WEBVTT - Steven Klinsky on Building Businesses 0:00:02.000 --> 0:00:06.760 This is mesters in Business with very Results on Bloombird 0:00:06.840 --> 0:00:11.160 Radio this weekend. On the podcast, I have an extra 0:00:11.200 --> 0:00:14.600 special guest. His name is Steve Klinsky and he has 0:00:14.720 --> 0:00:19.560 an absolutely storied history in the field of private equity. 0:00:20.120 --> 0:00:23.040 He is the person who essentially stood up the lb 0:00:23.160 --> 0:00:28.040 O department at Goldman Sachs when essentially there were half 0:00:28.080 --> 0:00:31.360 a dozen or so private equity firms in the country. 0:00:31.440 --> 0:00:34.800 He eventually goes to a Forceman Little where he's one 0:00:34.840 --> 0:00:39.680 of the first five founding partners. They grew a business 0:00:39.760 --> 0:00:43.600 where they eschewed junk debt. They very often were the 0:00:43.640 --> 0:00:47.600 white knight fighting against the so called barbarians at the gate. 0:00:48.040 --> 0:00:52.600 They believed in building businesses and far less focused on 0:00:52.760 --> 0:00:58.440 financial engineering. Eventually, Steve takes his experience and knowledge and 0:00:58.520 --> 0:01:01.880 stands up his own firm, New Mountain Capital, which is 0:01:01.920 --> 0:01:05.720 one of the largest private equity shops in the world. 0:01:05.800 --> 0:01:09.440 They have thirty seven billion dollars in clients and their 0:01:09.440 --> 0:01:13.800 own funds, which they have invested across a variety of 0:01:13.840 --> 0:01:19.760 disciplines from credit to strategic capital, as well as taking 0:01:19.880 --> 0:01:24.560 companies private and helping them grow into something more substantial 0:01:24.560 --> 0:01:27.080 than they've been in the past. I thought this was 0:01:27.120 --> 0:01:31.600 a master class in how private equity works from somebody 0:01:31.600 --> 0:01:34.360 who was there at the beginning, from Goldman to Forceman 0:01:34.400 --> 0:01:37.160 Little to his own firm, and has pretty much seen 0:01:37.240 --> 0:01:40.919 and done everything. I found this conversation to be fascinating, 0:01:41.200 --> 0:01:44.920 and I think you will also with no further ado, 0:01:45.280 --> 0:01:50.520 my conversation with New Mountain Capitals founder and CEO Steve Klinsky. 0:01:50.600 --> 0:01:52.440 So let's talk a little bit about that. M B 0:01:52.600 --> 0:01:56.280 A j D. That's quite a combination. What made you 0:01:56.680 --> 0:02:00.080 pursue that? I come from the Detroit Er Mission and 0:02:00.120 --> 0:02:02.360 I was a public school kid, went to university in 0:02:02.440 --> 0:02:06.080 Michigan and studied both economics and philosophy. Sorry about the 0:02:06.080 --> 0:02:10.960 theft of that last touch, and well, thank you, thanks 0:02:10.960 --> 0:02:14.560 for the condolences. Uh and uh. You know, my family 0:02:14.720 --> 0:02:17.519 had a business. My grandfather and grandmother had a store 0:02:17.560 --> 0:02:20.800 for thirty years in Detroit called Alberts where they sold 0:02:20.880 --> 0:02:23.160 women's clothes. And my we had been built into a 0:02:23.240 --> 0:02:26.200 chain by my dad and my uncle. So I was 0:02:26.240 --> 0:02:28.600 the youngest of five brothers and cousins, and they wanted 0:02:28.720 --> 0:02:30.440 to go into the business. And I also had a 0:02:30.480 --> 0:02:34.520 real love for constitutional law and political philosophy, so I 0:02:34.560 --> 0:02:37.639 actually went to both, you know, kind of the business 0:02:37.680 --> 0:02:40.600 school to kind of do a family obligation and the 0:02:40.639 --> 0:02:43.800 law school because I really love constitutional law at that 0:02:43.840 --> 0:02:47.320 point really interesting. Have you found one or the other 0:02:47.360 --> 0:02:50.280 more interesting in your career in Pe? I'm a big 0:02:50.320 --> 0:02:52.120 fan of both of them, and a big fan of 0:02:52.120 --> 0:02:54.120 the j d NBA program, and I'm about with both 0:02:54.160 --> 0:02:57.880 schools still today. You know. I thought the law school 0:02:57.960 --> 0:03:00.840 is much more traditionally academic, so I thought I was 0:03:00.960 --> 0:03:02.760 learning a lot there the business school. I was only 0:03:02.800 --> 0:03:04.560 twenty one years old. I was like the age of 0:03:04.560 --> 0:03:07.480 a college senior, and I didn't think I was learning anything. 0:03:07.560 --> 0:03:09.680 In hindsight, I learned a ton of the business school 0:03:09.720 --> 0:03:12.280 and at the law school both. I'm a big fan 0:03:12.320 --> 0:03:15.600 of multidisciplinary, you know, approaches, so they've both been great 0:03:15.600 --> 0:03:18.000 for me. So you do a senior thesis about what 0:03:18.120 --> 0:03:21.720 was then the newly emerging field of private equity. Which 0:03:21.720 --> 0:03:24.640 school did you do the thesis for? You do a thesis, 0:03:24.760 --> 0:03:26.880 especially for the j D NBA program. You get it. 0:03:26.919 --> 0:03:30.519 You get admitted into each school individually, but you've finished 0:03:30.560 --> 0:03:32.360 in four years instead of five, and you write a 0:03:32.400 --> 0:03:35.000 special thesis at j d NB A thesis that has 0:03:35.080 --> 0:03:38.440 long business And what was interesting was the first leverage 0:03:38.440 --> 0:03:41.160 by out of a public company happened when I was 0:03:41.200 --> 0:03:45.080 in graduate school. KKR took a a stock exchange company 0:03:45.120 --> 0:03:47.720 called Who Die Private and it was the first time 0:03:50.160 --> 0:03:54.000 it was the first leverage by out of a public company, 0:03:54.080 --> 0:03:56.880 and so it was a whole new idea. I found 0:03:56.920 --> 0:03:58.800 it very interesting. You know, I had no work experience 0:03:58.800 --> 0:04:01.320 in anything, so I thought, what an interesting idea and 0:04:01.360 --> 0:04:03.400 a potent. We had sold the family business, maybe buy 0:04:03.400 --> 0:04:06.640 another family business one day through a leverage buyout. So 0:04:06.760 --> 0:04:09.360 I did my thesis on how leverage buyouts work from 0:04:09.360 --> 0:04:11.280 the legal in the business side. And I might have 0:04:11.320 --> 0:04:13.960 been the first person coming out of graduate school saying 0:04:14.000 --> 0:04:18.080 I want to be a private equity specialists. So right place, 0:04:18.240 --> 0:04:21.800 right time, and the right insight into what was then 0:04:21.839 --> 0:04:25.719 a very novel field. So is that what ultimately leads 0:04:25.720 --> 0:04:28.640 you to starting at Goldman Sachs Well, I decided I 0:04:28.640 --> 0:04:31.000 thought about corporate law. I wanted to be a Supreme 0:04:31.040 --> 0:04:33.520 Court justice, and then I realized John Roberts, who was 0:04:33.560 --> 0:04:35.080 a year ahead of me, was the guy was gonna 0:04:35.760 --> 0:04:37.279 Yeah he was one year You know, there were some 0:04:37.360 --> 0:04:41.000 pretty smart dudes at Harvard Law School. So you see John, 0:04:41.080 --> 0:04:43.360 and you say, right now, he was one year older 0:04:43.320 --> 0:04:45.080 than me. So if I see John, I would say, hello, 0:04:45.160 --> 0:04:46.920 Mr Justice Roberts, you don't know me, That's what I 0:04:46.920 --> 0:04:49.880 would say to Mr Justice. But in school, but he 0:04:49.920 --> 0:04:51.640 was one year I had. I'm just saying, you know, 0:04:51.720 --> 0:04:54.640 I realized, you know, I had a picture of Oliver 0:04:54.720 --> 0:04:57.839 Wendell Holmes above my desk, and I was incredibly earnest 0:04:57.880 --> 0:04:59.839 and intent, and I said, well, you know, I'm alright, 0:04:59.880 --> 0:05:01.880 but there's some really it's probably not gonna be me 0:05:01.920 --> 0:05:05.560 as the Supreme Court justice. So I thought about, and 0:05:05.600 --> 0:05:07.680 I did work for Larry Tribe and Kind Law for 0:05:07.960 --> 0:05:11.359 really yeah, it was between corporate law and investment banking. 0:05:11.600 --> 0:05:14.799 And I decided, if I was gonna be in corporate, 0:05:14.839 --> 0:05:18.160 I'd rather be the client than the lawyer. And so 0:05:18.200 --> 0:05:20.719 I joined Goldman in there. It was a twelve person 0:05:20.800 --> 0:05:23.560 merger department and they were just in the days when 0:05:23.560 --> 0:05:27.479 the the takeover wars were very hot, and Goldman was 0:05:27.520 --> 0:05:30.400 the firm defending everyone against raids and Morgan Stanley was 0:05:30.440 --> 0:05:32.920 doing the raids. So I joined Goldman in their merger department, 0:05:33.520 --> 0:05:35.680 but said I'd like to be your lb O guy. 0:05:35.720 --> 0:05:38.320 They said, we've never done it. Le they said, we've 0:05:38.360 --> 0:05:40.280 never done one. You could be the LBL guy, as 0:05:40.279 --> 0:05:42.240 like saying I want to be the wheat farmer on 0:05:42.320 --> 0:05:46.600 the moon. There was no competition go ahead and uh so, 0:05:46.800 --> 0:05:49.160 uh so there there was no LBO that had ever 0:05:49.200 --> 0:05:51.880 been done at Goldman Sachs when I joined it. And 0:05:51.960 --> 0:05:53.840 I came in with the idea because I had been 0:05:53.839 --> 0:05:56.320 studying it as a student. So you stood up the 0:05:56.440 --> 0:05:59.400 LBO division at Goldman. Essentially I helped bring it in 0:05:59.440 --> 0:06:02.080 the idea. They were starting to get topical, and they 0:06:02.120 --> 0:06:05.039 set up a two person group with a guy named 0:06:05.040 --> 0:06:07.600 Fred Eckert as a vice president and me as the associate. 0:06:07.640 --> 0:06:10.640 So we we were the original LBO group of Goldman Sachs. 0:06:11.440 --> 0:06:15.080 And uh We're supposed to do three million of revenue. 0:06:15.080 --> 0:06:17.440 We did thirty million. It just took off very fast, 0:06:17.560 --> 0:06:20.320 you know. And what we were doing was basically advising 0:06:20.320 --> 0:06:23.240 Goldman clients how to take their own family businesses back 0:06:23.279 --> 0:06:25.280 off the stock market. We were more we weren't owning 0:06:25.320 --> 0:06:28.520 businesses as much as we were advising families and stuff. 0:06:28.520 --> 0:06:31.000 We I did work on the very first principal investment 0:06:31.040 --> 0:06:33.760 that Goldman ever did. And Goldman was the size of 0:06:33.760 --> 0:06:36.680 a law firm back that people forget how much the partnership. 0:06:37.560 --> 0:06:40.080 We all fit in one room for the Christmas photo 0:06:40.120 --> 0:06:42.320 every year, and I mean it was literally like the 0:06:42.360 --> 0:06:44.280 size of a of a law from not a giant 0:06:44.320 --> 0:06:47.240 global institution. And the first deal they ever did with 0:06:47.240 --> 0:06:50.920 the partners own money was a company called Trinity paper Bag. 0:06:51.560 --> 0:06:54.840 It was a twelve million dollar paper and plastic bag 0:06:54.880 --> 0:06:56.680 company that the guy said, you know the bag and 0:06:56.760 --> 0:06:58.760 Tootsie with the ice cream, that was my bag. He was, 0:06:58.800 --> 0:07:00.839 you know, he's a great entrepreneur. And it was a 0:07:00.839 --> 0:07:03.359 half a million dollar investment from the firm and I 0:07:03.440 --> 0:07:05.440 worked on it, and the two CEO's of the firm 0:07:05.480 --> 0:07:09.080 watched over me, the head of mergers and everyone watched 0:07:09.120 --> 0:07:11.120 over me. There. Everyone was very concerned with this deal 0:07:11.120 --> 0:07:13.080 because there was a half a million, half a million 0:07:13.080 --> 0:07:15.960 of the partner's money. So it was very early days 0:07:16.000 --> 0:07:18.120 and all this stuff. So it was a good time too. 0:07:18.280 --> 0:07:20.760 It's like going to Silicon Valley the day transistors were 0:07:20.800 --> 0:07:23.160 invented or something. That's very good time. So how long 0:07:23.240 --> 0:07:26.640 does it take for the LBO group at Goldman to 0:07:27.000 --> 0:07:30.920 build into something fairly hefty. Yeah, I started a Goldman 0:07:30.960 --> 0:07:33.800 in a one doing you know, mostly raid work and 0:07:34.120 --> 0:07:37.920 traditional merger and seller work. The LBO group was probably 0:07:37.920 --> 0:07:40.640 started in eight two and it was already a big 0:07:40.680 --> 0:07:43.440 success in eighty four when I got quartered away by 0:07:43.520 --> 0:07:45.720 force a little they poached me away. So tell us 0:07:45.720 --> 0:07:49.760 a little bit about that. You're effectively amongst the first 0:07:49.840 --> 0:07:52.880 five founding partners. Is that a fair stay? Well, there 0:07:52.920 --> 0:07:55.400 were only twenty private equity firms in the world in 0:07:56.240 --> 0:07:58.520 four They are now over five thousand. I also just 0:07:58.560 --> 0:08:00.920 finished being the chairman of the price of an equity industry, 0:08:00.960 --> 0:08:03.560 something called the American Investment Council. But there used to 0:08:03.600 --> 0:08:07.520 only be twenty private equity firms. KKR was the biggest, 0:08:07.600 --> 0:08:11.720 with four dred million of assets and eight people, and 0:08:11.800 --> 0:08:14.160 Forest my little was the second biggest, with two hundred 0:08:14.200 --> 0:08:17.560 million of assets and four professionals. And they hired me 0:08:17.600 --> 0:08:22.280 and as the fifth professional. And by nineties two guys 0:08:22.280 --> 0:08:24.200 had left, so it was the two Forceman brothers, and 0:08:24.240 --> 0:08:26.440 I was the most senior guy, you know in the nineties. 0:08:26.760 --> 0:08:30.440 But it was you know, very small, very new, and uh, 0:08:30.920 --> 0:08:33.959 you know, obviously a great time to enter. So even 0:08:34.040 --> 0:08:37.240 back then when it was the size that you could 0:08:37.240 --> 0:08:40.320 take a Christmas picture with everybody in one room. At 0:08:40.360 --> 0:08:45.400 Goldman they're still doing investment banking, they're trading, their advising clients, 0:08:45.720 --> 0:08:49.040 They're involved in a lot of different things. How is 0:08:49.080 --> 0:08:51.800 it different when you moved to a shop with a 0:08:51.880 --> 0:08:55.680 singular focus on private equity and LBO. Well, the the 0:08:55.800 --> 0:08:58.400 key thing to me was the thing about being in 0:08:58.440 --> 0:09:02.320 a private equity shop versus investment bank is that you 0:09:02.360 --> 0:09:04.600 are the owner of the company. I mean, even when 0:09:04.640 --> 0:09:07.160 I was at Goldman Sachs doing private equity work, it's 0:09:07.200 --> 0:09:09.920 more equivalent or merger work. It's much more equivalent to 0:09:09.960 --> 0:09:13.720 being a house broker than owning the house. So you 0:09:13.800 --> 0:09:15.880 sell a lot of houses and you get commission on 0:09:15.960 --> 0:09:18.880 what you sell. But when you're in private equity, you 0:09:18.960 --> 0:09:22.280 own the business, you control it, you're responsible for it, 0:09:22.720 --> 0:09:25.000 you have real ownership in it. As a member of 0:09:25.040 --> 0:09:28.440 forcement Little I had true ownership in that company that 0:09:28.480 --> 0:09:31.000 I never had as an investment banker Goldman Sachs. So 0:09:31.080 --> 0:09:34.000 that was the attraction to how does the private equity said, 0:09:34.160 --> 0:09:38.480 how does that affect your psychology? At what deals you consider, 0:09:38.600 --> 0:09:42.199 what you skip? How does that change how you view them. Well, again, 0:09:42.240 --> 0:09:46.000 it gives you an owner's mentality. A really good investment 0:09:46.000 --> 0:09:48.800 banker has that mentality anyways because they just want to 0:09:48.840 --> 0:09:52.559 give great, you know, wise advice. A bad investment banker 0:09:52.640 --> 0:09:54.880 just wants to get deals done and doesn't care much. 0:09:55.360 --> 0:09:58.520 But as a private equity owner, again, first of all, 0:09:58.559 --> 0:10:01.319 you do invest heavily of your own money in the transactions. 0:10:01.400 --> 0:10:04.120 Plus you have additional ownership through the you know, the 0:10:04.160 --> 0:10:08.360 carried interests, the profits interests, and so I come from 0:10:08.360 --> 0:10:12.640 a family business background, and private equity really is a 0:10:12.679 --> 0:10:14.800 common if you do it right, as a combination of 0:10:14.840 --> 0:10:17.440 the family business mentality of a small group of people 0:10:17.440 --> 0:10:20.440 who own the business, but also the best aspects of 0:10:20.440 --> 0:10:23.160 a big company where today we have tremendous resources that 0:10:23.200 --> 0:10:25.640 a family could never have. But you do have that 0:10:25.720 --> 0:10:28.240 family business mentality when you own a business, if you're 0:10:28.240 --> 0:10:30.640 a good private equity firm, So you leave Goldman, you 0:10:30.720 --> 0:10:33.280 end up Enforcement. How long did you stay at Enforcement? 0:10:33.360 --> 0:10:36.280 Little and what sort of deals were you working on? Yeah? 0:10:36.320 --> 0:10:39.080 So I joined in eighty four as a as a 0:10:39.120 --> 0:10:42.240 younger version of a partner. I made as an associate partner, 0:10:42.240 --> 0:10:45.920 I made full general partner by eighty six, and uh, 0:10:46.720 --> 0:10:49.599 so I was there for their glory years of the 0:10:49.600 --> 0:10:51.960 eighties and the nineties. I was there from eighty four 0:10:52.000 --> 0:10:55.040 to ninety nine in their best best years, and so 0:10:55.120 --> 0:10:57.880 I did live through things like Barbarians at the Gate. 0:10:57.920 --> 0:11:00.480 I was a partner for that. I have online in 0:11:00.520 --> 0:11:03.040 the book where I say Ross Johnson is totally insane 0:11:03.080 --> 0:11:05.040 and leave the book. I actually spent about four months 0:11:05.120 --> 0:11:07.080 night and day working on it. But I'm I'm happy. 0:11:07.160 --> 0:11:10.080 My line was not pay anything, borrow anything. I'm very 0:11:10.120 --> 0:11:13.000 happy with my line um on page two fifty nine 0:11:13.000 --> 0:11:15.800 if your listeners want to check it out. And uh 0:11:16.040 --> 0:11:18.800 we were also the uh the white Night. We were 0:11:18.840 --> 0:11:21.319 the kind of the anti milk and junk bond guys. 0:11:21.360 --> 0:11:23.760 So we were the white Knight on Revlon. We had 0:11:23.800 --> 0:11:25.839 some great success in the eighties and the nineties were 0:11:25.840 --> 0:11:29.440 even better. So I can talk more about that. But 0:11:29.480 --> 0:11:31.679 so I was there for fifteen years. So let's talk 0:11:31.720 --> 0:11:33.400 a little bit about l b O s in the 0:11:33.480 --> 0:11:35.959 eighties and nineties. You mentioned the first l B O 0:11:36.640 --> 0:11:39.839 of a publicly traded company took place in ninety nine, 0:11:39.880 --> 0:11:42.040 and that led to your j D n b A 0:11:42.160 --> 0:11:45.600 thesis about it tell us a little bit about what 0:11:45.760 --> 0:11:50.080 the eighties and nineties were like when junk bonds and 0:11:50.200 --> 0:11:53.560 lb os first began to ramp up and become popular. Well, 0:11:53.640 --> 0:11:56.440 so just to give a little historical perspective on how 0:11:56.559 --> 0:11:59.200 much things have changed, and there is an economic backdrop 0:11:59.280 --> 0:12:01.679 to all of this up. So, my first day at 0:12:01.679 --> 0:12:06.160 work was October one one at Goldman Sachs. The highest 0:12:06.200 --> 0:12:09.560 interest rates in US history were literally the day before 0:12:09.600 --> 0:12:14.120 I started work, September, I think the tenure treasury was 0:12:14.240 --> 0:12:17.680 fifteen point eight four. So when we're you know, third 0:12:17.840 --> 0:12:21.360 three point seven percent tenure treasuries, it is nowhere near 0:12:21.440 --> 0:12:24.440 kind of the situation. There had been stag inflation where 0:12:24.440 --> 0:12:26.480 the stock market was lower in eighty one than it 0:12:26.520 --> 0:12:30.240 had been in nineteen sixty eight, and you know, incredibly 0:12:30.280 --> 0:12:34.439 depressed market, super high interest rates. So the initial idea 0:12:34.520 --> 0:12:40.079 of leverage biout's very high inflation was really was financial engineering, truthfully, 0:12:40.080 --> 0:12:42.880 back in those days, because if you had ninety five 0:12:43.000 --> 0:12:47.079 parts debt and five parts equity and ten percent inflation, 0:12:47.160 --> 0:12:49.440 you know, you could triple your equity with no unit 0:12:49.480 --> 0:12:52.440 growth at all. And interest rates were coming down after 0:12:52.520 --> 0:12:56.360 Vulka and Reagan broke you know, inflation and the stock 0:12:56.400 --> 0:12:59.959 market was going up. So that's where private equity start 0:13:00.080 --> 0:13:03.720 did as it really was for investment bankers as a room, 0:13:03.840 --> 0:13:06.440 having the nerve to borrow money when other people had 0:13:06.440 --> 0:13:10.800 been kind of beaten down for thirteen years. Forcement Little started, 0:13:11.240 --> 0:13:13.960 you know, around a little bit few years before then, 0:13:14.280 --> 0:13:16.439 and they started without junk bonds. It used to be 0:13:16.559 --> 0:13:19.160 the commercial banks would lend the senior debt and the 0:13:19.200 --> 0:13:22.080 insurance companies like Credential would lend what was called the 0:13:22.080 --> 0:13:25.800 mezzanine debt. There was no junk debt available in the market, 0:13:26.200 --> 0:13:29.160 and Forcement Little created instead of going to insurance companies, 0:13:29.440 --> 0:13:32.839 raised its own fund for the mezzanine debt that they 0:13:32.840 --> 0:13:35.720 could have the banks themselves and then force some little equity. 0:13:36.080 --> 0:13:39.240 So that's how it all started. The initial deals were 0:13:39.240 --> 0:13:42.720 small in dollars, but incredibly high returns. Like we owned 0:13:42.720 --> 0:13:45.640 a company called tops Chewing Gum back in the baseball 0:13:45.679 --> 0:13:49.560 card craze, eighty million dollar deal with ten million of 0:13:49.559 --> 0:13:52.240 equity that went up to eight hundred million of value. 0:13:52.280 --> 0:13:55.080 So ten million became eight hundred million. It's eighty times 0:13:55.080 --> 0:13:58.040 your money, which is not bad. It's not the five 0:13:58.040 --> 0:14:00.560 trillion of gains. Private equity makes the day, but it 0:14:00.640 --> 0:14:03.400 was very eye opening. Or William, you know there was 0:14:03.440 --> 0:14:06.840 a very famous deal Gibson greeting cards where like a 0:14:06.880 --> 0:14:09.280 half a million of equity went to forty million. I mean, 0:14:09.320 --> 0:14:12.760 those were the that's what got people all excited. Numbers, 0:14:12.960 --> 0:14:15.240 well that is it was kind of venture capital numbers 0:14:15.240 --> 0:14:18.559 because the dollars were so small, so it was a 0:14:18.600 --> 0:14:21.120 tiny compared to what private equity is today, but very 0:14:21.200 --> 0:14:24.640 high returns. So that started everyone going into the field. 0:14:24.720 --> 0:14:29.640 After the initial twenty firms, you know, Carlisle started, Blackstone started, 0:14:29.680 --> 0:14:32.000 and they're very transparent. They saw the success of these 0:14:32.040 --> 0:14:34.080 other firms and said, why can't we do that too, 0:14:34.120 --> 0:14:36.480 So in the mid eighties lots of people started to 0:14:36.640 --> 0:14:39.440 enter a new firms that became great and kept growing 0:14:40.120 --> 0:14:44.840 milk and started junk bonds around the mid eighties saying hey, 0:14:44.920 --> 0:14:47.440 and he had done I think serious academic work that 0:14:47.800 --> 0:14:50.880 the credit ratings were too conservative and if you just 0:14:51.000 --> 0:14:53.520 only went into triple as, you were giving up return. 0:14:54.320 --> 0:14:58.120 And so he was creating that market and he both 0:14:58.200 --> 0:15:01.720 lent to great companies like you uh, the cable companies 0:15:01.720 --> 0:15:03.680 that grew to be giants, and to some people who 0:15:03.760 --> 0:15:06.080 were kind of more questionable character who you know, gave 0:15:06.120 --> 0:15:09.480 business a bad name. So, uh, that was the alternative. 0:15:09.480 --> 0:15:11.600 And then for some little didn't use We were the 0:15:11.600 --> 0:15:13.480 one from that didn't use milk, and we had our 0:15:13.480 --> 0:15:16.440 own fund and so we were kind of the white 0:15:16.440 --> 0:15:18.800 shoe alternative to milking and all those Let's get a 0:15:18.800 --> 0:15:21.760 little granular, and you're the right person to dive into 0:15:21.840 --> 0:15:24.200 this with both a j D and an n B A. 0:15:24.800 --> 0:15:27.640 When we're talking about a structure of a financing and 0:15:27.680 --> 0:15:33.240 the senior mezzanine and junk, essentially that's the payout order 0:15:33.360 --> 0:15:35.560 in the event of a bankruptcy. Tell us a little 0:15:35.600 --> 0:15:38.920 bit about why it's structured that way, the advantages of 0:15:39.000 --> 0:15:41.600 each and the risks of each. Yeah, I mean, the 0:15:42.080 --> 0:15:44.600 best way to understand private equity is just to think 0:15:44.640 --> 0:15:47.760 about if you're buying a house. It's really using the 0:15:47.760 --> 0:15:51.280 principles everyone used in real estate over in the corporate world. 0:15:51.640 --> 0:15:53.280 So if you know, if you're a real estate guy 0:15:53.320 --> 0:15:55.600 and you're buying a building, you would have a mortgage 0:15:55.640 --> 0:15:57.640 and then put up your own money, or maybe you 0:15:57.680 --> 0:16:00.000 would have a first mortgage and then a second mortgage 0:16:00.080 --> 0:16:02.240 so you could put up less money, and if you're 0:16:02.240 --> 0:16:05.120 really good at improving the building or you just get lucky, 0:16:05.160 --> 0:16:07.880 that inflation raises the value of the building. You know, 0:16:08.000 --> 0:16:10.640 by having used debt, all the gain goes to that 0:16:10.720 --> 0:16:13.080 thin strip that is the equity. But of course if 0:16:13.080 --> 0:16:15.480 the value drops, the first thing that gets lost is 0:16:15.520 --> 0:16:19.200 the equity. So the senior debt is the safest thing 0:16:19.240 --> 0:16:21.560 because let's say it's sixty cents out of a hundred, 0:16:21.880 --> 0:16:24.560 until forty cents is lost, the senior debt is safe. 0:16:25.120 --> 0:16:27.680 Then the junk debt or mezzanine debt maybe the next 0:16:27.680 --> 0:16:30.520 twenty cents in the old days, and so if it's 0:16:30.520 --> 0:16:33.400 worth eighty cents on the dollar, they're safe, and then 0:16:33.440 --> 0:16:35.640 the equity is the bottom twenty. But if it goes 0:16:35.720 --> 0:16:38.560 up to two dollars, they've made a dollar on twenty cents. 0:16:38.600 --> 0:16:40.800 So it's just like real estate, but it was done 0:16:40.800 --> 0:16:43.360 in the in the corporate world, and there's just different 0:16:43.440 --> 0:16:46.440 risks and return possibilities. You know. The thing with debt 0:16:46.560 --> 0:16:49.400 is you can only make your interest rate. With equity, 0:16:49.400 --> 0:16:51.240 you're unlimited on how much you can make, but you're 0:16:51.240 --> 0:16:53.480 the first person to lose money if you do a 0:16:53.480 --> 0:16:57.240 bad that's a perfect explanation of that. So in the 0:16:57.280 --> 0:17:00.400 nineties you have more companies entering the space ace. You 0:17:00.440 --> 0:17:04.840 mentioned there were twenty pe firms back then. Uh, now 0:17:04.880 --> 0:17:09.720 there's five thousand. How competitive was it to source steals? 0:17:09.800 --> 0:17:13.720 Was there, you know, overwhelming luxury of choices or were 0:17:13.720 --> 0:17:17.359 people scratching to get into the best deals. The truth 0:17:17.440 --> 0:17:19.720 is it always feels competitive, no matter where you are 0:17:19.760 --> 0:17:22.040 in history or any given time. It never feels that 0:17:22.119 --> 0:17:26.719 easier or that. It's only in hindsight you realize how 0:17:26.840 --> 0:17:30.320 wonderful or terrible the conditions were. And bad news usually 0:17:30.400 --> 0:17:33.520 leads to good opportunities, and good news usually leads to problems. 0:17:33.560 --> 0:17:35.040 I mean, so you just have to live through all 0:17:35.040 --> 0:17:37.840 this stuff. I will say. When there were a fewer firms, 0:17:37.880 --> 0:17:40.480 so I was effectively there had Ted and Nick Forceman, 0:17:40.520 --> 0:17:43.240 Brian Little had retired from the firm. I was the 0:17:43.280 --> 0:17:45.600 next senior. So for years I was kind of like 0:17:46.000 --> 0:17:49.280 the Turkish merchant in the sock where the sellers would 0:17:49.280 --> 0:17:50.920 come and lay all their goods out in front and 0:17:50.960 --> 0:17:52.920 say you can look at this company and this company 0:17:52.920 --> 0:17:54.679 and this company, and I say no, no, no, bring 0:17:54.760 --> 0:17:57.960 them show me another company. Today, private equity is so 0:17:58.040 --> 0:18:00.320 much more professional. And my firm, which is not as 0:18:00.359 --> 0:18:02.000 famous as for us a little bit, but it's much 0:18:02.000 --> 0:18:04.359 bigger in the industry, is much bigger. You know, we 0:18:04.440 --> 0:18:08.879 have two hundred people were proactively super deep in specific 0:18:08.920 --> 0:18:12.919 industries like life science supplies, where were incredibly knowledgeable. And 0:18:12.960 --> 0:18:16.520 it's gone from kind of the small generalists to really 0:18:16.640 --> 0:18:20.600 sophisticated business building organizations who use frankly, much less debt 0:18:20.920 --> 0:18:23.600 as a percentage of the capital structure. Now you might 0:18:23.640 --> 0:18:28.040 have six equity and debt not And how long did 0:18:28.040 --> 0:18:32.600 that transition takes, because that's a very different structure. Obviously 0:18:32.680 --> 0:18:35.159 interest rates have an impact, will get to that. I 0:18:35.160 --> 0:18:38.239 think that transition has been steadily happening for the forty year. 0:18:38.280 --> 0:18:41.159 I've been in private equity for forty years now, and 0:18:41.240 --> 0:18:43.640 one thing I try to say is that private equity 0:18:43.760 --> 0:18:46.920 has evolved from a form of finance into a form 0:18:47.000 --> 0:18:52.200 of business. So in when interest rates were there and 0:18:52.800 --> 0:18:55.479 everything was started, it was about you know, and I 0:18:55.560 --> 0:18:57.880 was one of the four, for example, four investment bankers 0:18:57.880 --> 0:18:59.680 having a lot of hood spun and saying let's borrow 0:18:59.720 --> 0:19:04.160 some my and go for it. Today it's extremely differently. 0:19:04.200 --> 0:19:09.160 My organization owns companies that employ I think sixty people, 0:19:09.240 --> 0:19:11.200 we would be roughly eighty three and the Fortune five 0:19:11.560 --> 0:19:14.240 if we were one entity. We use all that knowledge 0:19:14.240 --> 0:19:17.119 to buy the next fairly small company and build it. 0:19:17.200 --> 0:19:20.280 So it is so different from where I was with 0:19:20.320 --> 0:19:22.720 Forceman Little, or where I was even when I started 0:19:22.760 --> 0:19:25.359 my firm by myself, I didn't have the you know, 0:19:25.400 --> 0:19:27.639 the strength. The key is to build. Think of private 0:19:27.640 --> 0:19:30.800 equity as a business that builds businesses and make that 0:19:30.880 --> 0:19:34.640 business engine stronger and stronger. And that's it's a better 0:19:34.680 --> 0:19:36.880 form of governance because you're like a family business. Since 0:19:36.920 --> 0:19:39.680 you don't have nine reporting, you don't have to worry 0:19:39.680 --> 0:19:42.800 about third parties. You can be very rational, but you're 0:19:42.800 --> 0:19:45.320 no longer constrained to just a few investment bankers. You 0:19:45.359 --> 0:19:47.919 can now be a very strong operation. And that's been 0:19:47.960 --> 0:19:50.440 a fourty year transition. So we're gonna talk about New 0:19:50.440 --> 0:19:52.919 Mountain Capital and a bit. I want to stay in 0:19:52.960 --> 0:19:56.760 the nine nineties. What sort of sectors and what sort 0:19:56.760 --> 0:20:00.399 of industries were the hot memes back then? What did 0:20:00.440 --> 0:20:02.919 you focus? Yeah, so the big long term story with 0:20:03.000 --> 0:20:05.480 Force some Little as investors, and it was a great firm. 0:20:05.520 --> 0:20:07.199 We were the second biggest firm, but I think we 0:20:07.280 --> 0:20:11.120 had the highest returns was you know, in the eighties, 0:20:11.200 --> 0:20:14.240 it was about kind of any company that looked cheap 0:20:14.359 --> 0:20:16.720 with a lot of debt. You know, obviously there was 0:20:17.520 --> 0:20:20.280 seven crash of the stock market, but there was a 0:20:20.320 --> 0:20:24.000 recession in where what we could see was our high 0:20:24.119 --> 0:20:27.560 quality companies that were market leaders did fine, and the 0:20:27.680 --> 0:20:31.399 number three auto parts elastomer company lost all market share 0:20:31.400 --> 0:20:33.919