The transcript from this week’s, MiB: Steven Klinsky, New Mountain Capital, is below.
You can stream and download our full conversation, including any podcast extras, on iTunes, Spotify, Stitcher, Google, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.
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ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week 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 LBO department at Goldman Sachs when essentially there were half a dozen or so private equity firms in the country. He eventually goes to a Forstmann Little where he’s one of the first five founding partners. They grew a business where they issued 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 $37 billion in clients and their own funds, of 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 masterclass in how private equity works from somebody who is there at the beginning from Goldman to Forstmann 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’s founder and CEO, Steve Klinsky.
So let’s talk a little bit about that MBA/JD, that’s quite a combination. What made you pursue that?
STEVEN KLINSKY, FOUNDER, CEO AND MANAGING DIRECTOR, NEW MOUNTAIN CAPITAL: I come from the Detroit area of Michigan as a public school kid, went to University of Michigan and studied both economics and philosophy.
RITHOLTZ: Sorry about the theft of that last (inaudible).
KLINSKY: Well, thank you. Thanks for the condolences. And you know, my family had a business. My grandfather and grandmother had a store for 30 years in Detroit called Albert’s where they sold women’s clothes, and 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 want them 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.
RITHOLTZ: Really interesting. Have you found one or the other more interesting in your career in PE?
KLINSKY: I’m a big fan of both of them and a big fan of the JD/MBA program and involved 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 21 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 at the business school and at the law school both. I’m a big fan of multidisciplinary approaches. So they have both been great for me.
RITHOLTZ: 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?
KLINSKY: You do a thesis specially for the JD/MBA program. You get admitted into each school individually. But you finish in four years instead of five, and you write a special thesis, a JD/MBA thesis that has law and business. And what was interesting was the first leveraged buyout of a public company happened when I was in graduate school. KKR took a stock exchange company called who Houdaille, private, and it was the first time there’ve been —
RITHOLTZ: ’79 or something like that?
KLINSKY: In 1979, it was the first leveraged buyout of a public company. And so it was a whole new idea, I found it very interesting. And I had no work experience in anything. So I thought, well, what an interesting idea. We had sold the family business, maybe buy another family business one day through a leveraged buyout. So I did my thesis on how leveraged buyouts work from the legal and the business side. And I might have been the first person coming out of graduate school, saying, I want to be a private equity specialist.
RITHOLTZ: 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?
KLINSKY: Well, 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 who was going to be —
RITHOLTZ: Oh, is that true?
KLINSKY: Yeah. There were some pretty smart dudes at Harvard Law School.
RITHOLTZ: Wow. That’s great.
KLINSKY: So I —
RITHOLTZ: So you see John and you say, all right —
KLINSKY: And now, he was one year older me. So whenever I see John, I would say, hello, Mr. Justice Roberts. You don’t know me. That’s what I would say to Mr. Justice Roberts. But —
RITHOLTZ: But in school —
KLINSKY: But he was one year ahead. I’m just saying, you know, I realized, you know, I had a picture of Oliver Wendell Holmes above my desk and I was —
RITHOLTZ: Right.
KLINSKY: — incredibly earnest and intent and I said, well, you know, I’m all right, but there’s some really — that’s probably not going to be me as the Supreme Court justice.
RITHOLTZ: That’s very funny.
KLINSKY: So I thought about a — and I did work for Larry Tribe in canon law for some time.
RITHOLTZ: Oh, really?
KLINSKY: Yeah. It was between corporate law and investment banking. And I decided, if I was going to be in corporate, I’d rather be the client than the lawyer. And so I joined Goldman in there, it was a 12-person merger department. And they were just in the days when the takeover wars were very hot, and Goldman was the firm defending everyone against raids, and Morgan Stanley was doing the raid. So I joined Goldman and their merger department, but said, I’d like to be your LBO guy. They said we’ve never done an LBO —
RITHOLTZ: What’s an LBO? Right.
KLINSKY: But they said, we’ve never done one. You can be the LBO guy. As I was saying, I want to be the wheat farmer on the moon.
RITHOLTZ: Right.
KLINSKY: There was no competition.
RITHOLTZ: Sure. Go ahead.
KLINSKY: Go ahead. And so 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.
RITHOLTZ: So you stood up the LBO division at Goldman essentially?
KLINSKY: I helped bring in the idea. They were starting to get topical and they set up a two-person group with a guy named Fred Eckert as vice president and me as the associate. So we were the original LBO group of Goldman Sachs. And we were supposed to do $3 million of revenue, we did $30 million. It just took off very fast.
RITHOLTZ: That what it.
KLINSKY: 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. I did work on the very first principal investment that Goldman ever did. And Goldman was the size of a law firm back then.
RITHOLTZ: Right.
KLINSKY: People forget how much —
RITHOLTZ: It was a partnership that was small.
KLINSKY: We all fit in one room for the Christmas photo every year. And I mean, it was literally like the size of a law firm, 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 $12 million paper and plastic bag company that the guy said, you know, the bag and Tootsie with the ice cream, that was my bag. 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 CEOs 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’s a half million —
RITHOLTZ: It’s their money.
KLINSKY: — half million of the partners’ money. So it was very early days and all this stuff. So it was a good time to — it’s like going to Silicon Valley the day transistors were invented or something. But I had a very good time.
RITHOLTZ: Right. So how long does it take for the LBO group at Goldman to build into something fairly hefty?
KLINSKY: Yeah. I started at Goldman at ’81 doing, you know, mostly raid work and more traditional merger and seller work. The LBO group has probably started in ’82, and it was already a big success in ‘84 when I got quartered away by Fortsmann Little. They poached me away.
RITHOLTZ: So tell us a little bit about that. You’re effectively amongst the first five founding partners, is that a fair statement?
KLINSKY: Yeah. Well, there were only 20 private equity firms in the world in 1984. There are now over 5,000.
RITHOLTZ: Wow.
KLINSKY: But I also just finished being the chairman of the private equity industry, something called the American Investment Council. But there used to only be 20 private equity firms. KKR was the biggest with $400 million of assets and eight people. And Forstmann Little was the second biggest with $200 million of assets, and four professionals and they hired me in as the fifth professional. And by ‘90s, two guys had left. So it was the two Forstmann brothers, and I was the most senior guy, you know, in the 90s. But it was, you know, very small, very new and you know, obviously a great time to enter the field.
RITHOLTZ: 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. They’re advising clients. They’re involved in a lot of different things. How is it different when you move to a shop with a singular focus on private equity and LBO?
KLINSKY: Well, the key thing to me was — the thing about being in a private equity shop versus an 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 to a 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 Forstmann Little, I had true ownership in that company that I never had as an investment banker at Goldman Sachs. So that was the attraction to come to the private equity side.
RITHOLTZ: How does that affect your psychology at what deals you consider, what you skip? How does that change how you view the world?
KLINSKY: Well, yeah, 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. It 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, you know, the carried interest, the profits interests.
And so I come from a family business background and private equity really, if you do it right, is 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.
RITHOLTZ: So you leave Goldman, you end up at Forstmann, how long did you stay at Forstmann Little and what sort of deals were you working on?
KLINSKY: Yeah. So I joined in ’84, as a younger version of a partner, I mean as an associate partner, I’m made full general partner by ‘86. And so I was there for their glory years of the ‘80s and the ‘90s. I was there from ‘84 to ’99 in their best-best years, and so I did live through things like barbarians at the gate.
RITHOLTZ: Sure.
KLINSKY: I was a partner for that. I have one line 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 happy my line was not pay anything, borrow anything. I’m very happy with my line. My page is 259 if your listeners want to check it out. And we were also the white knight, we were the kind of the anti-Milken junk bond guy. So we were the white knight on Revlon. We had some great success in the ‘80s, and in the ‘90s, we’re even better. So I can talk more about that. So I was there for 15 years.
RITHOLTZ: So let’s talk a little bit about LBOs in the ‘80s and ‘90s. You mentioned the first LBO of a publicly traded company took place in 1979, and that led to your JD/MBA thesis about it. Tell us a little bit about what the 1980s and ‘90s were like when junk bonds and LBOs first began to ramp up and become popular.
KLINSKY: Yeah. Well, also just to give a little historical perspective on how much things have changed, and that there is an economic backdrop to all of this stuff. So my first day at work was October 1,1981 at Goldman Sachs. The highest interest rates in U.S. history were literally the day before I started work. September 13, 1981, I think the 10-year Treasury was 15.84 percent. So when we’re at, you know, 3.7 percent 10-year Treasuries, it is nowhere near kind of the situation.
RITHOLTZ: Yeah.
KLINSKY: There had been stagflation, where the stock market was lower in ‘81 than it had been in 1968. And you know, incredibly depressed market, super high interest rates. So the initial idea of leveraged buyouts very high inflation really was financial engineering, truthfully, back in those days, because if you had 95 parts debt, and 5 parts equity, and 10 percent inflation, you know, you could triple your equity with no unit growth at all.
And interest rates were coming down after Volcker and Reagan broke, you know, inflation, and the stock market was going up. So that’s where private equity started, as it really was for investment bankers in sort of a room having the nerve to borrow money when other people had been kind of beaten down for 13 years.
Forstmann Little started, you know, a round or 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 Prudential would lend what was called the mezzanine debt. There was no junk debt available in the market. And Forstmann Little created, instead of going on insurance companies, raised its own fund for the mezzanine debt, that they could have the banks themselves and then Forstmann 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 Topps Chewing Gum back in the baseball card craze.
RITHOLTZ: Sure.
KLINSKY: $80 million deal with $10 million of equity that went up to $800 million of value.
RITHOLTZ: Wow.
KLINSKY: So $10 million became $800 million, it’s 80 times your money —
RITHOLTZ: Not bad.
KLINSKY: — which is not bad. It’s not the $5 trillion of gains private equity makes today, 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 $40 million. I mean, those were the — that’s what got people all excited and —
RITHOLTZ: That’s venture capital numbers.
KLINSKY: Well, that is — and it was kind of venture capital numbers because the dollars were so small.
RITHOLTZ: Right.
KLINSKY: So it was so tiny compared to what private equity is today, but very high returns. So that started everyone going into the field after the initial 20 firms. You know, Carlyle started, Blackstone started, and they were very transparent. They saw the success of these other firms and said, why can’t we do that, too? So in the mid ‘80s, lots of people started to enter as new firms that became great and kept growing.
Milken started junk bonds around the mid ‘80s, 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 AAAs, you were giving up return. And so he was creating that market. And he both lent to great companies like, you know, 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 that was the alternative. And then Forstmann Little didn’t use — we were the one firm that didn’t use Milken. We had our own fund, and so we were kind of the white-shoe alternative to Milken and others.
RITHOLTZ: Let’s get a little granular and you’re the right person to dive into this with both a JD and an MBA. When we’re talking about a structure of a financing and their 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.
KLINSKY: 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 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, then 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 60 cents out of 100, until 40 cents is lost, the senior debt is safe. Then the junk debt or mezzanine debt may be the next 20 cents in the old days. And so if it’s worth 80 cents on the dollar, they’re safe and then the equity is the bottom 20. But if it goes up to $2, they’ve made $1 on 20 cents. So it’s just like real estate, but it was done 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.
RITHOLTZ: Right.
KLINSKY: You’re unlimited on how much you can make. But you’re the first person to lose money if you do a bad.
RITHOLTZ: That’s a perfect explanation of that. So in the 1980s, you have more companies entering the space. You mentioned there were 20 PE firms back then. Now, there’s 5,000. How competitive was it to source deals? Was there, you know, overwhelming luxury of choices, or were people scratching to get into the best deals?
KLINSKY: 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 impossible.
RITHOLTZ: It’s only in hindsight, you realized how good you —
KLINSKY: It’s only in hindsight you realized 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 fewer firms, I was effectively — there had Ted and Nick Forstmann, 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 sack, where the sellers would come and lay all their goods out in front so you can look at this company and this company and this company. And I’d say no, no, no, bring and show me another company.
Today, private equity is so much more professional. In my firm, which is not as famous as Forstmann Little but it’s much bigger — and the industry is much bigger, you know, we have 200 people. We’re proactively super deep in specific industries like life science supplies, where we’re 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 60 percent equity and 40 percent debt, not 95 percent and 5 percent.
RITHOLTZ: How long did that transition takes because that’s a very different structure. Obviously, interest rates have an impact, we’ll get to that.
KLINSKY: I think their transition has been steadily happening for the 40. I’ve been in private equity for 40 years now. And one thing I tried to say is that private equity has evolved from a form of finance into a form of business. So in 1981, when interest rates were there and everything was started, it was about — you know, and I was one of the four, for example, for investment bankers having a lot of hutzpah and saying let’s borrow some money and go for it.
Today, it’s extremely differently. My organization owns companies that employ, I think, 67,000 people. We would be roughly 83 in the Fortune 500 if we were one entity.
RITHOLTZ: Wow.
KLINSKY: 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 Forstmann Little or where I was even when I started my firm by myself. I didn’t have, 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 90-day 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 40-year transition.
RITHOLTZ: So we’re going to talk about New Mountain Capital in a bit.
KLINSKY: Yeah. Yeah.
RITHOLTZ: I want to stay in the 1990s.
KLINSKY: Yeah.
RITHOLTZ: What sort of sectors and what sort of industries were the hot memes back then?
KLINSKY: Yeah.
RITHOLTZ: Where did you focus?
KLINSKY: Yeah. So the big long term story with Forstmann 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 ‘80s, it was about kind of any company that looked cheap with a lot of debt. You know, obviously, there was the 1987 crash of the stock market. But there was a recession in ‘88, where what we could see was our high quality companies that were market leaders did fine. And the number 3 auto parts elastomer company lost all market share to the number 1 guy and did terrible. And no matter how little you had paid for it, you had paid too much.
So as a firm, Forstmann Little said, look, let’s evolve into higher quality growth companies, not just buy things because they’re low EBITDA, but really pick companies that can be great growth leaders. And the transaction that I’m most proud of in the ‘90s was a company called General Instrument —
RITHOLTZ: Sure.
KLINSKY: — that, you know, when we found it, it was a very messed-up conglomerate doing race track tote 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 all going to destroy all American electronics. We had a different opinion, I can tell you why, that we could fight back. And it went from about a billion of value to $20 billion of value over the course of the ‘90s.
RITHOLTZ: Wow.
KLINSKY: And that was what I worked closest on over the ‘90s. And so the other great deals we did in the ‘90s, though, Gulfstream jet —
RITHOLTZ: Sure.
KLINSKY: — which Ted, you know, personally loved and led, went through some tough times and end up being a huge success. We had Ziff Davis magazines that we sold to Mr. Son and started Masayoshi Son’s career. He bought and — because he had spotted it and got him kind of into the Internet and all that through —
RITHOLTZ: So you’re to blame?
KLINSKY: Well, he’s done fine. He did very well with it. And so we had a lot of great — we had Department 56 Christmas ornaments. We had all sorts of deals. So it wasn’t one specific industry. But we went from kind of junky cheap companies to, I view, the General Instrument being the model for what Forstmann Little was involving it.
RITHOLTZ: What’s kind of interesting is you mentioned a couple of times about what happens when you’re in the number 3 and number 4 companies, and they’re getting their lunch eaten by the number 1 —
KLINSKY: Yeah.
RITHOLTZ: In all of these sectors, is it very much a winner takes all, where you really want to be in the top, maybe second company, but not much further beyond that?
KLINSKY: 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 New Mountain, it was really based on two principles; defensive growth and business building. And what I —
RITHOLTZ: Defensive growth.
KLINSKY: Defensive growth, this is like a — defensive offensive growth and business building. What I mean by that, even more important than number 1 versus number 3, there are some industries that have the wind at their back, that have secular growth for the next 10 years. And there are some industries that are inherently subject to changing conditions. Oil prices go up or down, you know, fashion retail goes in and out, unlike for example, selling an ingredient for pharmaceuticals, where they need the ingredient and you’re inspected by the FDA.
So I mean, there are good industries and bad industries from the point of view of safety and growth. And the biggest mistakes in private equity in my 40 years’ observation is when the industry melts underneath you. So for example, there were giant disasters after I left Forstmann Little. Forstmann Little was doing great when I left. After I left, they changed their strategy and went into what were called CLECs. These are alternative telephone companies that were supposed to —
RITHOLTZ: I remember those.
KLINSKY: That was a super hot theme in the year 1999 and 2000. And so after I left to start New Mountain, they migrated into that, and that whole industry was very hot and then blew up.
RITHOLTZ: That was the George Gilder telecosm debacle.
KLINSKY: Yeah. It was the idea that you could go win against the — 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 entrants —
RITHOLTZ: Right.
KLINSKY: — as well as they had expected. And so these things went from $15 billion to zero. There was XO Communication and McLeod.
RITHOLTZ: I recall. Right.
KLINSKY: So that was the — 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 coffeecup.com —
RITHOLTZ: Yeah.
KLINSKY: — 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 Forstmann Little, was pick the sectors that at least for 10 years ahead, have clear, stable secular growth, and then buy in 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 $70 billion of enterprise value gains without one missed interest payment, and added over 61,000 jobs without 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 skill. So it’s those two things.
RITHOLTZ: 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 in a not so good neighborhood.
KLINSKY: Yeah. I mean, you know, if you go off, 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 it has rising values and you search for the right value, and then you improve that house and you know, you fix the plumbing and you paint it 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 at that.
RITHOLTZ: Really, really interesting.
KLINSKY: So that’s what we’re based on.
RITHOLTZ: So let’s talk a little bit about your experience at Forstmann Little during the RJR Nabisco takeover. Tell us a little bit about that experience, what was that like?
KLINSKY: Yeah. It was an amazing time, and just to give some context to it, it was part of a bigger, longer term battle, which there was the whole junk bond world building behind Mike Milken, who I now like and respect, and I think he’d become a great philanthropist. At that time, my firm was just dead set opposed to any —
RITHOLTZ: Doing battle with him, right?
KLINSKY: Doing battle with him, not using his money. And you know, there’s a famous editorial Ted Forstmann wrote that I helped, you know, write the first draft up for him and all that. And we had fought against junk bonds in the Revlon situation, we had fought against junk bonds in 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 Di, bigger than life. Also, had grown up in a very white-shoe, preppy way in Connecticut, and I think was just kind of offended by the whole junk bond world and just opposed it, didn’t like it.
RITHOLTZ: They’re barbarians.
KLINSKY: They’re barbarians. He’s the one who said the barbarians at the gate. And some people would say —
RITHOLTZ: Oh, really? Is that what it’s supposed —
KLINSKY: That was his line.
RITHOLTZ: Oh, no, it’s his?
KLINSKY: Yeah. No. It’s 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 writer who wrote MASH, and they have Ted and Nick dressed up as Indians and with cowboys, and you know, KKR, and so none of that happened. But the book was quite accurate.
And anyways, RJR itself, you know, was going to be a deal where KKR was working with Ross Johnson, the CEO of RJR, because the stock had fallen so much. Then Ross Johnson decided not to go with KKR, and he teamed up with Lehman Brothers and Salomon Brothers who had a giant chance for $400 million of fees by doing the deal, which was astounding —
RITHOLTZ: Right.
KLINSKY: — amount of fees for Wall Street in the ‘80s. And KKR felt, well, that was a break of a word. 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 Forstmann Little as the second biggest firm after KKR 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 want to do the deal. I don’t want to do the deal. It makes sense. And Ted says to me after, what do you think of him? And I say, I think he’s totally insane.
And again, I wasn’t 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, where we should — you know, it’s our job to study is it a good deal or no. We spent weeks, night and day, studying it, decided it wasn’t a good deal, decided not to bid, which I’m fine with. And then when we decided not to bid at 90, it eventually went up to, you know, 111 or something like that.
But what’s interesting was the size of it. I think it was, with all the debt, like a $35 billion deal.
RITHOLTZ: Huge.
KLINSKY: And at that time, it was the 19th largest company in the in the Fortune 500, I think, at the time. So it would be like a $300 billion 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, and said if they lend their full legal limit —
RITHOLTZ: They could —
KLINSKY: — then we raise enough.
RITHOLTZ: Yeah.
KLINSKY: It’s like we need $20 billion of debt and if, you know, bank Santander will lend 300 and then, you know, we tried to total it up and it barely got to the — it was just an astoundingly big thing.
RITHOLTZ: There’s no way to do this without junk bonds.
KLINSKY: There’s no way to do it without junk bonds. And they eventually used, you know — and again, they use 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 —
RITHOLTZ: Right.
KLINSKY: — which means you have to grind. So it’s like a vicious cycle of destruction.
RITHOLTZ: Right.
KLINSKY: And it almost destroyed KKR. KKR ended up buying it and it was kind of a Pyrrhic victory because it was a very tough deal for them. They’ve done great at getting through it. And you know, they’re wonderful Firm today, but I would — I don’t think it was a happy experience for KKR to have bought it. And 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 gave it a hard study and said no, but it was a wild time.
And the investment bankers at that time were just — every time we went to a meeting on due diligence, is this a good company or not, all they wanted to do was talk about the fee splits. Well, there’s 400 of fees. We said, no, we don’t want to talk about that. We’re trying to figure out what are the earnings of the business?
RITHOLTZ: Well, you guys put your own capital at risk also.
KLINSKY: We would have but —
RITHOLTZ: So it’s a little different —
KLINSKY: It’s totally different.
RITHOLTZ: — calculus.
KLINSKY: We didn’t —
RITHOLTZ: You cared less about — you’re more ROI than, hey, what are the fees like?
KLINSKY: We didn’t — yeah, the fees were irrelevant to us. We were all about — we would have been investing our fund in a huge way.
RITHOLTZ: Right.
KLINSKY: And we couldn’t get anybody even to, like, focus on the business itself. Everybody was so focused on, you know, the arrangements around it. It was a wild time and —
RITHOLTZ: 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 behavior?
KLINSKY: Well, I mean, they can get out of hand. So I mean, in ’07 and ’08, you know, what killed the economy in ’07 and ‘08 were mortgages going down.
RITHOLTZ: Right.
KLINSKY: But they —
RITHOLTZ: Those were the junk equivalent mortgages.
KLINSKY: But those were — yeah, even worse, you know —
RITHOLTZ: So prime junk mortgages. Right.
KLINSKY: — in that levels and levels on that. But, you know, lending was getting very effusive in ’07 and ’08. And, again, banks, whether junk bond or not, were saying, well, we’re not even lending, we’re syndicating so we don’t have —
RITHOLTZ: Right.
KLINSKY: — to worry about it. I would say today, you know, it is a much different environment. Even though the so-called junk bond markets are strong and high yield is strong, 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. You know, we have both a public version called New Mountain Finance Company or private versions. And when we’re lending to other people’s deals, we’re usually under 40 percent loan-to-value, you know, not 95 percent to value, which is what it was in 1981.
RITHOLTZ: That’s pretty safe. You got 60 percent of losses ahead of you.
KLINSKY: 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 defensive growth industry.It’s a very good company. It’s a very good sponsor. And we’re almost always under 40 percent of the value, so we’ve had a very good safety record there. But it’s a different mindset than the ‘80s. I mean, it was a much wilder debt market in the ‘80s 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 ‘80s, where you had you know, Michael Douglas on the giant cell phone in Wall Street and seven people —
RITHOLTZ: Right.
KLINSKY: That’s what people think private equity is today, and it just isn’t anymore.
RITHOLTZ: So back then you had high rates that were falling. Today, we have still relatively low rates —
KLINSKY: Yeah.
RITHOLTZ: — that are rising.
KLINSKY: Yeah.
RITHOLTZ: How does the various interest rate regimes affect what structures of deal look like, especially if there’s a lot of debt involved?
KLINSKY: Yeah. Well, they absolutely do affect it. So again, the reason leveraged buyouts took off and became a wild stallion in the ‘80s was because you had 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 didn’t get over a thousand till like ‘81 or ‘82.
RITHOLTZ: Right.
KLINSKY: And now it’s 30,000. So I mean, I tell people, I show him the curve of the stock markets. I had a pretty good career, right? I mean, because —
RITHOLTZ: Right.
KLINSKY: — my timing was quite good. Plus, you know, 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 our current day. You know, unit growth didn’t matter because of inflation and rising markets. I would say for any good firm today, for the last 10 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 a really bad private equity firm.
RITHOLTZ: That’s a giant wind at everybody’s back for three or four decades. Falling rates —
KLINSKY: Right.
RITHOLTZ: — was at 80 to ‘20, ‘22. That’s a pretty good run of the general trend is lower, and you have equity markets from 80 at least through ‘21, rising pretty substantial, even with the 2000s being a pretty —
KLINSKY: It’s definitely been a 40-year secular bull market. After 13 years of stagflation from ‘68 to ’81, it’s been, you know, 40 years from ‘81 to today.
RITHOLTZ: I’m glad you brought up that term because I’m old enough to remember the ‘70s, as a kid going to get gas to mow the lawn —
KLINSKY: Right.
RITHOLTZ: — and having the guy — the attendant asked me, do you have an even number or odd number license plate?
KLINSKY: Right.
RITHOLTZ: My answer was, I’m 11, I don’t have a license plate, just give the kid a gallon of gas. But whenever people talk about, oh, today, we have stagflation, you’ve experienced both, how do you compare this year to the ‘70s?
KLINSKY: Well, that’s why I tried to say my first day at work, intra-10-year Treasuries were 15.8 percent versus —
RITHOLTZ: Right.
KLINSKY: — 3.7 percent.
RITHOLTZ: Right, 6x today.
KLINSKY: And a house mortgage could be 20 percent. People are paying 20 percent of their house mortgages. And the stock market was, I think, six times net income. When I used to sit in the Goldman, you know, merger department and, like, what we could sell the company for, and we’d all sit around the table. I mean, if we really stretched 10 times net income, I think if we find the hot buyer, we can get the 10 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, the —
RITHOLTZ: Right. What — why —
KLINSKY: Google would be worth a penny or so.
RITHOLTZ: Why would I want to sell something for tangible book value?
KLINSKY: Right, right. Right. Why would I take more —
RITHOLTZ: It’s go build, it’ll take you two years.
KLINSKY: Why would I take more than the value of the accounts receivables. There’s no — so that’s — and so it is totally different today. But also, the skill sets, again, when we get into more New Mountain, there are 8 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 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 isn’t around anymore, I think. If it is, it’s going to be bottom quartile.
RITHOLTZ: Let’s talk a little bit about why you launched new Mountain Capital. You were having fun at Forstmann Little, why set down and stand up your own shop?
KLINSKY: Yeah. You know, I’ve had a great 20 years working with Goldman Sachs and Forstmann Little. Forstmann Little was 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 then working at the firm. And Ted was kind of a very large — he was a great mentor to me in a lot of ways. He was also known — you know, he’s passed away. He’s known to be a somewhat difficult personality and so —
RITHOLTZ: Larger than life sort of.
KLINSKY: Larger than life, dating Lady Di, you know —
RITHOLTZ: Perfect.
KLINSKY: — flying in the Gulfstreams and all that, but it was always kind of a — it was not a calm, happy place inside. So I broke off to start New Mountain. And you know, it’s gone better than ever would have expected and it’s been a great experience.
RITHOLTZ: Yeah. So when you leave Forstmann Little, are you thinking, I’m going to just do the same thing, or you’re thinking, I have a lot of ideas that wouldn’t have worked there that I want to try out on my own?
KLINSKY: You know, I had really enjoyed the General Instrument experience, where we took it from a billion of value to 20 billion, and we had argued —
RITHOLTZ: I can imagine why you would enjoy that.
KLINSKY: 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 a thousand channel cable systems on demand. It was really a great experience for nine years. And I —
RITHOLTZ: Just really building a business, not just putting passive capital work.
KLINSKY: Right. And it was considered one of the first grade 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 Forstmann Little. So the idea of safety, but growth really growing businesses, the whole name New Mountain comes to the idea of building new mountains in 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 the fact to build a culture that was kind of more of a Goldman Sachs family business culture plus those approaches, you know, were compelling.
RITHOLTZ: So talk about building New Mountains in 2019. You executed a $4 billion IPO for your Avantor life sciences company, the largest healthcare-related IPO I think in history, is that true?
KLINSKY: Yeah. We’ve had some good IPO successes. And you know, I’m not going to 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 J.T.Baker for $290 million when it was going to be discontinued by Mallinckrodt. We renamed it Avantor, changed the management, changed the strategy, and built it from $290 million to 20 billion-plus and —
RITHOLTZ: Not too shabby.
KLINSKY: Not too 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. We’ve had other —
RITHOLTZ: What does Signify do?
KLINSKY: Signify is the leader in sending doctors and nurses into the homes for medical checks. And we took it from 250,000 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 CVS with what the doctor visits do. It could be really a great thing for society, you know, if they buy it. So, you know, those are just some examples. We’ve had a bunch of good successes.
RITHOLTZ: So this is in pouring money into startups like venture does. You look at existing companies that are either undervalued or maybe misvalued is a better way to describe it?
KLINSKY: What we do is — we have a whole very formal top-down process for 20 years, where we choose the sectors that we think can grow with secular growth for the next 10 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, IT, managing wind and solar farms, 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, 100 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’ve never had a business — again, go out of business or not paying interest payment. And the question is, you know, how high we can build?
RITHOLTZ: So it’s different math then I need 100x winner versus 99?
KLINSKY: Yeah. I don’t have — coming from a family business, we say we don’t have portfolio theory. We have family business theory.
RITHOLTZ: Right.
KLINSKY: When we go into a company, we want to preserve and protect it. We’re responsible for it. If there’s a problem, we work 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.
RITHOLTZ: What other lines of investment do you focus on? Do you do credit? Do you do distressed asset, real estate? Tell us where else you focus?
KLINSKY: Yeah. 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 businesses. We just don’t have control, but we’re very involved in building the business. If equity is 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’s our credit arm, which trades publicly as New Mountain Finance Company, and we have private versions. 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 a net lease, and have both the credit of the company and the real estate as collateral. And that’s like another high version of you know.
RITHOLTZ: That was a huge business for a while, the net leasebacks.
KLINSKY: Yup.
RITHOLTZ: Is that still as popular as it once was?
KLINSKY: It’s always been nichey 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 you know, we had a very good run of it so far.
RITHOLTZ: 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?
KLINSKY: Yeah. So that is our private credit. We run about $10 billion of private credit. We have one of the largest and oldest of the — what’s called the BDC, 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 —
RITHOLTZ: Right.
KLINSKY: — it’s actually better for this type of lending. It’s not like owning a long-term fixed rate bond.
RITHOLTZ: Right.
KLINSKY: 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. And net lease is similar, where what’s nice about it is you have rent escalators for 20 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 we do the credit in the net lease for good steady yield, and we do private equity and strategic equity for, you know, big returns.
RITHOLTZ: 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?
KLINSKY: Yeah. So in 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 30 percent gross returns on the investment or better? That’s our —
RITHOLTZ: Over what time period?
KLINSKY: Over about a four-year period, four thoughtful periods?
RITHOLTZ: All right. So we’re not talking 30 percent annually, you —
KLINSKY: No. Compound 30 percent.
RITHOLTZ: Over four years?
KLINSKY: Which is like a three or four bagger —
RITHOLTZ: Right.
KLINSKY: — the 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 lease funds, we’re trying to have a current yield. It used to be — it’s about 800 basis points over the base rate. So it used to be kind of a 10 percent type target. And as rates have moved up, that target moves up as well. And that’s supposed to be current yield every — you know, paid out every quarter.
RITHOLTZ: Like LIBOR plus 6? So do even use —
KLINSKY: Just like LIBOR plus —
RITHOLTZ: — LIBOR anymore?
KLINSKY: Yeah. People do use LIBOR.
RITHOLTZ: Yeah.
KLINSKY: And again, I’m going to talk about specifically, but you know, you might see a 13 percent type return on loans, where it used to be 10 percent last year. I mean, and the interest rates are still going through, working through because as the interest rates reset from the borrowers. And we’re resetting higher at the moment.
RITHOLTZ: So I’ve noticed some of the publicly traded —
KLINSKY: Yeah.
RITHOLTZ: — private equity firms have a tendency to say, we’re going to offer our all strategy funds, which is 20 percent of each of our five strategies. Do you guys do anything along those lines?
KLINSKY: We haven’t. I mean, it’s not a bad idea to do that. 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 ala carte.
KLINSKY: And you mentioned your LPs, who are your clients, meaning what sort of investors?
KLINSKY: In the private equity fund and strategic equity fund, it’s the big pension funds in the U.S. It’s the big Canadian asset plans. It’s the sovereign funds around the world, in Europe and Asia. In our credit funds, the public one, it’s some institutions and retail investors, just high-net-worth investors who are looking for double digit yields, and also a net lease. That’s kind of the breakdown.
RITHOLTZ: Really interesting. Before we get to our favorite questions, I have a couple of curveballs to throw at 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.
KLINSKY: 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 and the way we build companies. I’m also trying to do philanthropy alongside New Mountain. I’ve been very involved in education reform for many years. And after school centers, I set up the first charter school in New York State.
RITHOLTZ: Oh, really?
KLINSKY: I’m the chair of Harvard’s Public Education Policy Group, I succeeded Jeb Bush there. And the cost of college has gotten incredibly expensive. The average college even at a state school is 30,000 a year all in. There are — and so what we did in 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. They’re like a library of free courses, with practice questions. They qualify you to take the college board, which does the SATs exams and advanced play school —
RITHOLTZ: The APs. Yeah.
KLINSKY: — has a set of exams called the CLEP 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. You don’t get it at Harvard and Yale, but Michigan State, Penn State, Ohio State, you know.
RITHOLTZ: So in other words, you could do a year of school essentially for free?
KLINSKY: Totally for free. And we also pay the exam fees for you.
RITHOLTZ: Oh, no kidding.
KLINSKY: So anybody, if you are the poorest person in the world and you have ambition, go to modernstates.com or.org, modernstates.org, you’ll see all the courses laid out. All you got to do is download them like you would a Netflix movie. 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 CLEP exams I’ll take for credit. So we have over 300,000 users. We’ve saved, you know, tens and tens of millions of dollars from 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, then you have to do the Godfather every time.
RITHOLTZ: Right.
KLINSKY: 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 Purdue has made it a key program at Purdue. They call it Purdue Fast Start. They’re encouraging every poor kid in Indiana to take these courses and enter Purdue as a sophomore. We’re working with all sorts of people. So it’s my major charity cause.
RITHOLTZ: That’s really intriguing. And then another curveball, your wife, a former Bear Stearns banker, published a book in 2016, Opening Belle, spelled with an E on Belle, which is a fictionalized account of a woman navigating the financial crisis here at Wall Street. Tell us a little bit about that. That sounds quite fascinating.
KLINSKY: Yeah. 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 a Me Too movement, got her master’s in in Fine Arts at Columbia, wrote both a great book that’s in a lot of school libraries called the Walls Within Walls for like Harry Potter readers, and wrote a best seller called Opening Belle for adults, which is about a woman named Belle, who is working through Wall Street as the breadwinner, with a husband who’s like an audio visual guy.
So everybody thinks 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 going to be a Reese Witherspoon movie, and it’s still kind of out there. And so I recommend anyone who wants to know what it’s like to be a woman on Wall Street.
RITHOLTZ: 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?
KLINSKY: Well during the lockdown, we, of course, had to watch Tiger King.
RITHOLTZ: Really?
KLINSKY: And when I was — when we were stuck for months going crazy at home, with our — 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 character.
RITHOLTZ: Hilarious.
KLINSKY: That got us through COVID. These days, though, and I’m not going to be locked down anymore, these days, I love White Lotus 2 and I love Succession. I’m waiting for succession to come back. So those would be the shows today.
RITHOLTZ: I’m going to give you a recommendation because I think this might intrigue you. We just started Kaleidoscope —
KLINSKY: I haven’t heard of it.
RITHOLTZ:– which is like 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. We’ll see if that’s —
KLINSKY: Like a kaleidoscope. That’s very interesting.
RITHOLTZ: That’s the thought process.
KLINSKY: Got it.
RITHOLTZ: Tell us a little bit about your mentors who helped shape your career.
KLINSKY: Yeah. Look, the biggest mentor in my life was my father, 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 Carlota in Mexico who ended up getting, you know, shot by her firing squad, but you learn a lot and everything.
And as far as investment mentors, I was very influenced by Goldman Sachs and its culture. Ted Forstmann and the Fortsmann Little guys were incredibly good investors and very thoughtful. And so I mean, everybody is a mentor. I’m reading everything I can, and I read a lot of nonfiction and I try —
RITHOLTZ: Let’s talk about —
KLINSKY: Yeah.
RITHOLTZ: — about what you’re reading. Tell us what you’re currently finishing up and what are some of your favorites.
KLINSKY: Well, I mean, some of the things I’m finishing up, like I say, I’m finishing up this book about Maximilian and Carlota, which is an old history book that I came across. I just — I read Chip War, you know, which I thought was very good about some —
RITHOLTZ: Chip War.
KLINSKY: Chip War.
RITHOLTZ: Chip War. It’s about the semiconductor industry. It’s a great book. So I read a lot of nonfiction, and the best nonfiction I’ve read is Ron Chernow has some great biographies.
RITHOLTZ: Amazing.
KLINSKY: I love Grant biography. I love the biography of Vanderbilt. I’m a big fan of George Washington, Winston Churchill and Lincoln and guys like that.
RITHOLTZ: There’s a new Churchill biography out that some people have been talking about.
KLINSKY: I just read Splendid and the Vile like months ago.
RITHOLTZ: Larson.
KLINSKY: And obviously, the whole Manchester series was great. And so, you know, so I read a lot. I read mostly nonfiction.
RITHOLTZ: What sort of advice would you give to a recent college grad who was interested in a career in either private equity or investing?
KLINSKY: 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 10 years. I don’t have to be in my grandfather’s store selling coats. I can be moving into, you know, DNA 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. And I’m not a fan of stock market investing, I just find it too dang difficult and arbitrary. I am a big fan of private equity and credit investing and net lease investing.
RITHOLTZ: And our final question, what do you know about the world of investing today you wish you knew 30 or 40 years ago when you were first getting started?
KLINSKY: Well, I didn’t know anything about the world of investing 30 or 40 years ago. I could 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 stance, you’re the player on the field. And you’re the coach and player, you control the play, you play better and you can make money either gambling on the team or being the team. 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 good private equity is.
RITHOLTZ: 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 to check out all of our previous podcasts. You can find those at iTunes, Spotify, YouTube, wherever you get your favorite podcast from. Sign up for my daily reading list at ritholtz.com. Follow me on Twitter @ritholtz. 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. Atika Valbrun is our project manager. Justin Milner is my audio engineer.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.
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