Business | Ted Forstmann

Large and little

The mixed legacy of one of America’s most dashing entrepreneurs

|NEW YORK

THE capitalist dream was lived to the full by Ted Forstmann, a private-equity pioneer who died on November 20th. He loved buying firms and transforming their fortunes, from Gulfstream, a builder of corporate jets, to Dr Pepper, a maker of sugary drinks, and IMG, a sports-management agency that was his last big acquisition. He loved playing sport and gambling. He loved the ladies, too. A lifelong bachelor, he was said to have squired Princess Diana and other beauties.

Mr Forstmann was a red-blooded conservative, not the puritanical sort that rules the Republican roost nowadays. He hated the sort of big government that instinctively throws money at a “problem” and usually makes it worse. But he was also a generous philanthropist, who paid for scholarships and advocated school vouchers before anyone really understood what these meant.

In 1978, with his brother Nick and Brian Little (who died in 2001 and 2000 respectively), he founded Forstmann Little, one of the first private-equity firms, in those days known as “bootstrappers”, for their use of debt to pull up underperforming firms by their bootstraps. Mr Forstmann was made famous by his 1988 battle with a rival buy-out firm, Kohlberg Kravis Roberts (KKR) to buy RJR Nabisco, as memorialised in a bestselling book, “Barbarians at the Gate” (which is how Mr Forstmann described his rivals). He ultimately lost after refusing to match KKR in its enthusiasm for using junk bonds (these days euphemised as “high-yield debt”), which he dismissed as “funny money”.

An editorial he wrote at the time for the Wall Street Journal could have run almost unchanged in early 2007, with its warnings against overpriced, debt-fuelled deals brokered by fee-addicted investment bankers, and its conclusion that “all of America will pay the penalty, because the debt is huge and widely held and the banking structure's integrity would be at stake.”

Nowadays, private-equity firms struggle to demonstrate that they are improving the firms they buy, and not just profiting from financial shenanigans. Mr Forstmann, in contrast, had a gift for making firms run better, from launching the successful V aircraft at Gulfstream (which he bought for $825m in 1990 and sold nine years later for $5.3 billion) to expanding IMG into college sports.

In the 1990s, having taken big losses on overleveraged deals like the RJR buy-out, Forstmann Little's rivals replaced their leaders and grew into financial conglomerates, managing a wider variety of funds and going into consultancy. But, with Mr Forstmann still at the helm, his firm stuck to private equity. It proved his undoing. He bet heavily on two frothy telecoms firms in the late 1990s tech bubble, which went bust. For all his firm's early successes, his archrivals at KKR are again living large while Forstmann Little is all but forgotten.

This article appeared in the Business section of the print edition under the headline "Large and little"

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