Thirty Minute Mentors Podcast Transcript: New Mountain Capital Founder and CEO Steve Klinsky

I recently interviewed Steve Klinsky on my podcast, Thirty Minute Mentors. Here is a transcript of our interview:

Adam: Our guest today is a pioneer in the world of private equity. Steve Klinsky co-founded Goldman Sachs's leveraged buyout group, was an early partner at Forstmann Little, and is the founder and CEO of New Mountain Capital, where he has overseen more than $20 billion of capital commitments since its inception. Steve, thank you for joining us.

Steve: Well, thanks, Adam. Thanks for having me here.

Adam: You broke into the world of private equity in 1981, right after graduating law school and right as the private equity boom was about to take place. Can you take listeners back to the early days of your career? What attracted you to asset industry? And what were the best lessons you learned early on in your professional journey?

Steve: Yeah, thank you. Yeah, I went to law school and business school and finished both of them in 1981. And if you think back with the macro economy, the stock market was lower in 1981 than it had been in 1968, there had been 13 years of stagflation and interest rates were close to 20%. Companies were selling at four or five times net income. So it was a much different, much more depressed in value, time when I joined the street. And the whole idea of taking a company private was a totally new idea. So the first public company to be bought as a leveraged buyout was in 1979, when KKR bought A.J industries, that was the first time anyway, someone bought a company off the stock exchange. And I actually wrote my thesis, my Business School thesis, about the idea, I thought it was so interesting. It's such a potentially good, new idea, interesting new idea. So when I came to Goldman Sachs, I said, I want to be a leveraged buyout guys. If you've never done a leveraged buyout, you can be the leveraged buyout guys, like why not? There was no competition. There were maybe 15 or 20 private equity funds in the entire world. There's now 5,000 of them. And it was, you know, a great time to begin, and I can talk about how it evolved. But that was the entry point.

Adam: Yeah, I'd actually love to ask you about that. How has the private equity industry evolved since you've been in? I mean, it's obviously very different today than in 1981.

Steve: Yeah, well, what I say- and because I'm the chairman of the industry, I speak from my own firm- you know, private equity has evolved from a form of finance into a form of business. So in 1981, it was a form of Finance. And the idea was, there's very low value companies, there's lots of inflation, if you could just borrow money and buy a company cheap, inflation alone, you know, can help make money. So let's say you bought a company with 95 parts debt, five parts equity, and had 10% inflation; you triple your money in a year. That was kind of the mindset; that values were going to go up and leverage would increase. That, you know, that value creation. It's now over 40 years later, where I, you know, when we talk about private equity today, it's all about owning companies and being better at building them, and bringing skill and capital to mainstream companies as top top Business Builders. But it was, what I would say for investment bankers in the room, borrowing as much as they could back in 1981. And, you know, the stock market, I was walking on the trading floor of Goldman Sachs, when the, you know, Dow broke 1,000 I think, no, it's now over 30,000. So it's just been a growth market for 40 years, and a great time.

Adam: What were the skills that you developed early on in your career that have been most important to your success today? And what are the skills that you think anyone listening to this conversation should think about developing, whatever stage they're in in their careers?

Steve: Yeah. Well, what's great about private equity, the reason I enjoy it so much is that, you know, you don't just own one company and learn one industry. I saw a cartoon years ago where a guy says, I'm 70 years old, and I've learned a lot in my life, but unfortunately, it's all about aluminum. I mean, you know, you could spend 50 years being an expert at aluminum smelting. Private equity is kind of different. We now manage over 30 billion in assets. We bought maybe 60 companies since we started the firm. We own over 20 of them today. Everything from life sciences, supply chain software, to Yankee Stadium, to all sorts of things. So, you know, what's great about private equity is you learn a general way to think about problem solving, managing businesses, building businesses, whatever the industry is. And, you know, we built a team of 100, over 180 people, at New Mountain who work collectively at whatever business, we choose to improve it. And so it's how to understand a business's strategic position, how to make sure you're buying something in a good safe space, and then really add value in, you know, 10 or 15 different ways to build it. So it's just really a pure business building exercise, as a team, not a lot of me doing it, but the team that we've assembled doing it, and that's the fun of the business.

Adam: So for people who are listening to this conversation and interested in breaking into private equity, yeah, what advice do you have? What would you tell listeners to do? Whether it’s what skills to think about developing or what other pieces of advice to incorporate; what should listeners be thinking about?

Steve: Yeah, well, there's a few different ways to answer that question. As far as joining a big, well established, private equity fund like Blackstone or KKR, or whatever, or New Mountain, there's a pretty well established track where you, you know, you go to college, you do a good job, you get hired by Goldman Sachs, or JP Morgan Bank or McKinsey Consulting, and then the private equity firms are hiring from the people who've been working at those type of firms for a year or two. That's the standard track to being an associate at a firm like mine. If you're not doing the track that way, there are lots of their smaller buyout firms or people just doing their own deals, private equity deals, you know, that they do for themselves, where the skill there is really knowing how to identify a company and build it. It's no different than saying, hey, if I wanted to get good at owning houses and improving them, you would learn carpentry, you would shop for houses, you learn how to buy a house and fix it up and decorate, and how to be a fixer upper of a house. That's what private equity is for a company. So you could come out of an operating background in your own industry and say, I'm going to borrow some money and buy a company or find partners and buy a company and build it. And it's just owning and building a business privately where, you know, the management organizer gets ownership in the company and is working, not just for salary, but to own a piece of the business that he's building. So it's just getting good at an industry and building a company. And, you know, we're doing it for an established firm across multiple sectors.

Adam: Steve, can you describe your process, once you invest in a company, a stat that I love is that New Mountain has added or created over 43,000 net jobs, which is incredible. And I want to see if you could explain to listeners what steps you and your team take to add value once you come into a company?

Steve: Yeah, okay. So I'll talk about what we do. And then that's one of the stats and there's some other ones we're proud of too. But there's basically two major investment ideas that New Mountain has lived off of, we're now 21 years old, and I've been doing this for over 40 years. The first idea is defensive growth, which is, we go out of our way to pick sectors that we think can do well for the next 10 years, whether the macro economy is good or bad. So a lot of your life and your future is determined by what sector you choose to go in. And this is true. This is the advice I give you before you take a job. Let's say you're not in private equity. If you go into, you know, an industry that's cyclical or not growing, it's much harder to have a successful career than if you go into industries that are healthy and growing for years ahead. So industry selection is the first major thing we do. And we go for what we call defensive growth or non cyclical growth industries, like science supplies, we must have information and data. We're upgrading the power systems, the wind farms, solar panels, you know, things that are not going to go up and down like oil prices are, you know, are a declining industry. So the first thing we do is pick a good industry. Then we go out and we constantly hunt. And we look at hundreds and hundreds of companies a year to buy seven as our target every year. When we find one, we don't use very much debt, we keep the capital structure safe. And then we have all sorts of professional management that we team up with the existing management to build the business. So you know one company that our biggest company today is a business called Avantor. We bought it for $290 million. And today it's worth about $22 billion and it just entered the Fortune 500 this year so this little company is on tour. When we found it, it was called JT Baker. It was a discontinued operation of a bigger company. They were going to discontinue it and end it, but it had a nice, steady business, selling chemicals to bench scientists. We bought that and added entirely new management, new computer systems, bought European manufacturing, built factories in India, took it around the world, and shifted it from being just traditional lab chemicals into very high purity life science supplies for Amgen and Biogen and those type of companies. And it's just grown and grown and grown over the last 11 or 12 years to the current size. In other cases, you know, we can take two little companies and put them together. One may have had good customers and one may have had good technology. Together, they have great customers and great technology. And then keep building and building that there's a company we just took public this year called Signify that we bought for 800- it's worth about 7 billion today, three or four years later, because we added all sorts of digital systems and better ways to do business. So lots of ways to build companies, but you start with a safe base, and then keep adding, improving it in every way you can think of and it's not one genius coming up with all these answers. It's a collective team of our people and the management of the company, you know, working together,

Adam: A lot of listeners are, I'm sure, taking notes and nodding, but also saying to themselves, I'm not going to be one of those seven companies that'll be working with New Mountain next year. What would you say to them in so far as what are the best practices that they should be thinking about to better position their companies for growth and for success?

Steve: Yeah, well, again, try to steer yourself into the healthy part of the industry, or being in a healthy industry is very important, because if your industry is melting on you, it's a much tougher proposition. And then we're generally much more focused on growth than we are with cost cutting. Cost cutting, you know, can't take you very far. I mean, you want to have efficient costs and not waste money, but what we try to do is add kind of a venture capital mindset, to a base business. So what new products can we add? How can we add digital technology to our existing business to, you know, just become more efficient or do better. Are there other little companies, you know, sometimes, you can buy little other competitors or little small guys in your industry that if they're part of your company, you are much more profitable than they were standalone. And most entrepreneurs don't think about that. Private equity firms think about that as a regular way, activity. And a lot of entrepreneurs just don't think about buying anybody because you're just running your own business. So you can add critical mass that way, the international expansion, you know? You might be underpriced. Some companies have never evaluated, are they getting enough for their product. So there's, it's not one simple, single thing. And the statistics that came out of it, you know, the job creation, we're super proud of, it's over 43,000 jobs net of any job loss. So jobs added or created. We've never had a bankruptcy, I've never missed an interest payment in the history of New Mountain Private Equity. We've spent over 5 billion in R&D software, Capex, we usually raise the R&D budget a lot rather than cut the budget. And we've generated over 37 billion in gains for pension funds and folks like that. So it's just straight business building in every way you can think of.

Adam: One of the things you mentioned when you set the example of the company that you took over that was on the verge of potentially going out of business that's now in the Fortune 500, was bringing in new management. And I wanted to know if you could go into depth on that topic, if not on that particular company in general, what you look for, when you're bringing in new management, and from your perspective, what makes a great manager and a great management team.

Steve: Yeah. So I mean, our first choice is always to have great management at the company we're buying and just team up with them. That's our preference. Sometimes we're buying a business where the guy who's selling to us is retiring and that's why he's selling, you know, he's saying, look, find my successor, and you run it, or this particular division was a discontinued operation of a big public company where they hadn't really put top management into it, they were just keeping it off balance to sell it. So, you know, we do know, if you have the right basic situation, you know, management can really make it work, or it has to be the right situation to begin with, but then management can really help. It's hard to judge good management, frankly, you know, it's not an easy situation. Usually the best indication is just what success they've actually had in the past. I mean, you know, some people say, well, I'm lucky or unlucky. For some reason some people keep being lucky year after year, because somehow they're good at it. You don't exactly know every element that went into the outcome, but some people consistently have good outcomes and can explain that outcome to you. That's one thing I judge by. I often judge by, was the person, when you look at their career, when they move from job to job, were they pulled there by someone who already knew that. Like, did a former coworker go to a new company and then recruit them over, which is a sign that people who knew them respected them. And also, I would tell you that the people who are the best managers, usually from a personality, are the sort of person you would like to work for yourself, or you'd like to have your brother or your kid or something work for. They're usually levelheaded, nice people, you know, team oriented, trying to get to the right decision, not some, you know, crazy genius who no one can stand who's just so brilliant that you work for him anyways. I mean, it's usually just the good team builder, a manager with good judgment, and good results and a track record of people trusting him and wanting to work with them, and usually turns out to be the good, good manager. So those are some of the things that I look for.

Adam: Yes, Steve, to your point that core principles of effective leadership are universal, whether you're running a small business, whether you're running a Fortune 500 company, whether you're running a company that's in need of some kind of turnaround, great leaders- I absolutely believe that.

Steve: I mean, I also tell no younger people, everything's just a version of something else. So if you're the one who can run the, you know, the carwash drive in High School successfully, you're very likely to be the one who's going to run the giant company one day, because everything's just a version of each other, and every experience and leadership and actually getting stuff done, whatever size is just a version of the same question over and over again, whether it's not for profit, profit, big small, it's essentially organizing people together, you know, to go down the right direction. And that's, you know, it's the same issue again, and again. And if you read history, like I read a lot of history, you know, you read about, you know, the Roman Empire, or whatever. I mean, it's the same questions that keep coming up in every form. So I agree with what you said.

Adam: I couldn't agree with you more. Steve, with that in mind, you work with so many different leaders, and you're working with companies that are in all kinds of industries, and leaders at all kinds of levels. What can anyone do to become a better leader?

Steve: Yeah, well, again, I think it's, again, having experiences, whatever size. I mean it. Whatever you're doing, get active. If you're active in it, you're going to learn more from the experience. It's being respectful and thoughtful of other people. I think reading nonfiction is a great method, because, you know, essentially you're learning from every one of those stories, you know, about how to treat people or what to do, or how to overcome adversity or whatever. And then just always being intellectually curious and respectful of others. And it's all just a training for the next. So again, it's one big playground where you play the same games again, and again, but you know, at whatever size or however they call it, it's the same fundamental issues.

Adam: In your experience, how important is company culture, to financial success, and what are the keys to building a winning organizational culture?

Steve: Well, I think it's extremely important. So because you, again, it's whether an organization is ultimately going to be cohesive, and going down the right direction, or not cohesive and not going down the right direction. Culture is just another name for “do you work well together and what you care about.” And so again, at New Mountain, I guess the way I would describe our culture is respectful and try to respect the companies that we own, the people who invest with us, the people who work here, we don't want to have, you know, made three times our money on one company and killed the other and say, well, we're ahead of the game. You know, we've never had a bankruptcy or missed an interest payment. And we're focused on getting the very best talent in the world we can to our firm, but people who also respect the judgment of other people, so I mean, if you're running a project, and you could be absolutely the best, you're still interested in the ideas of the other people at the table because they're very good as well and share the- whatever we buy everybody shares in the game, whatever we buy, whether you worked on that deal or not, we talk about it, we make the company better. Not, did we kill a company and buy a car with the prospect of pillaging the business or something, that's not the culture I would ever want to have at the firm. And it's self reinforcing over the years, so that, you know, the new people who join you, because they know what you are and they believe in it. So it'd be, you know, the culture actually gets easier to keep as you as you live it, you know, year after year.

Adam: Risk management is a really important topic in your industry, a really important topic in your business, a really important topic in just about every business. And I wanted to get your thoughts on how you manage risk and your best advice for listeners on the topic of risk management.

Steve: Yeah, I mean, I would say if you asked around about New Mountain, in my own industry, risk management would come up very high. Again, we've never had a bankruptcy, we never missed an interest payment in the history of our private equity firm, which is really pretty unusual in private equity, because by definition, you're buying lots of companies, you're using debt, and it's easy to have something go wrong, even if you're careful. I was always trained that you don't lose money, the only question is how much money you're gonna make. So I think returns can be higher if you don't lose money along the way. And just as a human, you know, trying to be happy with my life and what I did with my life, I don't want to, I mean, I would feel so guilty if things go bad at a company and we caused it. So it's not just risk management, if you're driving the car, you know, getting your passenger home safely. I mean, I view the companies we own and our investors like we're driving the car, and I want to get home one piece, you know, versus having a bunch of champagne and hoping it works out. So I start with risk management. When we go into the Investment Committee, there's always two questions. First question is, is it safe? Do we feel that under all sorts of, you know, bad cases, we'll make our money back with a decent gain, even if things go bad in the world? And second, does it meet the return targets that we set? You know, if you said, hey, I'll give you, you know, 75 cents if it's heads and you lose 30 cents if it's tails, I still wouldn't take that bet, because I don't want to, you know, depend on chance, even if the odds are in my favor. We want to depend on skill and control risk in business deals.

Adam: Steve, you've personally achieved so much success in your life. Your company has achieved such an incredible track record of success. But I wanted to ask you about a failure that might stand out to you, and how you were able to navigate through it, and what advice you have for the listeners on how to manage failure?

Steve: Yeah, well, let me say, I mean, we've had a very good track record abroad. You always get buffeted and have a hard time. So like, I would say, the worst situation my own firm faced, is at the beginning, you know, this was about 10 or 12 years ago, as we were raising a big new fund, the very first company we bought, and it turned out that their financial reporting had all sorts of inaccuracy. And I'm not gonna assign blame to anyone, but it was not what had been presented to us. And we were in a very deep hole with that company. Now, you know, you could say, well, you know, everyone makes mistakes, throw him the keys. What we did was the opposite, we put more and more effort behind that company, you know, fixed it as well as we could. Sold off that major piece at a loss to what we had paid, but kept a little piece that was making, you know, $1 million, and built that company into a company making $30 million and made again, a full investment. So what I would say is we didn't, you know, throw him the keys and run away, we tried harder because we wanted to make that investment, you know, and meet our satisfaction. So you're always going to have terrible reverses. And you could have reversed that, you can overcome it but if you're well intended, you're doing your best, keep fighting, you know, if we lose say, well, you know, I win some, lose some- that's not our attitude. I don't lose any. And then you’ve got to make high returns without losing by building stuff. So you know, but there's always challenges and you fight through as well as you can.

Adam: I think that that's a great attitude and a great lesson for listeners because, as Steve mentioned earlier on in the podcast, that New Mountain at one point was managing Yankee Stadium. And when you're a baseball team or any sports team, you're gonna lose games. And it's very clear to anyone who watches sports, when a team wins and when a team loses. But for the rest of us, when we struggle and when we have failures, they're often times in private and our successes are a lot easier for people to see. But what the reality is, is that everyone, every human being, no matter how successful you are, has successes and has failures. And it's all about how you respond to the failures that enable you to go back and achieve success.

Steve: And even things that aren't failures. Sometimes you just have different chapters. So like, you know, I was forced, like Goldman Sachs and the force model for the first 20 years of my career, when the force model was the second biggest firm in the world. And we're all in corporate jets and helicopters, and it was great. And then I left to start my own firm. And I walked down the street with a cardboard box to a rental office, nowhere they would charge me to use the fax machine and the conference table and all that and raised my rent every month, because once I printed business cards, I know I'm not going to move. So I went from like the top of the business food chain to the very, very bottom of the business food chain. So it wasn't so much a failure, but boy, it was the equivalent to a failure, because you have to start all over again. And you just do it, you know? If you're determined enough, then you have a plan, you know, sometimes you just have to do that. And then it becomes if it works, you get into stylage. Oh, work those happy days at the time, if you got miserable days, and you're just so focused on getting through it that I just was like a bull running through a wall that I didn't worry about, like that was just so focused on the job, but you're just gonna go through that step. And God forbid things like health challenges and other things that are even worse- you know. So anyways, I don't know what to say except, you know, try not to take risks where you expect to get hit and try to cover every angle. You can drive as defensively as you can and do your best, then someone bangs your car, you do your best to drive and fix it and get out of it. There's nothing much else to do about.

Adam: What went into your decision to go out on your own and to leave such a lucrative career? And to people listening to this conversation, what advice do you have on when to leave or whether to leave and how to do it?

Steve: Well, I mean, so I was at Goldman Sachs for three or four years and with Forstmann Little for 15 or 16. So I was among the barbarians at the gate in those type of days. And it was very glamorous and a lot of fun. A very, you know, quirky shot, Ted was a little bit like Donald Trump or something larger than life, very glamorous. So both great to work for in some aspects, but not necessarily, you know, where I wanted to spend, you know, the last 20, 30 years of my career. So I got to the point where I was in my early 40’s, and that's kind of a natural time to say, are you going to do it on your own or not? Or, you know, just given the culture of Forstmann Little I went off on my own. And fortunately things have worked out very well. But it could have been different if it was the greatest culture. And it was different, you know? I'm trying to build a culture here where people don't have to face that sort of decision. And again, Ted was a fantastic guy and a wonderful mentor. And he's the one who told me, if you don't lose money, it's how much you're going to make. And I learned to talk to him. But it made sense to go off and do my own conversations really focused on private equity, career advice, leadership.

Adam: But so much of your time, energy, and passion is dedicated outside of the world of business and focused on education and education reform. And I don't know how much listeners know this, but you're the founder and CEO of Modern States Philanthropy dedicated to making college more affordable and accessible for everyone. And you're the founder of the Klinsky children's centers, which has helped thousands of underprivileged kids in New York and has been replicated in Miami and is actually the team charity of the Miami Heat, which I won't hold against you as a Laker fan, because we did beat The Heat in the finals last year.

Steve: But you didn't beat the children's centers?

Adam: We did not and I don't know that we can beat The Heat now. But the question I have for you is given your deep and incredible background in philanthropy, what can anyone listening to this conversation do to pay it forward?

Steve: Well, I mean, I think it all gets back to what we're saying about how to do things in business. Whether I view business, philanthropy, any form of problem solving as essentially an identical practice, you know, and I got involved with philanthropy, just because I do view my business life as being socially positive and meaningful and good. But you know, you want to have a life that you're happy about when you look back at why I didn't waste my years, I get good stuff. So the first thing I did was after my brother Gary- I had a brother who was seven years older than me. When I was in kindergarten, he was a seventh grader who cared for me after school and was really a big influence on my life. He had a genetic weakness in his system and died when he was age 29. And I was like 21 or 22. So when I became a partner on Wall Street I was doing fine. I started to create these after school centers in his memory back starting in ‘93, that are still running now. And I got to see education firsthand, that even though we were in the neighborhood, we had the lowest scores and the highest murder rates and everything terrible about, you know, you can think of statistically, the kids were great. The public school teachers were great. They were wonderful people, which led me to do other things in education, including Modern States, which are free online courses. So we have 270,000 people who have used our courses, you know. And we pay the exam so they can get credit bearing exams from college. But the lesson is, you know, whether it's a charity or a business project, it's just roll up your sleeves, think about what you want to accomplish, and then start to try to come up with a plan or join someone else who has a plan and do it, you know? And then it will lead to you learning how to do it and doing more of it. So there's no magic answer, except do it.

Adam: Just go and get after it.

Steve: Yeah, and come up with a vision of what you want to do. Every time there's an obstacle go, well, why don't I try this to get around that though? Well, then there's more than one. I try this. And then, you know, if you see a path, you can take it. If you don't see a path and keep thinking about something until you do see a path, but it whether it's business, or charity or whatever, it's just working together with people to solve a problem. And, you know, Modern States is absolutely not for profit, but it's a strategy to solve a problem, which is no different from what we do in private equity, where, you know, we see problems and we solve them. So to me, it's all the same.

Adam: Steve, thanks for all the great advice, and thanks for being a part of Thirty Minute Mentors.

Steve: Well, thanks so much for your show is great, and thanks for having me on. I appreciate it.


Adam Mendler is the CEO of The Veloz Group, where he co-founded and oversees ventures across a wide variety of industries. Adam is also the creator and host of the business and leadership podcast Thirty Minute Mentors, where he goes one on one with America's most successful people - Fortune 500 CEOs, founders of household name companies, Hall of Fame and Olympic gold medal winning athletes, political and military leaders - for intimate half-hour conversations each week. Adam has written extensively on leadership, management, entrepreneurship, marketing and sales, having authored over 70 articles published in major media outlets including Forbes, Inc. and HuffPost, and has conducted more than 500 one on one interviews with America’s top leaders through his collective media projects. A top leadership speaker, Adam draws upon his insights building and leading businesses and interviewing hundreds of America's top leaders as a top keynote speaker to businesses, universities and non-profit organizations.

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