(FORTUNE Magazine) – EVERY SEPTEMBER a distinguished group of men is cordially invited to spend an evening at an exclusive dining room overlooking the East River in midtown Manhattan. After cocktails and an elegant dinner, waiters clear the dessert plates, and the smoke from the first cigars starts curling toward the ceiling. Well-fed, well-groomed, and well-heeled, the gentlemen settle back to hear the annual results of an investment company known as AEA Investors, of which they are the fortunate shareholders. Over the past 15 years, AEA has compiled a 45% compound average annual return on its investors' money. AEA is obviously no ordinary investment club, and its 60-odd members are no ordinary businessmen. Look closer and you will begin to recognize their faces. Sitting around the room are Irving Shapiro, the former chairman of E.I. du Pont de Nemours; Frank Cary, once the head of IBM; Reginald Jones, the widely admired retired leader of General Electric; Roger Smith, the current CEO of General Motors; and former U.S. Secretary of State and Nobel laureate Henry Kissinger. Many share the same credential -- they are retired or soon-to-be- retired chief executives of the 50 largest FORTUNE 500 industrial and service companies. As one diner aptly describes the crowd, ''They are the Who's Who of corporate America.'' In what amounts to irrefutable -- if hardly surprising -- proof that the rich do indeed get much richer, AEA has earned drop-dead returns that do its blue-chip, white-shoe members proud. Although the deals don't run back to back, an investor who put up $100,000 in 1973, when AEA did its second deal -- the first, investment in a miniconglomerate called Leisure Group, was a flop -- would find his stake worth $26.3 million today. Says Howard L. Clark Jr., the chief financial officer of American Express, a corporate investor in AEA, and the son of a former American Express chief executive who is also an AEA investor: ''AEA is in the top 5% of American Express's venture capital and leveraged-buyout investments. They have had wonderful, wonderful performance.'' For almost two decades this elite club has been one of Wall Street's best- kept secrets. Founded as an investment vehicle for families bearing names such as Rockefeller, Mellon, Harriman, and du Pont, the firm has gone about its lucrative business unobtrusively: It does leveraged buyouts of small and medium-size companies, and then calls on the managerial skills of its eminent shareholders to run these properties, sitting on their boards and building them into industry leaders before reselling them or taking them public. AEA has never published a brochure and has always shunned publicity, in keeping with the way old money traditionally operates. Says Carl Hess, who has led it since its inception: ''This is a very private enterprise.'' Now for the first time, AEA's management has agreed to talk in detail about the firm's origins, membership, and unique investment strategy. Hess wants to make clear that ''AEA is not a secret cult.'' The timing is propitious because AEA, with $1.25 billion currently invested in its deals, is an organization in transition. At 76, Hess is scaling down his day-to-day involvement with the firm, and in February AEA appointed John C. Whitehead, 67, former co-chairman of Goldman Sachs and deputy secretary of state in the Reagan Administration, to succeed him as chairman. In April, Vincent Mai, 49, left Shearson Lehman Hutton, where he was a managing director, to become AEA's full-time chief executive and fill the other half of Hess's job. With many of the original investors getting, in Whitehead's words, ''a little long in the tooth,'' the organization is trying to ensure that its future will be as sterling as its past.

The AEA monogram originally stood for American European Associates. The idea dates back to another memorable meal -- a lunch in November 1963 in a private dining room high above New York's Rockefeller Center. At that lunch J. Richardson Dilworth, the Rockefeller family's financial adviser, introduced his friend George Love, then the chairman of both Chrysler and Consolidation Coal, the largest U.S. coal concern, to Sir Siegmund Warburg, the London financier and scion of the great German banking family. Recalls Love, now 88 and retired: ''On that particular day we were just dreaming.''

THE DREAM was to assemble a group of wealthy families and investors, pool some of their money, and delve into what Dilworth called, in the days before the term LBO was coined, the capital turnover business. He would find wealthy East Coast families like the Rockefellers to participate. Love, who was close to the Mellons of Pittsburgh and the Hannas of Cleveland, would be responsible for the Midwest. Sir Siegmund would cover Europe. Their first conversation was etched in the memory of all three men because as they finished their meal, the maitre d' approached their table with the news that President Kennedy had just been shot. Five years passed before the three found time to make the dream of American European Associates a reality. Dilworth and Love eventually rounded up the lion's share of the investors, and Love became the chairman. Sir Siegmund, involved for a short time, was soon bought out by others. To run daily operations, they hired Carl Hess, who once worked for the Cresap McCormick & Paget consulting firm and headed the corporate finance department of American Securities, the investing arm of the William Rosenwald family fortune, old Sears Roebuck money. Hess, Dilworth, and Love soon discovered that AEA's most useful investors were not the members of wealthy families or their advisers, as they had anticipated, but retired chief executives. Not only could these men come up with the necessary capital; they could also contribute to AEA's performance by lending their talents to the boards of the acquired companies. Ex-CEOs quickly became the group's bedrock. Unlike most clubs, this one has no membership committee, and glowing letters of recommendation won't win you admission. AEA's board of directors looks for congenial, like-minded businessmen who have had notable careers. Says Whitehead: ''It is very embarrassing and awkward when some friend of yours who is a distinguished CEO applies to join the club and you have to dream up a reason why he can't be admitted.'' It helps to be pals with current members and to have run General Motors, Exxon, or IBM, judging from the heavy representation of their past and present CEOs on the membership roster. Beyond such obvious criteria, AEA wants chief executives who represent diverse industries and parts of the country. It taps its members a year or two before they retire, in order to enlist them before they agree to sit on too many corporate boards. The shareholder group today includes some 60 men and one woman -- Kate Ireland, a member of the Hanna family -- and 12 institutional investors, among them the university endowments of Yale, Stanford, MIT, Duke, and Johns Hopkins. George Love and Carl Hess remain two of the largest individual shareholders, with around 6% of the stock apiece, and three institutions -- American Express, First Chicago Investment, and Prudential Insurance -- each own just over 9%. NEW INVESTORS, or ''participants'' as they are called, formally join by purchasing shares in AEA Investors Inc. when those shares become available -- usually after they are tendered upon the death of a member. Although AEA sold its original 200,000 shares in 1969 for 10 cents apiece, participation today costs $150 a share and members must buy a minimum of 1,000. They also sign a contract to commit to the buyout fund an amount usually in the upper six figures and sometimes seven. That money is on call for a five-year period, to be used when the investment committee decides to proceed with an acquisition. Helped by AEA's dizzying performance -- a 45% annual rate of return means your money doubles in less than two years -- Hess has had no trouble raising capital for deals. In fact, the pool of committed capital has grown from an initial $10 million to $500 million. The firm treats each deal separately, and members receive their gains in cash when a company in the portfolio is sold or in shares if the company goes public. AEA's 12 professional staffers, led for the past 17 years by executive vice president Robert Stillman, shop for the deals. Most of the browsing and buying is done through deal brokers, investment bankers, and lawyers who traipse through AEA's hushed and plush offices in midtown Manhattan like sample salesmen eager to display their wares. AEA has owned companies in a variety of industries: shoes, cement, chicken processing, diet centers, insurance, vocational schools, telecommunications, supermarkets. But the group is highly selective about what it buys. Says Hess: ''We look for a cornerstone company and a concept for growing the business.'' A cornerstone is a healthy, well-run outfit led by managers who may be short on capital but who are eager to expand. The concept may take any of several forms: diversification of the product line, horizontal and vertical integration through an industry, or expansion across the U.S. and abroad. For example, AEA has strung together three companies in the aluminum business -- Alflex, Barmet, and Fabwel -- to create a vertically integrated producer and fabricator of aluminum products with $350 million in sales. Last November, AEA bought Empire Berol, the pen and pencil company, whose international business it plans to expand. AEA's portfolio looks toy-size next to the holdings of Kohlberg Kravis Roberts, the LBO powerhouse that spent $25 billion to acquire RJR Nabisco. But any comparison is specious. Most KKR deals are everything an AEA deal is not: giant, leveraged to the hilt, and destined for eventual breakup. Carl Hess puts it succinctly when he says, ''We do no startups, we don't join other people's deals, we don't break things up, and there are no hostile raids.'' The firm is like a small greenhouse where companies are repotted and fertilized in carefully controlled light and temperature -- a place where all the gardeners have green thumbs. Most AEA acquisitions are fertilized with a 40% average equity infusion, vs. the tiny 5% to 10% typical of other LBO funds. More equity takes the pressure of servicing a heavy debt load off the acquired companies and leaves capital for expanding the business. More leverage could improve AEA's return on equity, but the firm has performed like a Derby winner anyway. To date the group has bought some 35 companies at an average cost of $100 million apiece and resold half, usually after building them internally or through acquisitions. Says John Canning Jr., head of First Chicago Investment, one of AEA's institutional investors: ''There is not a lot of black magic in the process. It takes good solid business discipline.'' A typical AEA buyout reserves as much as 30% of the equity for the company's top managers -- a giant carrot and a good deal more than most buyout groups provide. There's no junk bond financing, no mezzanine financing, just plain- vanilla debt provided by Morgan Guaranty Trust and other commercial banks and insurance companies. As the owner, AEA tries to avoid disturbing the company's relationships with its community, as well as with its banks, lawyers, and accountants. Corporate headquarters are not suddenly uprooted to Greenwich or Atlanta. But within weeks of the acquisition AEA assembles a fresh board of directors, plucking a few volunteers from the ranks of its cherished ex-CEOs. THESE DIRECTORS do more than add gloss to the new boards; they inject brains and experience. Broadcast International, a communications company that beams radio advertising into supermarkets, can tune in the smarts of Dr. Frank Stanton, a former president of CBS, and William R. Hewlett, the co-founder of Hewlett-Packard. Before AEA sold it late last year, American Health Cos., a chain of diet centers, had the counsel of IBM's Frank Cary and of Robert Hatfield, former chairman of Continental Group. The new directors also have the connections to grease the gears of commerce. After AEA acquired Birmingham Steel in 1984, President James Todd found himself with a stable of high-powered directors that included Mandell de Windt (formerly head of Eaton), Reginald Jones (GE), Edmund Littlefield (Utah International), and George Stinson (National Steel). When Todd wanted to buy and reopen a steel mill in Emeryville, California, Littlefield, who lives nearby, sketched out a strategy for winning approval from the local authorities. Says Todd: ''Mr. Littlefield was very helpful in pointing out who we should associate ourselves with from a legal standpoint, what kind of public posture we should take, what the history of the area was -- things of that type.'' Management's initiative and the board's coaching paid off handsomely. Birmingham, which lost $1 million on $74 million in sales in 1983, has earned $31.7 million on sales of $323 million in the first three quarters of its current fiscal year. Says Todd: ''In the steel industry, that's better than a kick in the head . . . We all owe a great deal to AEA.'' The warm feelings are mutual. To help finance the Birmingham Steel buyout, AEA made two equity investments totaling $16 million. Two years later, Birmingham went public and AEA pocketed a $90 million profit. Alas, not every deal benefits from strong board leadership. AEA bought Crutcher Resources, an oil field services company, and installed Kenneth Jamieson, a former Exxon chief and AEA participant, as its chairman in 1976. The company did well for a time, then chose to expand just before recession flooded the oil patch. It promptly drowned in Chapter 11. Says Carl Hess: ''In this business you have some deals, like Crutcher, that are total flops. Then you get some that are mediocre and some home runs that bring your average up.'' ALL TOLD, AEA has netted at least $700 million for its shareholders over a 15-year period, with a big chunk of that sum going to the institutions that coughed up most of the capital. But 20 of AEA's early individual investors have earned over $2.5 million and four have made more than $25 million apiece. Many of those retired CEOs who joined AEA in its early days when a chief executive's compensation was not as lavish as it is today (see Compensation) have taken home more as AEA participants than they earned during their entire managerial careers. A former AEA staffer who is now running his own buyout firm sums up his experience as well as that of the shareholders: ''AEA provided us with a great opportunity and a chance to make more money than we ever dreamed of.''

CHART: NOT AVAILABLE CREDIT: ILLUSTRATION BY MICHAEL BARTOLOS CAPTION: HOW THE RICH GET RICHER