Speaker 1: This is mesters in Business with very Results on Bloombird
Speaker 1: Radio this weekend. On the podcast, I have an extra
Speaker 1: special guest. His name is Steve Klinsky and he has
Speaker 1: an absolutely storied history in the field of private equity.
Speaker 1: He is the person who essentially stood up the lb
Speaker 1: O department at Goldman Sachs when essentially there were half
Speaker 1: a dozen or so private equity firms in the country.
Speaker 1: He eventually goes to a Forceman Little where he's one
Speaker 1: of the first five founding partners. They grew a business
Speaker 1: where they eschewed junk debt. They very often were the
Speaker 1: white knight fighting against the so called barbarians at the gate.
Speaker 1: They believed in building businesses and far less focused on
Speaker 1: financial engineering. Eventually, Steve takes his experience and knowledge and
Speaker 1: stands up his own firm, New Mountain Capital, which is
Speaker 1: one of the largest private equity shops in the world.
Speaker 1: They have thirty seven billion dollars in clients and their
Speaker 1: own funds, which they have invested across a variety of
Speaker 1: disciplines from credit to strategic capital, as well as taking
Speaker 1: companies private and helping them grow into something more substantial
Speaker 1: than they've been in the past. I thought this was
Speaker 1: a master class in how private equity works from somebody
Speaker 1: who was there at the beginning, from Goldman to Forceman
Speaker 1: Little to his own firm, and has pretty much seen
Speaker 1: and done everything. I found this conversation to be fascinating,
Speaker 1: and I think you will also with no further ado,
Speaker 1: my conversation with New Mountain Capitals founder and CEO Steve Klinsky.
Speaker 1: So let's talk a little bit about that. M B
Speaker 1: A j D. That's quite a combination. What made you
Speaker 1: pursue that? I come from the Detroit Er Mission and
Speaker 1: I was a public school kid, went to university in
Speaker 1: Michigan and studied both economics and philosophy. Sorry about the
Speaker 1: theft of that last touch, and well, thank you, thanks
Speaker 1: for the condolences. Uh and uh. You know, my family
Speaker 1: had a business. My grandfather and grandmother had a store
Speaker 1: for thirty years in Detroit called Alberts where they sold
Speaker 1: women's clothes. And my we had been built into a
Speaker 1: chain by my dad and my uncle. So I was
Speaker 1: the youngest of five brothers and cousins, and they wanted
Speaker 1: to go into the business. And I also had a
Speaker 1: real love for constitutional law and political philosophy, so I
Speaker 1: actually went to both, you know, kind of the business
Speaker 1: school to kind of do a family obligation and the
Speaker 1: law school because I really love constitutional law at that
Speaker 1: point really interesting. Have you found one or the other
Speaker 1: more interesting in your career in Pe? I'm a big
Speaker 1: fan of both of them, and a big fan of
Speaker 1: the j d NBA program, and I'm about with both
Speaker 1: schools still today. You know. I thought the law school
Speaker 1: is much more traditionally academic, so I thought I was
Speaker 1: learning a lot there the business school. I was only
Speaker 1: twenty one years old. I was like the age of
Speaker 1: a college senior, and I didn't think I was learning anything.
Speaker 1: In hindsight, I learned a ton of the business school
Speaker 1: and at the law school both. I'm a big fan
Speaker 1: of multidisciplinary, you know, approaches, so they've both been great
Speaker 1: for me. So you do a senior thesis about what
Speaker 1: was then the newly emerging field of private equity. Which
Speaker 1: school did you do the thesis for? You do a thesis,
Speaker 1: especially for the j D NBA program. You get it.
Speaker 1: You get admitted into each school individually, but you've finished
Speaker 1: in four years instead of five, and you write a
Speaker 1: special thesis at j d NB A thesis that has
Speaker 1: long business And what was interesting was the first leverage
Speaker 1: by out of a public company happened when I was
Speaker 1: in graduate school. KKR took a a stock exchange company
Speaker 1: called Who Die Private and it was the first time
Speaker 1: it was the first leverage by out of a public company,
Speaker 1: and so it was a whole new idea. I found
Speaker 1: it very interesting. You know, I had no work experience
Speaker 1: in anything, so I thought, what an interesting idea and
Speaker 1: a potent. We had sold the family business, maybe buy
Speaker 1: another family business one day through a leverage buyout. So
Speaker 1: I did my thesis on how leverage buyouts work from
Speaker 1: the legal in the business side. And I might have
Speaker 1: been the first person coming out of graduate school saying
Speaker 1: I want to be a private equity specialists. So right place,
Speaker 1: right time, and the right insight into what was then
Speaker 1: a very novel field. So is that what ultimately leads
Speaker 1: you to starting at Goldman Sachs Well, I decided I
Speaker 1: thought about corporate law. I wanted to be a Supreme
Speaker 1: Court justice, and then I realized John Roberts, who was
Speaker 1: a year ahead of me, was the guy was gonna
Speaker 1: Yeah he was one year You know, there were some
Speaker 1: pretty smart dudes at Harvard Law School. So you see John,
Speaker 1: and you say, right now, he was one year older
Speaker 1: than me. So if I see John, I would say, hello,
Speaker 1: Mr Justice Roberts, you don't know me, That's what I
Speaker 1: would say to Mr Justice. But in school, but he
Speaker 1: was one year I had. I'm just saying, you know,
Speaker 1: I realized, you know, I had a picture of Oliver
Speaker 1: Wendell Holmes above my desk, and I was incredibly earnest
Speaker 1: and intent, and I said, well, you know, I'm alright,
Speaker 1: but there's some really it's probably not gonna be me
Speaker 1: as the Supreme Court justice. So I thought about, and
Speaker 1: I did work for Larry Tribe and Kind Law for
Speaker 1: really yeah, it was between corporate law and investment banking.
Speaker 1: And I decided, if I was gonna be in corporate,
Speaker 1: I'd rather be the client than the lawyer. And so
Speaker 1: I joined Goldman in there. It was a twelve person
Speaker 1: merger department and they were just in the days when
Speaker 1: the the takeover wars were very hot, and Goldman was
Speaker 1: the firm defending everyone against raids and Morgan Stanley was
Speaker 1: doing the raids. So I joined Goldman in their merger department,
Speaker 1: but said I'd like to be your lb O guy.
Speaker 1: They said, we've never done it. Le they said, we've
Speaker 1: never done one. You could be the LBL guy, as
Speaker 1: like saying I want to be the wheat farmer on
Speaker 1: the moon. There was no competition go ahead and uh so,
Speaker 1: uh so there there was no LBO that had ever
Speaker 1: been done at Goldman Sachs when I joined it. And
Speaker 1: I came in with the idea because I had been
Speaker 1: studying it as a student. So you stood up the
Speaker 1: LBO division at Goldman. Essentially I helped bring it in
Speaker 1: the idea. They were starting to get topical, and they
Speaker 1: set up a two person group with a guy named
Speaker 1: Fred Eckert as a vice president and me as the associate.
Speaker 1: So we we were the original LBO group of Goldman Sachs.
Speaker 1: And uh We're supposed to do three million of revenue.
Speaker 1: We did thirty million. It just took off very fast,
Speaker 1: you know. And what we were doing was basically advising
Speaker 1: Goldman clients how to take their own family businesses back
Speaker 1: off the stock market. We were more we weren't owning
Speaker 1: businesses as much as we were advising families and stuff.
Speaker 1: We I did work on the very first principal investment
Speaker 1: that Goldman ever did. And Goldman was the size of
Speaker 1: a law firm back that people forget how much the partnership.
Speaker 1: We all fit in one room for the Christmas photo
Speaker 1: every year, and I mean it was literally like the
Speaker 1: size of a of a law from not a giant
Speaker 1: global institution. And the first deal they ever did with
Speaker 1: the partners own money was a company called Trinity paper Bag.
Speaker 1: It was a twelve million dollar paper and plastic bag
Speaker 1: company that the guy said, you know the bag and
Speaker 1: Tootsie with the ice cream, that was my bag. He was,
Speaker 1: you know, he's a great entrepreneur. And it was a
Speaker 1: half a million dollar investment from the firm and I
Speaker 1: worked on it, and the two CEO's of the firm
Speaker 1: watched over me, the head of mergers and everyone watched
Speaker 1: over me. There. Everyone was very concerned with this deal
Speaker 1: because there was a half a million, half a million
Speaker 1: of the partner's money. So it was very early days
Speaker 1: and all this stuff. So it was a good time too.
Speaker 1: It's like going to Silicon Valley the day transistors were
Speaker 1: invented or something. That's very good time. So how long
Speaker 1: does it take for the LBO group at Goldman to
Speaker 1: build into something fairly hefty. Yeah, I started a Goldman
Speaker 1: in a one doing you know, mostly raid work and
Speaker 1: traditional merger and seller work. The LBO group was probably
Speaker 1: started in eight two and it was already a big
Speaker 1: success in eighty four when I got quartered away by
Speaker 1: force a little they poached me away. So tell us
Speaker 1: a little bit about that. You're effectively amongst the first
Speaker 1: five founding partners. Is that a fair stay? Well, there
Speaker 1: were only twenty private equity firms in the world in
Speaker 1: four They are now over five thousand. I also just
Speaker 1: finished being the chairman of the price of an equity industry,
Speaker 1: something called the American Investment Council. But there used to
Speaker 1: only be twenty private equity firms. KKR was the biggest,
Speaker 1: with four dred million of assets and eight people, and
Speaker 1: Forest my little was the second biggest, with two hundred
Speaker 1: million of assets and four professionals. And they hired me
Speaker 1: and as the fifth professional. And by nineties two guys
Speaker 1: had left, so it was the two Forceman brothers, and
Speaker 1: I was the most senior guy, you know in the nineties.
Speaker 1: But it was you know, very small, very new, and uh,
Speaker 1: you know, obviously a great time to enter. So even
Speaker 1: back then when it was the size that you could
Speaker 1: take a Christmas picture with everybody in one room. At
Speaker 1: Goldman they're still doing investment banking, they're trading, their advising clients,
Speaker 1: They're involved in a lot of different things. How is
Speaker 1: it different when you moved to a shop with a
Speaker 1: singular focus on private equity and LBO. Well, the the
Speaker 1: key thing to me was the thing about being in
Speaker 1: a private equity shop versus investment bank is that you
Speaker 1: are the owner of the company. I mean, even when
Speaker 1: I was at Goldman Sachs doing private equity work, it's
Speaker 1: more equivalent or merger work. It's much more equivalent to
Speaker 1: being a house broker than owning the house. So you
Speaker 1: sell a lot of houses and you get commission on
Speaker 1: what you sell. But when you're in private equity, you
Speaker 1: own the business, you control it, you're responsible for it,
Speaker 1: you have real ownership in it. As a member of
Speaker 1: forcement Little I had true ownership in that company that
Speaker 1: I never had as an investment banker Goldman Sachs. So
Speaker 1: that was the attraction to how does the private equity said,
Speaker 1: how does that affect your psychology? At what deals you consider,
Speaker 1: what you skip? How does that change how you view them. Well, again,
Speaker 1: it gives you an owner's mentality. A really good investment
Speaker 1: banker has that mentality anyways because they just want to
Speaker 1: give great, you know, wise advice. A bad investment banker
Speaker 1: just wants to get deals done and doesn't care much.
Speaker 1: But as a private equity owner, again, first of all,
Speaker 1: you do invest heavily of your own money in the transactions.
Speaker 1: Plus you have additional ownership through the you know, the
Speaker 1: carried interests, the profits interests, and so I come from
Speaker 1: a family business background, and private equity really is a
Speaker 1: common if you do it right, as a combination of
Speaker 1: the family business mentality of a small group of people
Speaker 1: who own the business, but also the best aspects of
Speaker 1: a big company where today we have tremendous resources that
Speaker 1: a family could never have. But you do have that
Speaker 1: family business mentality when you own a business, if you're
Speaker 1: a good private equity firm, So you leave Goldman, you
Speaker 1: end up Enforcement. How long did you stay at Enforcement?
Speaker 1: Little and what sort of deals were you working on? Yeah?
Speaker 1: So I joined in eighty four as a as a
Speaker 1: younger version of a partner. I made as an associate partner,
Speaker 1: I made full general partner by eighty six, and uh,
Speaker 1: so I was there for their glory years of the
Speaker 1: eighties and the nineties. I was there from eighty four
Speaker 1: to ninety nine in their best best years, and so
Speaker 1: I did live through things like Barbarians at the Gate.
Speaker 1: I was a partner for that. I have online in
Speaker 1: the book where I say Ross Johnson is totally insane
Speaker 1: and leave the book. I actually spent about four months
Speaker 1: night and day working on it. But I'm I'm happy.
Speaker 1: My line was not pay anything, borrow anything. I'm very
Speaker 1: happy with my line um on page two fifty nine
Speaker 1: if your listeners want to check it out. And uh
Speaker 1: we were also the uh the white Night. We were
Speaker 1: the kind of the anti milk and junk bond guys.
Speaker 1: So we were the white Knight on Revlon. We had
Speaker 1: some great success in the eighties and the nineties were
Speaker 1: even better. So I can talk more about that. But
Speaker 1: so I was there for fifteen years. So let's talk
Speaker 1: a little bit about l b O s in the
Speaker 1: eighties and nineties. You mentioned the first l B O
Speaker 1: of a publicly traded company took place in ninety nine,
Speaker 1: and that led to your j D n b A
Speaker 1: thesis about it tell us a little bit about what
Speaker 1: the eighties and nineties were like when junk bonds and
Speaker 1: lb os first began to ramp up and become popular. Well,
Speaker 1: so just to give a little historical perspective on how
Speaker 1: much things have changed, and there is an economic backdrop
Speaker 1: to all of this up. So, my first day at
Speaker 1: work was October one one at Goldman Sachs. The highest
Speaker 1: interest rates in US history were literally the day before
Speaker 1: I started work, September, I think the tenure treasury was
Speaker 1: fifteen point eight four. So when we're you know, third
Speaker 1: three point seven percent tenure treasuries, it is nowhere near
Speaker 1: kind of the situation. There had been stag inflation where
Speaker 1: the stock market was lower in eighty one than it
Speaker 1: had been in nineteen sixty eight, and you know, incredibly
Speaker 1: depressed market, super high interest rates. So the initial idea
Speaker 1: of leverage biout's very high inflation was really was financial engineering, truthfully,
Speaker 1: back in those days, because if you had ninety five
Speaker 1: parts debt and five parts equity and ten percent inflation,
Speaker 1: you know, you could triple your equity with no unit
Speaker 1: growth at all. And interest rates were coming down after
Speaker 1: Vulka and Reagan broke you know, inflation and the stock
Speaker 1: market was going up. So that's where private equity start
Speaker 1: did as it really was for investment bankers as a room,
Speaker 1: having the nerve to borrow money when other people had
Speaker 1: been kind of beaten down for thirteen years. Forcement Little started,
Speaker 1: you know, around a little bit few years before then,
Speaker 1: and they started without junk bonds. It used to be
Speaker 1: the commercial banks would lend the senior debt and the
Speaker 1: insurance companies like Credential would lend what was called the
Speaker 1: mezzanine debt. There was no junk debt available in the market,
Speaker 1: and Forcement Little created instead of going to insurance companies,
Speaker 1: raised its own fund for the mezzanine debt that they
Speaker 1: could have the banks themselves and then force some little equity.
Speaker 1: So that's how it all started. The initial deals were
Speaker 1: small in dollars, but incredibly high returns. Like we owned
Speaker 1: a company called tops Chewing Gum back in the baseball
Speaker 1: card craze, eighty million dollar deal with ten million of
Speaker 1: equity that went up to eight hundred million of value.
Speaker 1: So ten million became eight hundred million. It's eighty times
Speaker 1: your money, which is not bad. It's not the five
Speaker 1: trillion of gains. Private equity makes the day, but it
Speaker 1: was very eye opening. Or William, you know there was
Speaker 1: a very famous deal Gibson greeting cards where like a
Speaker 1: half a million of equity went to forty million. I mean,
Speaker 1: those were the that's what got people all excited. Numbers,
Speaker 1: well that is it was kind of venture capital numbers
Speaker 1: because the dollars were so small, so it was a
Speaker 1: tiny compared to what private equity is today, but very
Speaker 1: high returns. So that started everyone going into the field.
Speaker 1: After the initial twenty firms, you know, Carlisle started, Blackstone started,
Speaker 1: and they're very transparent. They saw the success of these
Speaker 1: other firms and said, why can't we do that too,
Speaker 1: So in the mid eighties lots of people started to
Speaker 1: enter a new firms that became great and kept growing
Speaker 1: milk and started junk bonds around the mid eighties saying hey,
Speaker 1: and he had done I think serious academic work that
Speaker 1: the credit ratings were too conservative and if you just
Speaker 1: only went into triple as, you were giving up return.
Speaker 1: And so he was creating that market and he both
Speaker 1: lent to great companies like you uh, the cable companies
Speaker 1: that grew to be giants, and to some people who
Speaker 1: were kind of more questionable character who you know, gave
Speaker 1: business a bad name. So, uh, that was the alternative.
Speaker 1: And then for some little didn't use We were the
Speaker 1: one from that didn't use milk, and we had our
Speaker 1: own fund and so we were kind of the white
Speaker 1: shoe alternative to milking and all those Let's get a
Speaker 1: little granular, and you're the right person to dive into
Speaker 1: this with both a j D and an n B A.
Speaker 1: When we're talking about a structure of a financing and
Speaker 1: the senior mezzanine and junk, essentially that's the payout order
Speaker 1: in the event of a bankruptcy. Tell us a little
Speaker 1: bit about why it's structured that way, the advantages of
Speaker 1: each and the risks of each. Yeah, I mean, the
Speaker 1: best way to understand private equity is just to think
Speaker 1: about if you're buying a house. It's really using the
Speaker 1: principles everyone used in real estate over in the corporate world.
Speaker 1: So if you know, if you're a real estate guy
Speaker 1: and you're buying a building, you would have a mortgage
Speaker 1: and then put up your own money, or maybe you
Speaker 1: would have a first mortgage and then a second mortgage
Speaker 1: so you could put up less money, and if you're
Speaker 1: really good at improving the building or you just get lucky,
Speaker 1: that inflation raises the value of the building. You know,
Speaker 1: by having used debt, all the gain goes to that
Speaker 1: thin strip that is the equity. But of course if
Speaker 1: the value drops, the first thing that gets lost is
Speaker 1: the equity. So the senior debt is the safest thing
Speaker 1: because let's say it's sixty cents out of a hundred,
Speaker 1: until forty cents is lost, the senior debt is safe.
Speaker 1: Then the junk debt or mezzanine debt maybe the next
Speaker 1: twenty cents in the old days, and so if it's
Speaker 1: worth eighty cents on the dollar, they're safe, and then
Speaker 1: the equity is the bottom twenty. But if it goes
Speaker 1: up to two dollars, they've made a dollar on twenty cents.
Speaker 1: So it's just like real estate, but it was done
Speaker 1: in the in the corporate world, and there's just different
Speaker 1: risks and return possibilities. You know. The thing with debt
Speaker 1: is you can only make your interest rate. With equity,
Speaker 1: you're unlimited on how much you can make, but you're
Speaker 1: the first person to lose money if you do a
Speaker 1: bad that's a perfect explanation of that. So in the
Speaker 1: nineties you have more companies entering the space ace. You
Speaker 1: mentioned there were twenty pe firms back then. Uh, now
Speaker 1: there's five thousand. How competitive was it to source steals?
Speaker 1: Was there, you know, overwhelming luxury of choices or were
Speaker 1: people scratching to get into the best deals. The truth
Speaker 1: is it always feels competitive, no matter where you are
Speaker 1: in history or any given time. It never feels that
Speaker 1: easier or that. It's only in hindsight you realize how
Speaker 1: wonderful or terrible the conditions were. And bad news usually
Speaker 1: leads to good opportunities, and good news usually leads to problems.
Speaker 1: I mean, so you just have to live through all
Speaker 1: this stuff. I will say. When there were a fewer firms,
Speaker 1: so I was effectively there had Ted and Nick Forceman,
Speaker 1: Brian Little had retired from the firm. I was the
Speaker 1: next senior. So for years I was kind of like
Speaker 1: the Turkish merchant in the sock where the sellers would
Speaker 1: come and lay all their goods out in front and
Speaker 1: say you can look at this company and this company
Speaker 1: and this company, and I say no, no, no, bring
Speaker 1: them show me another company. Today, private equity is so
Speaker 1: much more professional. And my firm, which is not as
Speaker 1: famous as for us a little bit, but it's much
Speaker 1: bigger in the industry, is much bigger. You know, we
Speaker 1: have two hundred people were proactively super deep in specific
Speaker 1: industries like life science supplies, where were incredibly knowledgeable. And
Speaker 1: it's gone from kind of the small generalists to really
Speaker 1: sophisticated business building organizations who use frankly, much less debt
Speaker 1: as a percentage of the capital structure. Now you might
Speaker 1: have six equity and debt not And how long did
Speaker 1: that transition takes, because that's a very different structure. Obviously
Speaker 1: interest rates have an impact, will get to that. I
Speaker 1: think that transition has been steadily happening for the forty year.
Speaker 1: I've been in private equity for forty years now, and
Speaker 1: one thing I try to say is that private equity
Speaker 1: has evolved from a form of finance into a form
Speaker 1: of business. So in when interest rates were there and
Speaker 1: everything was started, it was about you know, and I
Speaker 1: was one of the four, for example, four investment bankers
Speaker 1: having a lot of hood spun and saying let's borrow
Speaker 1: some my and go for it. Today it's extremely differently.
Speaker 1: My organization owns companies that employ I think sixty people,
Speaker 1: we would be roughly eighty three and the Fortune five
Speaker 1: if we were one entity. We use all that knowledge
Speaker 1: to buy the next fairly small company and build it.
Speaker 1: So it is so different from where I was with
Speaker 1: Forceman Little, or where I was even when I started
Speaker 1: my firm by myself, I didn't have the you know,
Speaker 1: the strength. The key is to build. Think of private
Speaker 1: equity as a business that builds businesses and make that
Speaker 1: business engine stronger and stronger. And that's it's a better
Speaker 1: form of governance because you're like a family business. Since
Speaker 1: you don't have nine reporting, you don't have to worry
Speaker 1: about third parties. You can be very rational, but you're
Speaker 1: no longer constrained to just a few investment bankers. You
Speaker 1: can now be a very strong operation. And that's been
Speaker 1: a fourty year transition. So we're gonna talk about New
Speaker 1: Mountain Capital and a bit. I want to stay in
Speaker 1: the nine nineties. What sort of sectors and what sort
Speaker 1: of industries were the hot memes back then? What did
Speaker 1: you focus? Yeah, so the big long term story with
Speaker 1: Force some Little as investors, and it was a great firm.
Speaker 1: We were the second biggest firm, but I think we
Speaker 1: had the highest returns was you know, in the eighties,
Speaker 1: it was about kind of any company that looked cheap
Speaker 1: with a lot of debt. You know, obviously there was
Speaker 1: seven crash of the stock market, but there was a
Speaker 1: recession in where what we could see was our high
Speaker 1: quality companies that were market leaders did fine, and the
Speaker 1: number three auto parts elastomer company lost all market share
Speaker 1: to the number one guy and did terrible. And no
Speaker 1: matter how little you had paid for it, you had
Speaker 1: paid too much. So as a firm, force little set look,
Speaker 1: let's evolve into higher quality growth companies, not just by
Speaker 1: things because they're low EBA D, but really picked companies
Speaker 1: that can be great growth leaders. And the transaction that
Speaker 1: I'm most proud of in the nineties was a company
Speaker 1: called General Instrument that, you know, when we found it
Speaker 1: was a very messed up can go armor at doing racetrack,
Speaker 1: toe boards and defense electronics, but buried within it was
Speaker 1: the best cable and satellite television equipment business in the world.
Speaker 1: And people thought the Japanese were over going to destroy
Speaker 1: all American electronics. We had a different opinion that I
Speaker 1: can tell you why, that we could fight back, and
Speaker 1: it went from about a billion of value to twenty
Speaker 1: billion of value over the course of the nineties. And
Speaker 1: that was what I worked closest on over the nineties,
Speaker 1: and so the other great deals we did in the nineties, though,
Speaker 1: Gulf Stream Jet, which Ted you know, personally loved and lead,
Speaker 1: went through some tough times and being a huge success.
Speaker 1: We had Ziff Davis Magazines that we sold to Mr
Speaker 1: Sun and started massiocis Son's career. He bought it because
Speaker 1: he had spotted it and got him kind of into
Speaker 1: the Internet and all that through through us. Well he's
Speaker 1: not fine, he's done. He did very well with it.
Speaker 1: And uh so we had a lot of great We
Speaker 1: had Department fifty six Christmas ornaments, We had all sorts
Speaker 1: of deals. So it wasn't one specific end street, but
Speaker 1: we went from kind of junkie cheap companies too. I
Speaker 1: viewed the general instrument being the model for what force
Speaker 1: model was about what's kind of interesting is you mentioned
Speaker 1: a couple of times about what happens when you're in
Speaker 1: the number three and number four company and they're getting
Speaker 1: their lunch eaten by the number one in all of
Speaker 1: these sectors. Is it very much a winner take all
Speaker 1: where you really want to be in the top maybe
Speaker 1: second company, but not much further beyond that. Well, what
Speaker 1: I can say, and this is getting maybe ahead of
Speaker 1: it to get into new mountain strategy. But when I
Speaker 1: broke off to start a new mountain, it was really
Speaker 1: based on two principles defensive growth and business building. And
Speaker 1: what offensive offensive growth? This is like a defensive growth
Speaker 1: in business building. What I mean by that even more
Speaker 1: important than number one versus number three. There are some
Speaker 1: industries that have the wind at their back, that have
Speaker 1: secular growth for the next ten years, and there are
Speaker 1: some into strees that are inherently subject to changing conditions.
Speaker 1: Oil prices go up or down. Uh you know, fashion
Speaker 1: retail goes in and out, unlike for example, selling an
Speaker 1: ingredient for pharmaceuticals where they need the ingredient and your
Speaker 1: spect in by the f d A and you know
Speaker 1: they're so I mean, there are good industries and bad
Speaker 1: industries that from the point of view of safety and growth,
Speaker 1: and the biggest mistakes in private equity in my forty
Speaker 1: years observation is when the industry melts underneath you. So,
Speaker 1: for example, there were giant disasters. After I left for
Speaker 1: some little forcement was doing great when I left. After
Speaker 1: I left, they changed their strategy and went into what
Speaker 1: we're called selex, these alternative telephone companies that were supposed
Speaker 1: to That was a super hot theme in the year
Speaker 1: and two thousand and so after I left to start
Speaker 1: a new mountain, they migrated into that, and that whole
Speaker 1: industry was very hot, and then blew up the idea
Speaker 1: George Gilder telecosm. It was the idea that you could
Speaker 1: go in against. There. There had been a regulatory change
Speaker 1: that said the big Bell telephone monopoly is going to
Speaker 1: share its equipment with the nice new entrant and be
Speaker 1: very friendly and let the new entrant use its equipment.
Speaker 1: And that sounded great. Let's go into the new entrant
Speaker 1: and then lo and behold. For some reason, the equipment
Speaker 1: didn't work for the new entrant as well as they
Speaker 1: had expected, and so these things went from fifteen billion
Speaker 1: to zero. There was exo communication and anyway, that was
Speaker 1: because the industry, and once you've gone into that space,
Speaker 1: there was no way to save it. Or the initial
Speaker 1: Internet boom where if you own coffee cups dot com
Speaker 1: as a name, you were worth a billion dollars and
Speaker 1: you had no earnings and no revenue. Though I mean
Speaker 1: there were things that just go away. I mean bitcoin,
Speaker 1: and you know, a crypto could totally vanish, and if
Speaker 1: you put your money in there, it's not how well
Speaker 1: you manage your business, you're just in the wrong space.
Speaker 1: So the idea of New Mountain was, and this is
Speaker 1: kind of evolving from Force a little, was pick the
Speaker 1: sectors that at least for ten years ahead, have clear, stable,
Speaker 1: secular growth, and then buying at a reasonable price so
Speaker 1: we don't use that much debt. My firm has never
Speaker 1: had a bankruptcy, never missed an interest payment. In the
Speaker 1: history of our private equity effort. We've generated over seventy
Speaker 1: billion of enterprise value gains without one missed interest payment
Speaker 1: and added over sixty one jobs about one missed interest payment.
Speaker 1: So if you start safe, the question is how high
Speaker 1: you can build it, how big a mountain you can build,
Speaker 1: And that gets to operational skills. So it's those two things.
Speaker 1: So the concept to make the parallel to real estate.
Speaker 1: You're better off with the worst house in a great
Speaker 1: neighborhood than a great house and a not so good name. Yeah,
Speaker 1: I mean you know, if you go off. I guess,
Speaker 1: I guess the equivalent would be instead of saying, I'm
Speaker 1: going to go into the middle of the desert and
Speaker 1: build a building and hope people come around me, which
Speaker 1: may or may not work. If you're in a neighborhood
Speaker 1: you know as rising values, and you search for the
Speaker 1: right value and then you improve that house and you
Speaker 1: and you know, you fix the plumbing and you painted
Speaker 1: and you clean it up. You know, it's safer than
Speaker 1: taking the speculation on whether people are going to move
Speaker 1: to the jungle and create you know, the village in
Speaker 1: the jungle or not really interested that. That's what we're
Speaker 1: based on. So let's talk a little bit about your
Speaker 1: experience enforcement little during the R j R And Nibisco takeover.
Speaker 1: Tell us a little bit about that experience. What was
Speaker 1: that like? Yeah, it was an amazing time. And just
Speaker 1: to give some context to it, it was part of
Speaker 1: a bigger, longer term battle, which was there was the
Speaker 1: whole junk bond world building behind Mike Milk and who
Speaker 1: I now like in respect and I think he's become
Speaker 1: a great philanthropist. At the time, my firm was just
Speaker 1: dead set opposed to anything doing battle with him, not
Speaker 1: using his money. And you know, it was a famous editorial.
Speaker 1: Ted Forceman wrote that I helped, you know, right, the
Speaker 1: first draft of for him and all that. So uh,
Speaker 1: And it was we had fought against junk bonds in
Speaker 1: the Revlon situation. We had fought against junk bonds and
Speaker 1: lear Siegler situation, and we were the alternative to junk
Speaker 1: bonds as a firm. And Ted, who was a very colorful,
Speaker 1: glamorous guy dating lady died bigger than life. Also was
Speaker 1: kind of had grown up in a very white shoe
Speaker 1: preppy way in Connecticut, and I think it was just
Speaker 1: kind of offended by the whole junk bond world and
Speaker 1: just opposed it. Didn't like it. They're barbarians, They're they're barbarians.
Speaker 1: He's the one who said the barbarians at the gate
Speaker 1: and some people. That was his line, you know, is
Speaker 1: his line. And the book, by the way, is quite accurate.
Speaker 1: The movie is a total joke. So the movie says
Speaker 1: based on a true story, but it was written by
Speaker 1: the guy comedy right who wrote mash And they have
Speaker 1: Ted and Nick dressed up as Indians and with cowboys,
Speaker 1: and you know, KKRE and so that was none of
Speaker 1: that happened, but the book was quite accurate. And anyways,
Speaker 1: Our j Are itself, you know, was going to be
Speaker 1: a deal where kak Are was working with Ross Johnson,
Speaker 1: the CEO of Our Jeri. Because the stock had fallen
Speaker 1: so much. Then Ross Johnson decided not to go with
Speaker 1: kke Are and he teamed up with Lehman Brothers and
Speaker 1: Solomon Brothers, who had a giant a chance for four
Speaker 1: millions of fees by doing the deal, which was astounding
Speaker 1: amount of fees for Wall Street in the eighties, and
Speaker 1: KKR felt, well that was a break of a word.
Speaker 1: They that they were entitled to still go after the
Speaker 1: company and it was very cheap by a lot of
Speaker 1: measures when the whole thing started. And then Ross Johnson
Speaker 1: and his investment bankers didn't have enough money in the
Speaker 1: world to do the deal, and so they came to
Speaker 1: force Himan Little as the second biggest firm after kke Are,
Speaker 1: and said would you back us because we need your
Speaker 1: capital to get the deal done. And this is why
Speaker 1: you know, again in the book, there's a meeting where
Speaker 1: Ross Johnson comes in to meet Ted. I'm a partner,
Speaker 1: so Ted and I sit with him, and he says,
Speaker 1: I wanted to the deal. I don't want to do
Speaker 1: the deal. It makes sense it's to And Ted says
Speaker 1: to me, after, what do you think of him? And
Speaker 1: I say, I think he's totally insane? And again I
Speaker 1: was and quoted again in the book. But we actually
Speaker 1: spent you know, night and day for weeks working. You know,
Speaker 1: we thought we should study it. I mean, it's a
Speaker 1: huge opportunity. We should, you know, it's our job to
Speaker 1: study as a good deal or not. We spent weeks,
Speaker 1: night and day studying it. Decided it wasn't a good deal,
Speaker 1: decided not to bid, which UM fine with. And then
Speaker 1: when we decided not to bid at ninety, it eventually
Speaker 1: went up to you know, a hundred and eleven or
Speaker 1: something like that. But was interesting was the size of it.
Speaker 1: I think it was with all the debt, like a
Speaker 1: thirty five billion dollar deal, and at the time it
Speaker 1: was the nineteenth largest company in the in the fortune
Speaker 1: five hundred I think at the time, so it's it's
Speaker 1: it would be like a three hundred billion dollar deal today.
Speaker 1: It was just huge for the time. And I remember
Speaker 1: literally sitting with the bankers at Manny Hanny, and we
Speaker 1: went through every lending bank in the world. Every major
Speaker 1: bank has said if they lend their full legal limit,
Speaker 1: could we raise enough debt. It's like, we need twenty
Speaker 1: billion of debt and if you know, Bank Santander will
Speaker 1: lend three it. And And you know, we tried to total
Speaker 1: it up and it barely got to the It was
Speaker 1: just an astoundingly big thing. There's no way to do
Speaker 1: this without junk bonds. There's no way to do it
Speaker 1: without junk bonds. And they eventually used, you know, and
Speaker 1: again they used something called reset notes, which said, well,
Speaker 1: if the bonds aren't doing well, we'll pay you a
Speaker 1: higher interest rate, which means, of course you're killing the
Speaker 1: company even further, which so it's like a vicious cycle
Speaker 1: of destruction. And it almost destroyed KKE Care. Kke Care
Speaker 1: and to buying it, and it was kind of a
Speaker 1: pyric victory because it was a very tough deal for them.
Speaker 1: They've they've done grated getting through it and they're you know,
Speaker 1: they're a wonderful firm today. But I would I don't
Speaker 1: think it was a happy experience from KKE Care to
Speaker 1: have bought it. And uh, you know, so We looked
Speaker 1: at it very hard decided not to bid. So I'm
Speaker 1: proud of our role in it. I mean, we we
Speaker 1: gave it a hard study and said no. But it
Speaker 1: was a wild time. And and the investment bankers at
Speaker 1: the time, we're just every time we went to a
Speaker 1: meeting on do Dillon side? Is this a good company
Speaker 1: or not? All they wanted to do was talk about
Speaker 1: the feet splits. Well, there's four hundred a fee. This
Speaker 1: is what we said. No, we don't want to talk
Speaker 1: about that. We're trying to fire out what are the
Speaker 1: earnings of the business. You know that. Well, you guys
Speaker 1: put your own capital. We look a little different. It's
Speaker 1: totally calculus less about you have more r O I
Speaker 1: than hey, what are the feast we didn't you have?
Speaker 1: The fees were irrelevant to us. We were all about
Speaker 1: we would have been investing our fund in a huge way.
Speaker 1: And we couldn't get anybody even to like focus on
Speaker 1: the business itself. Everybody was so focused on the you know,
Speaker 1: the the arrangements around it. It was. It was. It
Speaker 1: was a wild time. And so that obviously raises the question,
Speaker 1: all right, right off the bat, junk bonds shift the
Speaker 1: focus from hey, I'm risking my own capital and I
Speaker 1: want it back to how big a fee can we
Speaker 1: spin up? What are some of the other problems that
Speaker 1: you run into when junk bonds allow you to engage
Speaker 1: in that behavior? Well, I mean they can get out
Speaker 1: of hand. So I mean in oh seven and oh eight, Uh,
Speaker 1: you know what killed economy seven right where mortgages going down.
Speaker 1: But those were even levels and levels on that. But
Speaker 1: you know, lending was getting very effusive in oh seven
Speaker 1: and O eight and again banks, whether junk bond or not,
Speaker 1: we're saying, well, we're not even lending, we're syndicating, so
Speaker 1: we don't have to worry about it. I would say today,
Speaker 1: you know it is it is a much different environment.
Speaker 1: Even though the so called junk bond markets are strong
Speaker 1: and high yield is strong. Uh, there is much more
Speaker 1: equity in companies than there used to be. From the
Speaker 1: private equity firm. We have a lending arm at my
Speaker 1: firm as well. We have you know, we have both
Speaker 1: a public version called New Mountain Finance Company at private
Speaker 1: versions and when we're lending to other people's deals were
Speaker 1: usually undert loan to value, uh, you know, not to value,
Speaker 1: which is what it was. That's pretty safe. You have
Speaker 1: of losses etiot, right, and we think it's a good
Speaker 1: company that we've studied, you know, we use our private
Speaker 1: equity people to study the credit. So we say, look,
Speaker 1: it's in a tofensive growth industry. It's a very good company,
Speaker 1: it's a very good sponsor, and we're almost always under
Speaker 1: of the value. So we've we've had a very good
Speaker 1: safety record there. But it's a different mindset than the eighties.
Speaker 1: I mean, it was a it was a much wilder
Speaker 1: debt market in the eighties than it is today. It's
Speaker 1: a very different industry and a lot of the political
Speaker 1: criticism about private equity, I think is a holdover of
Speaker 1: the eighties where you had you know, Michael Douglas on
Speaker 1: the giant cell phone in Wall Street and stuff and people.
Speaker 1: That's what people think private equity is today and it
Speaker 1: just isn't anymore. So back then you had high rates
Speaker 1: that were falling. Today we have still relatively low rates
Speaker 1: that a rising. How does the various interest rate regimes
Speaker 1: affect what structures of deal look like, especially if there's
Speaker 1: a lot of debt involved. Yeah, well, absolutely absolutely, they
Speaker 1: absolutely do affect it. So again, the reason leverage biouts
Speaker 1: took off and became a wild stallion in the eighties
Speaker 1: was because you at interest rates going down for the decade,
Speaker 1: you had the stock market going up for the decade.
Speaker 1: I was walking Goldman's floor when the market broke a thousand,
Speaker 1: you know, the market was didn't get over a thousand,
Speaker 1: util like one or eighty two, and now it's thirty thousand.
Speaker 1: So I mean, I tell people I had to, I
Speaker 1: show him the curve of the stock market. I had
Speaker 1: a pretty good career, right, I mean, because my timing
Speaker 1: was quite good pleasant. You know, I'm trying to I'm
Speaker 1: trying to be good at what I do as well.
Speaker 1: So that is what led to the use of high debt,
Speaker 1: to all the enthusiasm for the field. I truly believe
Speaker 1: things have evolved. When we get to a current day.
Speaker 1: It you know, unit growth didn't matter because of inflation
Speaker 1: and rising markets. I would say for any good firm today,
Speaker 1: for the last ten years, is really about unit growth,
Speaker 1: business improvement, making the business better, because you can't just
Speaker 1: count on rising stock markets and falling interest rates anymore.
Speaker 1: If you do, you're you're really bad. Private equity firms
Speaker 1: so that's a giant end at everybody's back for three
Speaker 1: or four decades falling rates? Was it eighty two two?
Speaker 1: That's a pretty good run of the general trend is lower,
Speaker 1: and you have equity markets from eighty to at least
Speaker 1: through twenty one rising pretty substantially. Even with the two
Speaker 1: thousand's being a pretty it's probably been a forty year
Speaker 1: secular bullmarket after thirteen years of stagflation from sixty to
Speaker 1: eighty one, it's been, you know, forty good years from
Speaker 1: eight one to today. I'm glad you brought up that
Speaker 1: term because I'm old enough to remember the seventies as
Speaker 1: a kid going to get gas to mow the lawn
Speaker 1: and having the guy the attendant asked me, do you
Speaker 1: have an even number or odd number license plate? My
Speaker 1: my answer was, I'm eleven. I don't have a license plate.
Speaker 1: Just give the kid as down a guess. But whenever
Speaker 1: people talk about, oh, today we have stag inflation, you've
Speaker 1: experienced both. How do you compare this series to the
Speaker 1: seven Well, this is this is what I tried to say.
Speaker 1: My first day at work into ten year treasuries were
Speaker 1: fifteen point eight percent versus three point seven at a
Speaker 1: house mortgage could be people paying of the house mortgages,
Speaker 1: and the stock market was I think six times net
Speaker 1: income when I used to sit in the Goldman you know,
Speaker 1: h merger department on like what we could sell the
Speaker 1: company for, and we'd all sit around the table. I mean,
Speaker 1: if we really stretched ten times net income, I think,
Speaker 1: if we find the hot buyer, we can get the
Speaker 1: ten times you know, with no adjustments, no trickery, after
Speaker 1: tax net income. That would be a great price for
Speaker 1: most businesses. Or I remember reading a book when I
Speaker 1: was in graduate business school. Never pay more than tangible
Speaker 1: book value for any business. I mean, if you did
Speaker 1: that Amazon, you know, I mean, Google would be worth
Speaker 1: the penny. Or so why would I want to sell
Speaker 1: something for tangible? Why would I pay more than the
Speaker 1: value of the accounts receivable? There's no So that's and
Speaker 1: so it is totally different today. But also the skill
Speaker 1: sets you know what what I again, when we get
Speaker 1: into more new mountain. There are eight billion people in
Speaker 1: the world who get up every morning trying to make
Speaker 1: their life better, make the world better. And there are
Speaker 1: pockets of innovation all at all times, including now where
Speaker 1: things are getting better, cheaper, better, ways to do things.
Speaker 1: And if you're part of those trends and you accelerate
Speaker 1: those trends and improve those businesses, there's wonderful opportunities at
Speaker 1: all time. But it isn't just a general be dumb,
Speaker 1: lever things up, wait for things to rise. That is
Speaker 1: like dumb private equity that's been isn't around anymore. I
Speaker 1: think if it is, it's going to be bottom Quartel.
Speaker 1: Let's talk a little bit about why you launched New
Speaker 1: Mountain Capital. You were having fun at Enforcement Little. Why
Speaker 1: set out and stand up your own shop? Yeah, you know,
Speaker 1: I had had a great twenty years working with Goldman
Speaker 1: Sachs enforce some little Force Mi Little is a top,
Speaker 1: top performing place. It was a very quirky place. We
Speaker 1: had eight professionals at the firm and more people flying
Speaker 1: the jets and the helicopters and the working at the firm.
Speaker 1: And and Ted was kind of a very large who
Speaker 1: was a great mentor to me in a lot of ways.
Speaker 1: Was also known, you know, he's passed away, was known
Speaker 1: to be a somewhat difficult personality and uh life dating
Speaker 1: lady Die, you know, flying in the Gulf streams and
Speaker 1: all that. But it was always kind of a It
Speaker 1: was not a calm, happy place inside. So I broke
Speaker 1: off to start a new mountain, and uh, you know,
Speaker 1: it's gone better than ever would have expected. And it's
Speaker 1: been a great experience. Yes, So when you leave forceman
Speaker 1: a little, are you thinking I'm going to just do
Speaker 1: the same thing. Are you thinking I have a lot
Speaker 1: of ideas that wouldn't have worked there that I want
Speaker 1: to try out on my own. You know, I had
Speaker 1: really enjoyed the General Instrument experience where we took it
Speaker 1: from a billion of value to twenty billion, and had
Speaker 1: we had I can imagine why it enjoy well. And
Speaker 1: besides that the value went up. We had been the
Speaker 1: first company in the world to propose an all digital
Speaker 1: television standard. We helped pioneer cable modems, We created the
Speaker 1: thousand channel cable systems on demand. It was really a
Speaker 1: great experience for nine years just really building a business,
Speaker 1: not just putting passive capital rock and it was it
Speaker 1: was considered one of the first great kind of technological deals.
Speaker 1: I used to go out to Kleiner Perkins and have
Speaker 1: a regulation with them, so I mean it was a
Speaker 1: really kind of a cutting edge deal. And other deals
Speaker 1: were similar at FORCEM a little so the idea of
Speaker 1: safety but growth, really growing businesses. The whole name New
Speaker 1: Mountain comes to the idea of building new mountains and
Speaker 1: industries where we invest and protect the downside first and
Speaker 1: then really build something instead of levering things or risking
Speaker 1: things was very attractive. And and the fact to build
Speaker 1: a culture that was kind of more of a Goldman
Speaker 1: Sachs family business culture. Plus that those approaches, you know,
Speaker 1: we're compelling. So talk about building new mountains in You
Speaker 1: executed a four billion dollar i p O for your
Speaker 1: Avantur Life Sciences company, the largest healthcare related I p
Speaker 1: O I think in history. Is that is that? Yeah,
Speaker 1: we've had we've had some good I p O successes
Speaker 1: and you know, and I'm only gonna tell you what's
Speaker 1: in the public record because I don't want to try to,
Speaker 1: you know, give returns or anything. We had bought a
Speaker 1: business that was called JT. Baker for two million dollars
Speaker 1: when it was going to be discontinued by Malan Kratt.
Speaker 1: We renamed it avant Or change the management, change the strategy,
Speaker 1: and built in from two nine million to twenty billion
Speaker 1: plus and not fortunate, not to shabby, and it's now
Speaker 1: you know, with Thermo Fisher, one of the two leaders
Speaker 1: in lab equipment and life science supplies around the world.
Speaker 1: We had another business like that called Signify, which is
Speaker 1: in contract to be sold to CVS. What Signify is
Speaker 1: the leader and sending doctors and nurses into the homes
Speaker 1: for medical checks. And we took it from two fifty
Speaker 1: thousand home visits a year to two and a half
Speaker 1: million home visits a year and then CVS, if they
Speaker 1: own it, could really do even better and save lives.
Speaker 1: By combining CBS with what the doctor visits do, it
Speaker 1: could be really a great thing for society if the
Speaker 1: you know, if they buy it. So, uh, you know,
Speaker 1: those are just some examples. We've had a bunch of
Speaker 1: good successes. So this isn't pouring money into startups like
Speaker 1: ventured does you look at existing companies that are either
Speaker 1: undervalued or maybe misvalued is a better way to describe it.
Speaker 1: But what we do is, uh, we have a whole
Speaker 1: very formal, top down process for twenty years where we
Speaker 1: choose the sectors that we think can grow with secular
Speaker 1: growth for the next ten years. Those are defensive growth
Speaker 1: sectors and we really become the best. We try to
Speaker 1: become the best there is anywhere in those sectors. So
Speaker 1: life science supplies healthcare, I T managing wind and solar farms,
Speaker 1: uh niche software and consumer different things like that. We
Speaker 1: buy a business that's already safe and stable but hasn't
Speaker 1: figured all the ways to grow itself yet, and then
Speaker 1: we grow it in every possible way. So we buy
Speaker 1: businesses from you know, one million on up and we
Speaker 1: add venture capital upside, but to a safe base. We
Speaker 1: don't want to have the one big winner and a
Speaker 1: bunch of losers. We we've never had a business again
Speaker 1: go out of business or not paying interest payment, And
Speaker 1: the question is, uh, you know how high we can do.
Speaker 1: So it's different math than I need one winner vers yeah,
Speaker 1: I don't have Coming from a family business, we say
Speaker 1: we don't have portfolio theory. We have family business theory.
Speaker 1: When we go into a company, we want to preserve
Speaker 1: and protect it. We're responsible for it. If there's a problem,
Speaker 1: we worked twice as hard to fix it. On the
Speaker 1: other hand, a lot of these businesses, you know, the
Speaker 1: entrepreneur had built it up to a certain size, had
Speaker 1: never done an acquisition, had never built the sales force,
Speaker 1: had never made technology investments in the full way, had
Speaker 1: never gone international. So we take the business and then
Speaker 1: take it up to the next level of growth. What
Speaker 1: other lines of investment do you focus on? Do you
Speaker 1: do credit, you do distress, that set real estate? Tell
Speaker 1: us where else you focus. So the way we think
Speaker 1: about it in these defensive growth sectors, our first choice
Speaker 1: is to buy majority control and build the business. That's
Speaker 1: our private equity fund. If the founder says, I love
Speaker 1: you guys, you can add a lot of value. I
Speaker 1: don't want to sell control. We have a non control
Speaker 1: fund called strategic Equity to buy the same sort of
Speaker 1: business as we just don't have control, but we're very
Speaker 1: involved in building the business. If equities not for sale,
Speaker 1: but we think it's a great, safe business, like a
Speaker 1: great software business that someone else bought, we can lend
Speaker 1: to them that we that's our credit arm which trades
Speaker 1: publicly as New Mountain Finance Company, and we have private
Speaker 1: versions and uh, you know, and since we've been so
Speaker 1: safe at the equity level, we've been very very safe
Speaker 1: at the debt level. And if they don't need a loan,
Speaker 1: we can lease them their own building back in and
Speaker 1: at least and have both the credit of the company
Speaker 1: and the real estate is collateral. And that's like to us,
Speaker 1: a very another high version of that. That was a
Speaker 1: huge business for a while. The net least bacs is
Speaker 1: that still as popular as it once was. It's always
Speaker 1: been niche within real estate. There was one guy who
Speaker 1: did it very aggressively, who bought every restaurant chain and stuff,
Speaker 1: who overstepped the people have been doing. The long term,
Speaker 1: it's been an extremely safe asset class and it's actually
Speaker 1: I think kind of an undiscovered asset class. And uh,
Speaker 1: you know, we had a very good run of it
Speaker 1: so far. And a lot of private equity has been
Speaker 1: focusing on private credit. What does New Mountain Capital do
Speaker 1: in the space of private credit if anything? Yeah, so
Speaker 1: that is our our private credit. We run about ten
Speaker 1: billion of private credit. We have one of the largest
Speaker 1: and oldest of the what's called the b DC, these
Speaker 1: publicly traded credit arms. What's great about them is it's
Speaker 1: floating rate debt, so as the interest rates have gone
Speaker 1: up with inflation, and it's actually better for this type
Speaker 1: of lending. It's not like owning a long term fixed
Speaker 1: rate bond, you get all the advantages of inflation and
Speaker 1: the higher interest rates. The key is to avoid defaults,
Speaker 1: and we do that by focusing on the safe industries
Speaker 1: and really knowing the businesses and being able to fix
Speaker 1: them if we need to go in and fix them. Uh.
Speaker 1: And net least is similar where what's nice about it
Speaker 1: is you have rent escalators for twenty years that more
Speaker 1: than cover inflation, and you have both the credit of
Speaker 1: the business and the real estate if you need the
Speaker 1: real estate. And so that we do the credit in
Speaker 1: the net least for good, steady yield, and we do
Speaker 1: private equity and strategic equity for you know, big returns.
Speaker 1: So I know we're not going to talk about performance
Speaker 1: and returns because of the normal compliance headaches. Do you
Speaker 1: target specific returns for different types of investment? Credit, real estate,
Speaker 1: business turnarounds? How do you think about those in terms
Speaker 1: of what that can generate. Yeah, So an investment committee
Speaker 1: for private equity or strategic equity, we have two questions.
Speaker 1: Is it safe on the downside even if the world
Speaker 1: goes bad, And do we think we have a fighting
Speaker 1: chance to make thirty percent gross returns on the investment
Speaker 1: or better? That's our over about a four year period,
Speaker 1: so we're not annually were you know, compound over four years,
Speaker 1: which is like a three or four bagger on investment.
Speaker 1: That's kind of and again we've had better and we've
Speaker 1: had worse, but you know we've that's kind of our
Speaker 1: standard target in private equity and strategic equity, and then
Speaker 1: in the credit and net least funds were trying to
Speaker 1: have a current yield. It used to be it's about
Speaker 1: eight hundred bases points over the base rates, so it
Speaker 1: used to be kind of a ten percent type target.
Speaker 1: And as rates have moved up, that target moves up
Speaker 1: as well. So and that's supposed to be current yield.
Speaker 1: Every you know paid out every quarter live war plus six. Yeah,
Speaker 1: people do use live more so and again I'm not
Speaker 1: talking about us specifically, but you know you might see
Speaker 1: a thirteen percent type return on loans where you to
Speaker 1: be last year, I mean, and and the interest rates
Speaker 1: are still going through, working through because as the interest
Speaker 1: rates reset from the borrowers. So I'm setting higher at
Speaker 1: the moment. I've noticed some of the publicly traded private
Speaker 1: equity firms UM have a tendency to say we're gonna
Speaker 1: offer are all strategy funds, which is each of our
Speaker 1: five strategies. Do you guys do anything We haven't. I mean,
Speaker 1: it's not a bad idea to do that. We you know,
Speaker 1: we want to let each limited partner choose just what
Speaker 1: they want for themselves. We haven't done, you know, the
Speaker 1: umbrella fund, but people can be We do have people
Speaker 1: who are on multiple funds, but we've done it. Cart
Speaker 1: and you mentioned your LPs. Who are your clients, meaning
Speaker 1: what sort of investors in the private equity fund and
Speaker 1: strategic equity fund. It's the big pension funds in the US,
Speaker 1: it's the big Canadian asset plans. It's the sovereign funds
Speaker 1: around the world in Europe and Asia, and in our
Speaker 1: credit funds. On the public one, it's some institutions and
Speaker 1: retail investors, just high net worth investors who are looking
Speaker 1: for double digit yields. Also in net lease. That's kind
Speaker 1: of the breakdown, really interesting. Before we get to our
Speaker 1: favorite questions, I have a couple of curveballs to throw you,
Speaker 1: and the first is you set up the Modern States
Speaker 1: Education Alliance to look for solutions to the high cost
Speaker 1: of college education. Tell us what that is, what motivated
Speaker 1: you to do that and how's it going. Yeah, thanks
Speaker 1: thanks for asking about that. That's a cause that's very
Speaker 1: near and dear to my heart. So you know, I'm
Speaker 1: proud of what New Mountain does in the way we
Speaker 1: build companies. I'm also trying to do philanthropy alongside a
Speaker 1: New Mountain. I've been very involved in education reform for
Speaker 1: many years and after school centers I set up set
Speaker 1: up the first charter school in New York State. I'm
Speaker 1: the chair of Harvard's Public Education Policy Group. I succeeded
Speaker 1: Jeb Bush there. And the cost of college has gotten
Speaker 1: incredible expensive. The average college even at a state school
Speaker 1: is thirty thousand a year all in there are And
Speaker 1: so what we did at Modern States, and it was
Speaker 1: an idea I had that we're now doing, is we
Speaker 1: hired the best professors we could find in the country,
Speaker 1: like Johns Hopkins math professors, to teach the basic freshman
Speaker 1: courses online as a top quality online course. But instead
Speaker 1: of charging which everybody does, we just give them away
Speaker 1: for free. There like a library of free courses with
Speaker 1: practice questions. They qualify you to take the College Board,
Speaker 1: which does the s A T exams in advanced Placement
Speaker 1: has a set of exams called the Clip exams that
Speaker 1: anyone can take at any age, and if you pass
Speaker 1: those exams, you get credit at almost any state school,
Speaker 1: any community college. Almost you don't get it at Harvard
Speaker 1: and Yale, but Michigan State, Penn State, Ohio State, you know, sowards.
Speaker 1: You could do a year school essentially totally for free,
Speaker 1: and we also pay the exam fees for you. So anybody,
Speaker 1: if you were the poorest person in the world and
Speaker 1: you have ambition, go to Modern States dot com or
Speaker 1: dot org Modern States dot org. You'll see all the
Speaker 1: courses laid out. All you gotta do is download them
Speaker 1: like you would a Netflix movie. Well, when you pass
Speaker 1: the course, we give you the voucher to pay for
Speaker 1: the exam, and when you have those exams passed, every
Speaker 1: admissions catalog will tell you which Clip exams I'll take
Speaker 1: for credit. So we have over three thousand users. We've saved,
Speaker 1: you know, tens and tens of millions of dollars for
Speaker 1: people already, and it is so efficient because you know,
Speaker 1: I spent we spent some millions to prepare the courses.
Speaker 1: But it's like if you do The Godfather on Netflix,
Speaker 1: and you have to do the Godfather every time. I
Speaker 1: mean once it's on the site, it's on the site.
Speaker 1: So if a million people use it, they can all
Speaker 1: see the same course. It doesn't cost us anymore, and
Speaker 1: we are paying the exam fees for as far as
Speaker 1: we can keep affording it. It's just a great way
Speaker 1: to save money. So like Perdue has made it a
Speaker 1: key program at Perdue, they call it Perdue Fast Start.
Speaker 1: They're encouraging every poor kid in Indiana to take these
Speaker 1: courses and enter Produe as a sophomore. We're working with
Speaker 1: all sorts of people. So it's my major charity cause
Speaker 1: that's really intriguing. And then another curve ball. Your wife,
Speaker 1: a former bear Stearns banker, published a book in Opening
Speaker 1: Bell spelled with an Eon Bell, which is a fictionalized
Speaker 1: accountable woman navigating the financial crisis here at Wall Street.
Speaker 1: Tell us a little bit about that. I'm very blessed.
Speaker 1: I have a beautiful, brilliant wife who was a managing
Speaker 1: director at bear Stearns, lived through, you know, all the
Speaker 1: me too movement before there was at me too movement,
Speaker 1: got her masters in in Fine arts at Columbia, wrote
Speaker 1: both a great book that's in a lot of school
Speaker 1: libraries called Walls within Walls for like Harry Potter readers,
Speaker 1: and wrote a bestseller called Opening Bell for adults, which
Speaker 1: is about a woman named Bell who is uh working
Speaker 1: through Wall Street as the breadwinner with a husban and
Speaker 1: who's like an audio visual guy. So everybody thinks it's
Speaker 1: that I'm an audio visual guy who's lost his job.
Speaker 1: But otherwise it's a very accurate book, and it's a
Speaker 1: great book, and it was gonna be a Reese Witherspoon
Speaker 1: movie and it's still kind of out there, and so
Speaker 1: uh it was. I recommend anyone who wants to know
Speaker 1: what it's like to be a woman on Walster. All Right,
Speaker 1: I only have you for a limited amount of time,
Speaker 1: so let's jump to our favorite questions. And since you
Speaker 1: mentioned Netflix, let's start there. Tell us what you were
Speaker 1: watching during the lockdown? What kept you entertained well during
Speaker 1: during the lockdown? We of course had to watch Tiger
Speaker 1: King and when I was when we were stuck for
Speaker 1: months aging crazy at home with are We have young
Speaker 1: adult kids now who had their you know, significant others over.
Speaker 1: We once had a Tiger King dinner party where we
Speaker 1: all dressed up, and we were going so crazy under
Speaker 1: COVID that everybody said, look, let's all come down and
Speaker 1: have dinner as a tiger king. Characters that got us
Speaker 1: through COVID. These days though, uh, and I'm gonna not
Speaker 1: have to be locked down anymore these is it's uh.
Speaker 1: I love White Lotus too, and I love Succession. I'm
Speaker 1: waiting for a Succession to come back. So those would
Speaker 1: be the shows today. Um, I'm gonna give you a
Speaker 1: recommendation because I think this might intrigue you. We just
Speaker 1: started Kaleidoscope, which is like um, Money Heist, only it's
Speaker 1: I think it's limited to eight episodes and apparently you
Speaker 1: can watch them in any order. There's no chronology. Well
Speaker 1: that's very interesting. That's that's the thought process. Tell us
Speaker 1: a little bit about your mentors who helped shape your career. Yeah. Look,
Speaker 1: the biggest mentor in my life was my father and
Speaker 1: incredibly influential to me and a wonderful man. I read
Speaker 1: a ton of history, so every time I read a
Speaker 1: history book, whether they failed or succeeded, they're kind of
Speaker 1: a mentor. For Like, I'm just finishing a book now
Speaker 1: about Emperor Maximilian and Carlott in Mexico ended up getting
Speaker 1: you know, shot by our firing squad. And but you
Speaker 1: learn a lot and everything. And uh as far as
Speaker 1: investment mentors, I was very influenced by Goldman Sachs and
Speaker 1: its culture. Uh Ted Forceman and the Forcemen little guys
Speaker 1: were incredibly good investors and very thoughtful. And so I
Speaker 1: mean everybody's a mentor. I'm reading everything I can and
Speaker 1: I read a lot of nonfiction and Nitralia, let's talk
Speaker 1: about about what you're reading. Tell us what you're currently
Speaker 1: finishing up, and what are some of your favorites. Well,
Speaker 1: I mean some of the things I'm finishing up. Like
Speaker 1: I said, I'm finishing up this book about Maximilian and Carlotta,
Speaker 1: which is an old history book that I came across.
Speaker 1: I just I read Ship Wars, you know, which I
Speaker 1: thought was very good. About Ship Wars, It's about the
Speaker 1: semiconductor industry, is a great book. So I read a
Speaker 1: lot of nonfiction, and the best nonfiction I've read is
Speaker 1: Ron Turno has some great biographies. I love the Grant biography.
Speaker 1: I love the biography of Vanderbilt. I'm a big fan
Speaker 1: of George Washington and Winston Churchill and Lincoln and guys
Speaker 1: like this, a Churchill biography out that some people have
Speaker 1: been talking about. I just it's splendid in the vile
Speaker 1: like six months ago. And obviously the whole Manchester series
Speaker 1: was great. And so uh uh. You know, so I
Speaker 1: read a lot of I read mostly nonfiction. What sort
Speaker 1: of advice would you give to a recent college grad
Speaker 1: who was interested in a career in either private equity
Speaker 1: or investing. You know, I am a big fan of
Speaker 1: private equity. I don't think at all that it's too
Speaker 1: late or the golden days are done, because you know, again,
Speaker 1: the advantage of one of the great advantages of private
Speaker 1: equity is you can always move into the industry that's
Speaker 1: emerging for the next ten years. I don't have to
Speaker 1: be in my grandfather's store selling coats. I can be
Speaker 1: moving into you know, d N a sample preparation. I
Speaker 1: can be moving into proteomics or whatever, wind farms, whatever.
Speaker 1: So private equity is a great field. You should think
Speaker 1: of it as building businesses, not levering businesses. And if
Speaker 1: you think about it that way, it's a wonderful place
Speaker 1: to be. Uh and uh, I'm not a fan of
Speaker 1: stock market investing. I just find a two day difficult
Speaker 1: and arbitrary. I am a big fan of private equity
Speaker 1: and credit investing. And a final question, what do you
Speaker 1: know about the world of investing today? You wish you
Speaker 1: knew thirty or forty years ago when you were first
Speaker 1: getting started. Well, I didn't know anything about the world
Speaker 1: of investing thirty or forty years ago. I can tell
Speaker 1: you more about Supreme Court decisions than I knew about investing.
Speaker 1: And again, what I've learned, or I'm trying to get
Speaker 1: people to accept, is that good investing is owning and
Speaker 1: building businesses, not You're not the bookie in the stands.
Speaker 1: You're the player on the field and you're the coaching player.
Speaker 1: You control the play, you play better, and you can
Speaker 1: make money either gambling on the team or being the team.
Speaker 1: I think, you know, I think the best results and
Speaker 1: kind of the most fun is actually being the team
Speaker 1: owning the business, building the business, rather than betting from
Speaker 1: the outside on the business. And that's what I think
Speaker 1: that private equity is really quite fascinating. Steve, thank you
Speaker 1: for being so generous with your time. This has been
Speaker 1: absolutely fascinating. We have been speaking with Steve Klinsky. He
Speaker 1: is the founder and CEO of private equity firm New
Speaker 1: Mountain Capital. If you enjoy this conversation, well, be sure
Speaker 1: and check out all of our previous podcasts. You can
Speaker 1: find those at iTunes, Spotify, YouTube, wherever you get your
Speaker 1: favorite podcast from. Sign up from my daily reading list
Speaker 1: at Ridhalts dot com. Follow me on Twitter at Ridhults.
Speaker 1: You can follow all of the Bloomberg Family of podcasts
Speaker 1: at Podcasts on Twitter. I would be remiss if I
Speaker 1: did not thank the crack team that helps put these
Speaker 1: conversations together each week. Paris Wald is my producer. Steve
Speaker 1: Russo is my head of research. Batica val Bron is
Speaker 1: our project manager. Justin Milner is my audio engineer. I'm
Speaker 1: Barry Rihults. You've been listening to Masters in Business n
Speaker 1: Bloomberg Radio four