Steve Klinsky, New Mountain Capital – Private Equity Titan | #489

Episode Summary

Executive Summary: Steve Klinski argues that private equity has evolved from 1980s financial engineering into a business-building discipline centered on industry selection, operational support, and downside protection. He also makes the case that private credit is an underappreciated, floating-rate asset class with strong risk-adjusted potential, especially in a higher-rate world. The conversation closes with his views on investing, education, and long-term institution building.

Main Topics: Evolution of private equity (Priority: 5/5): Klinski traces PE from a tiny, leverage-driven industry in 1981 to a broad, operationally sophisticated business model focused on building companies rather than just engineering returns. How New Mountain invests (Priority: 5/5): He explains New Mountain’s framework: select attractive sectors, protect downside, add operating expertise, and use patient capital to create value over time. Private credit and direct lending (Priority: 5/5): Klinski describes private credit as a key part of the firm’s platform, emphasizing floating-rate income, low loss rates, and using industry expertise to underwrite loans. Current market environment (Priority: 4/5): He discusses the effects of higher rates, slower deal volume, and more seller hesitation, while arguing that these conditions can actually favor disciplined buyers. Manager selection and allocators (Priority: 4/5): He stresses that private equity and private credit should be evaluated like operating businesses, with attention to culture, team continuity, strategy, and talent development. Non-consensus investing views (Priority: 4/5): Klinski argues that risk and return do not always rise together, that industry selection matters more than leverage, and that private markets can create value beyond the public-market mindset. Education and social impact (Priority: 3/5): He highlights his charitable work in education, including Modern States, a free college-credit platform aimed at reducing the cost of higher education.

Key Arguments: Private equity has shifted from financial engineering to business building; the best firms now act like operators and governors, not just financiers. Industry selection is the first and most important risk-control tool because bad industries can overwhelm even strong management. Downside protection matters more than leverage: New Mountain typically uses relatively modest debt, seeks safe entry points, and often invests in companies with significant equity beneath them. Private credit is attractive because it is floating-rate, underwritten by specialists, and often benefits when rates rise rather than suffer from it. Deal competition is intense, but patient capital can still find opportunities through proprietary sourcing, carve-outs, and sectors where sellers want certainty. Continuation funds and recapitalizations allow managers to extend ownership of winners while giving LPs liquidity choices. Allocators should evaluate PE managers as operating businesses: team quality, culture, strategy durability, and whether they can keep talent together over time. Risk and return are not mechanically linked in skill-based investing; superior selection and execution can reduce risk while improving returns. Education and business are both forms of creative organization; long-term societal improvement can come through both philanthropy and capital allocation.

Data Points: New Mountain Capital AUM: about $40 billion - Current firm size mentioned in the introduction and discussion of New Mountain’s growth. Industry start date: October 1, 1981 - Klinski says he came to New York and entered private equity at the beginning of the modern buyout era. 10-year Treasury yield in 1981: 15.84% - He uses this to illustrate the extreme interest-rate environment when the industry began. Private equity firms in 1981: about 20 - He contrasts the tiny early industry with today’s thousands of firms. Private equity firms today: about 5,000 - Used to show how much the industry has expanded. Original KKR size: $400 million - He cites KKR as the largest firm in the world at the time. Forestman and Little AUM: $220 million - He compares his former firm’s scale to today’s giants. Jobs created or added: over 60,000 - He says New Mountain tracks net job creation across its portfolio. Enterprise value gains: $79 billion - New Mountain’s cumulative value creation figure. Blue Yonder sale price: $8.5 billion - Example of a private equity business-building success story. Avantor purchase value: about $190 million - Initial acquisition of a small division that was later scaled dramatically. Avantor current value: over $20 billion - Illustrates long-term value creation through ownership and execution. Typical leverage: about 4x debt to EBITDA - He says this is New Mountain’s average leverage level when buying companies. Credit loan-to-value: under 40% LTV - He describes New Mountain’s lending posture as conservative. Private credit assets: about $10 billion - Size of the credit platform within the broader firm. Companies scanned annually: about 1,000 - He describes the firm’s sourcing process across targeted sectors. Companies acquired annually: about 10 - From the roughly 1,000 reviewed opportunities. Sector coverage: 12 sectors and 25 subsectors - New Mountain’s top-down industry framework. Operating footprint: 225 team members and 35 operating partners - He emphasizes the scale of the operating platform supporting portfolio companies. Portfolio employment footprint: 67,000+ employees - He says the portfolio would rank among the largest U.S. employers if it were one company. Modern States users: 400,000 - Number of people using his free college-credit charity platform. College savings mechanism: CLEP exams - Modern States helps students prepare for and pay for these exams to reduce college cost. Publicly discussed cash yields in credit: roughly 10% historically, closer to 13% with higher rates - He gives rough expectations for private credit income yields.

Pivotal Quotes: "private equity, properly done, has evolved from a form of finance into a form of business" — Steve Klinski: He defines how the industry has changed over four decades. "we talk about it as a business that builds businesses" — Steve Klinski: Explaining New Mountain’s operating philosophy and ownership mindset. "Risk and return do not at all go together because boxing is a game of skill" — Steve Klinski: His non-consensus view that skill can reduce risk while increasing return.

Implications: The episode suggests private markets are increasingly won by specialization, operating capability, and disciplined sector selection—not just leverage or deal access. For allocators, manager quality matters more than the asset class label.