Steven Klinsky on Building Businesses

Episode Summary

Executive Summary: Barry Ritholtz interviews Steve Klinski, founder of New Mountain Capital, about the evolution of private equity from the high-interest-rate, junk-bond-driven 1980s to today’s sector-focused, operationally oriented model. Klinski argues PE is now about building businesses in defensible growth industries, using prudent leverage and active management, not merely financial engineering.

Main Topics: Klinski’s path into private equity (Priority: 5/5): He explains his JD/MBA at Michigan, early fascination with leveraged buyouts, and decision to pursue finance over corporate law because he wanted to be the client, not the lawyer. The early days of Goldman Sachs and the birth of LBOs (Priority: 5/5): Klinski describes joining Goldman’s tiny mergers department, creating its first LBO group, and working in an era when the field was novel and competition was minimal. Forstmann Little and the junk-bond era (Priority: 5/5): He recounts becoming one of the early professionals at Forstmann Little, its opposition to junk bonds, and its role in landmark battles like Revlon and RJR Nabisco. How private equity has evolved (Priority: 5/5): Klinski argues PE has moved from a finance tactic driven by leverage and falling rates into a business-building discipline focused on operating improvement and sector expertise. New Mountain’s defensive growth strategy (Priority: 5/5): He outlines New Mountain’s approach: invest in industries with durable secular growth, use less leverage, avoid volatile sectors, and preserve downside protection before seeking upside. Credit, net lease, and returns (Priority: 4/5): Klinski explains how New Mountain extends its investment philosophy into private credit and net lease, emphasizing floating-rate lending, low loan-to-value, and stable yield. Philanthropy and education access (Priority: 4/5): He discusses Modern States Education Alliance, which offers free college-level online courses that prepare students for CLEP exams, aiming to reduce the cost of higher education.

Key Arguments: Private equity is best understood as owning and building businesses, not just levering them up; the owner mentality leads to better governance and outcomes. The original LBO boom was enabled by falling interest rates, high inflation, and low equity valuations, which made leverage unusually powerful. The biggest PE mistakes occur when firms back industries that are structurally weakening or overly cyclical, regardless of the quality of the underlying company. Modern PE has become more sophisticated and operational, with less debt, deeper industry specialization, and more emphasis on business improvement. New Mountain’s philosophy is to start with defensive sectors that should grow for 10 years, then buy good businesses and expand them rather than speculate on turnarounds in bad industries. Credit investing can be attractive when done conservatively, especially with floating-rate loans and low leverage, because rising rates can improve returns if defaults remain low. Education access can be improved by free, scalable online coursework paired with standardized-credit exams, reducing the cost barrier for college.

Data Points: Years at Forstmann Little: 15 years (1984–1999) - Klinski says he stayed through the firm’s 1980s and 1990s glory years. Private equity firms worldwide in 1984: about 20 - He contrasts the early industry with today’s roughly 5,000 firms. New Mountain assets: $37 billion - Bloomberg intro describes New Mountain Capital’s size. Goldman LBO group revenue target vs. actual: $3 million target; $30 million actual - Klinski says the original Goldman LBO group far exceeded expectations. 10-year Treasury yield on his first workday: 15.84% - He cites September 30, 1981 as the day before he started at Goldman. Tops Chewing Gum deal economics: $80 million deal; $10 million equity to $800 million value - Example of early leveraged buyout returns. Gibson Greeting Cards equity return: $0.5 million to $40 million - He uses it as a classic early PE success story. General Instrument value growth: about $1 billion to $20 billion - Klinski cites this as his proudest 1990s deal. RJR Nabisco deal size: about $35 billion - He says it was enormous for the time and required junk bonds. New Mountain enterprise value gains: over $70 billion - He says the firm has achieved this without a missed interest payment. Jobs added: over 61,000 - He says New Mountain’s portfolio companies have created this many jobs. Employees across portfolio: about 67,000 - He says New Mountain-owned companies employ this many people. Modern States users: over 300,000 - He describes adoption of the free education platform. Average cost of college: $30,000 per year all-in at a state school - Used to frame the need for Modern States. Avantor acquisition value growth: $290 million to $20 billion+ - He describes building the life sciences company after buying JT Baker. Signify home visits: 250,000 to 2.5 million annually - He cites the company’s growth under New Mountain. Private credit book: about $10 billion - He notes New Mountain’s private credit scale. Target private equity return: 30% gross over about four years - He describes New Mountain’s typical private equity underwriting goal. Credit target return: about 800 basis points over base rate; roughly 10% historically - He explains typical yield targets for credit and net lease investing. Loan-to-value in credit: under 40% - He says New Mountain generally lends conservatively against value.

Pivotal Quotes: "“private equity has evolved from a form of finance into a form of business.”" — Steve Klinski: He summarizes how the industry shifted from leverage-driven transactions to operating and building companies. "“you’re not the bookie in the stands, you’re the player on the field.”" — Steve Klinski: He explains his philosophy that true investing means active ownership and control. "“we don’t have portfolio theory. We have family business theory.”" — Steve Klinski: He describes New Mountain’s ownership mindset and emphasis on protecting and growing each company.

Implications: The interview shows private equity’s center of gravity has shifted toward operational expertise, defensive sector selection, and lower risk. For investors, it argues for patience and discipline; for companies, it suggests PE capital can be a growth partner, not just a levered buyer.