Leveraged buyout pioneer promoted school vouchers

Andrew Ross Sorkin / New York Times News Service /

Published Nov 21, 2011 at 04:00AM

Theodore Forstmann, a colorful financier and philanthropist who helped pioneer leveraged buyouts, died Sunday at the age of 71. The cause was brain cancer, his spokesman said. Forstmann, who lived in New York, had been diagnosed with a malignant glioma earlier this year.

Forstmann was among the very first executives to use debt to acquire companies, fix them and then sell them for millions — and sometimes billions — of dollars in profits. Beginning in the late 1970s, he pooled money from wealthy investors and large pension funds to back his acquisitions, while taking 20 percent of the profits, creating a business model that today is known as the private equity industry.

Over the next three decades, Forstmann bought, sold and turned around dozens of companies, including Gulfstream Aerospace, Dr. Pepper and General Instrument.  

He also coined, if inadvertently, a phrase that set the public image of the leveraged buyout industry. While golfing in the late 1980s with Richard Gelb, then the chairman of drug maker Bristol Myers, the discussion turned to a surge in takeovers by buyout firms. “What does it all mean?” Gelb asked Forstmann. “It means the barbarians are at the gate,” Forstmann replied. “And they’ll be coming for you next.”  

The phrase “barbarians at the gate,” was used by Bryan Burrough and John Helyar for the title of their 1990 best-selling book about the $25 billion buyout of RJR Nabisco, which Forstmann had bid on and lost to a private equity rival, Kohlberg Kravis Roberts. Forstmann happily recounted his conversation on the golf course dozens of times.  

Yet as buyouts grew and more and more debt was used to finance deals, Forstmann grew more cautious about the business, calling the heavy use of debt “wampum” and “funny money.” In an op-ed article in The Wall Street Journal in 1988, at the height of the buyout craze, he wrote, “Watching these deals get done is like watching a herd of drunk drivers take to the highway on New Year’s Eve.”

Education vouchers  

Forstmann — who gave hundreds of millions of dollars away to charity — was also among the first philanthropists to push for voucher programs for education in the 1990s, leading to the movement by financiers to promote charter schools. In 1999, he founded the Children’s Scholarship Fund, with John Walton, the son of Wal-Mart founder Sam Walton, to offer scholarships to underprivileged children to attend private schools using vouchers. He donated $50 million. The scholarship fund has since given away $443 million to 116,000 children.  

Most of Forstmann’s philanthropy centered on children. Starting in the 1980s, he was a Big Brother. In 1992, he founded the Silver Lining Ranch, a camp for terminally ill children in Aspen, Colo., which was first run by Andrea Jaeger, a former professional tennis player. And for 25 years, he held a prominent charity tennis tournament, known as “Huggy Bear,” at his summer home in Southampton, N.Y., raising over $20 million dollars for children’s charities, by bringing tennis pros like Martina Navratilova and Boris Becker to play against amateur donors.  

His charitable instincts went beyond the usual Manhattan charity circuit. In 1994, he flew on his GulfStream IV jet to Bosnia to deliver millions of dollars of medical supplies and emergency service personnel. Earlier this year, Forstmann signed the Giving Pledge, a promise by some of the nation’s wealthiest people to pledge to give away at least half of their fortunes. The Giving Pledge was started by Warren Buffett and Bill Gates.  

An influential donor to Republican candidates and causes, Forstmann was co-chairman of George H. W. Bush’s re-election campaign in 1992. He named Republican allies to run the companies his firm owned, appointing Donald Rumsfeld as chief executive of General Dynamics in 1990 and adding Colin Powell to the company’s board.

Notable love life

Unusual for a financier, Forstmann was also a regular bold-faced name in the gossip pages. He had a brief romantic relationship with Diana, Princess of Wales, which he said later turned into a long-term friendship. He was often photographed arm-in-arm with a model or actress, including Elizabeth Hurley — he was later the godfather of her son. Over the last several years, he dated Padma Lakshmi, the celebrity chef and model and former wife of Salman Rushdie. 

Forstmann never married. 

“He sees things differently, and that’s part of his genius and part of his problem, you know?” Barbara Hackett, a former girlfriend, explained in an interview with The New York Times in 2004. “He’s that person who is a terrific athlete, who is out with the most beautiful girl, who is flying around in his plane and has had all this tremendous success. That person may be difficult for a lot of other people to cozy up to and embrace.” 

‘Maybe I’ll adopt some children’ 

Forstmann had a complicated view of the single life. In 1995, he told The Washington Post, “I find the prospect of being married more difficult than most people. I would be a difficult husband.” He added, “Maybe I’ll adopt some children. I’m not going to do nothing about this.”  

Two years later, Forstmann became the guardian of an orphaned child, Everest, now 30 years old, from South Africa. Forstmann had been invited to South Africa in 1996 by Nelson Mandela to address the parliament on democratic capitalism. Forstmann was so moved by the work Mandela was doing with orphaned children that he made a $1 million donation. It was on a subsequent visit to Africa to the see the orphanage he had paid for with his donation that he met Everest.

“’This kid is for me, that’s it,” he recalled in an interview about the moment they first met. In another visit two years later, he met another boy, Siya, who had become close to Everest. He brought them both to live with him in New York and became their guardian.

He is survived by Siya and Everest, and his siblings: J. Anthony Forstmann, John Forstmann, Marina Forstmann Day and Elissa Forstmann Moran.

Forstmann grew up in Greenwich, Conn. His father, whom Forstmann said was an alcoholic, ran a wool business that went bankrupt in 1958.  

One of six children, Forstmann played ice hockey at Yale. He put himself through Columbia Law School with proceeds from gambling on bridge.  

In 1978, he started his leveraged buyout fund, Forstmann Little&Co., with his brother Nicholas and Brian Little, an investment banker. While other firms relied on the public debt markets, Forstmann raised his own special subordinated debt fund.

Streak ended with the tech bubble

His firm had a long stretch of beating his rivals, with an annual average rate of return of more than 55 percent a year on its equity funds through 2001. But that winning streak came to an end that year when two telecommunications investments, XO Communications and McLeodUSA, made at the height of the telecommunications bubble, failed. He later said that he should not have made the investments and blamed himself for delegating investing to a younger generation enchanted by the Internet.  

“All these psychoanalytical things have been written about me that I’m insecure. Maybe I’m very insecure. I thought the world had passed me by, OK? I really did. I didn’t understand a word they were talking about. I don’t use a computer today,” he said about the 2001 failed investments.  

That same year, his brother Nicholas died of small-cell lung cancer at age 54. Little had died a year earlier. And in 2004, the state of Connecticut, which had a pension fund invested in Forstmann Little, sued Forstmann and his fund for the loss of funds, alleging that the investments were too risky and beyond the scope of they type of investments he promised to make. A jury found in favor of the state but awarded no damages, leaving both sides to claim victory.  

After the ruling, Forstmann announced that his current fund would be his last. He said at the time that he had become disappointed with the industry and its focus on size and fees. “The world has gone in a completely different direction. It is not for me. Even if things had never changed, I wanted to stop years ago,” he said.  

Over the past seven years, he worked steadily on his last big investment: IMG, the sports, fashion and media agency that represented the likes of Tiger Woods and Roger Federer. He bought the company in 2004 for $750 million and became its chairman.

It encompassed everything he loved: deal-making and sports.