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