and sell out in five to seven years, as Forstmann Little did. All that mattered now was keeping up a steady flow of transactions that produced an even steadier flow of fees…
 
Sooner or later, Forstmann knew, the economy would turn down and all the junk-bond junkies would go belly-up when they couldn’t make their mountainous debt payments… When that happened, Forstmann feared, the use of junk-bond debt would be so widespread that the entire US economy might be dragged into depression.

– excerpts from Barbarians at the Gate