Trader Steven Klinsky had a front row seat to the most operatic takeover drama Wall Street has ever seen, the multibillion-dollar battle for control of RJR Nabisco.
He took away a formative lesson from that competition in the 1980s: stay away from highly leveraged acquisitions driven by debt junkies. The results were a quiet success.
His company, New Mountain Capital, focused on building mid-sized companies in predictable industries using modest amounts of debt. Earnings have been robust and investors are rewarding the results, with the New York-based group raising $15.4 billion in its seventh buyout fund, surpassing a $12 billion target set last year — and bucking a recent trend of poor fundraising across the industry.
New Mountain joins private equity groups such as CVC Capital Partners, Clayton, Dubilier & Rice, Warburg Pincus and EQT that have exceeded their fund targets at a time when many rivals are falling short of their targets.
It’s part of a rare run of success over the past few years among buyout groups, which have avoided making top-of-the-line valuation deals during the frenzied markets of 2021, instead consistently returning cash to investors.
“I preach against the old model of private equity from 40 years ago, where people think you borrow as much as you can, go play golf and see if it all works out in five years,” Klinsky said in an interview with the Financial Times.
The group is known for its ability to build small businesses in industries including health services, software and manufacturing into industry leaders by advancing their products into new markets or identifying acquisitions.
“New Mountain’s judicious use of leverage and its focus on building businesses in faster-growing parts of the economy have insulated the firm from the onslaught of Federal Reserve rate hikes,” said Maxwell Snyder, vice president of alternatives at NewEdge Wealth. investor in their funds.
Fundraising for the private equity industry slowed dramatically in 2022 as interest rates rose rapidly and public equity valuations fell, causing large investors to overexpose to private assets and stop investing in new funds.
Challenges in the industry have been compounded by a slowdown in deal-making and initial public offering activity, making it difficult for PE groups to exit their investments even as public markets hit new highs. In 2023, buyout firms distributed the lowest amount of cash they called from investors since the 2008 financial crisis, according to Bain & Co.
However, New Mountain has returned more capital than it has invested in recent years. As of January 2021, the firm has sold more than 20 companies and returned more than $10 billion in cash to its investors through successful deals such as Signify Health, a healthcare IT company.
Its 2017-era buyout fund returned 1.16 times what investors committed to through the end of 2023, making it the rare fund this year to return excess cash to investors, according to documents released by the public pension funds. After factoring in the fund’s remaining unsold investments, it generated 2.4 times profit.
New Mountain’s assets under management have more than doubled to $55 billion since Klinsky sold a minority stake in the group to Blackstone in 2018, cementing his billionaire status. The investment allowed him and his partners to invest $1.4 billion in their new fund. It also gave them the financial leverage to stay private and resist seeking a tie-up with a larger asset manager, Klinsky added.
A partner at Forstmann Little, an early pioneer of the $4 trillion private equity industry, in his 30s, Klinsky became Ted Forstmann’s chief lieutenant as the prolific financier studied the bid for RJR Nabisco. It was a key go-go deal of the 1980s, later recorded in a book Barbarians at the Gate.
Klinsky had an unforgettable part in the saga.
Ross Johnson, CEO of RJR, approached Forstmann to team up as a “white knight” to counter a takeover effort led by KKR. After hearing Johnson’s pitch, Forstmann consulted Klinsky, a trusted numbers provider, to see if it was feasible. “I think he’s completely insane,” Klinsky said in the book.
Forstmann never bid for RJR, which was sold to KKR for $29 billion, but he quickly became an emblem of the arrogance of the private equity industry, which was struggling under the crippling weight of its takeover debt.
When he left Forstmann Little in 1999 to form his own private equity firm, Klinsky decided on a different approach.
Many of the companies New Mountain is buying are family businesses that have never made an acquisition or built operations outside the US. In many stores, New Mountain is creating new corporate strategies.
This style has helped the firm earn large windfalls at a time when many rivals are struggling to charge in the industry.
In 2017, New Mountain pushed for so-called “value-added care,” where companies focus on preventive health measures to reduce costs. It acquired and merged two small companies in the sector for less than $500 million and renamed the group Signify Health. Last year, New Mountain sold CVS for $8 billion.
It has also seen success in technology investments. Klinsky’s firm acquired a small logistics software company called RedPrairie in 2010 for $550 million. Under new leadership, the company planned acquisitions and built artificial intelligence tools that put it at the forefront of identifying supply chain bottlenecks. In 2021, it sold the rebranded Blue Yonder to Panasonic for $8 billion, netting more than $5 billion for its investors and employees at the company.
Another big surprise was Avantor, a pharmaceutical chemical company that New Mountain acquired from Mallinckrodt for less than $300 million in 2010. Klinsky’s firm pushed Avantor into higher-margin specialty chemicals. In 2019, it went public with Avantor, which now trades for $15 billion. New Mountain earned profits in excess of $3 billion, according to FT calculations.
Klinsky said he prefers investing in these mid-sized companies in part because they offer far more growth opportunities for his more than 200 dealers and consultants.
“[A] A $500 million company might be a leader in an important niche industry, but there are so many things management hasn’t done yet. . . If you’re a $10 billion company, you’ve probably done almost everything smart there is to do,” he said. Such businesses are easier to sell to corporate buyers and other buyout firms, he added.
Even as private equity is under pressure from a slowdown in deal-making, Klinsky doesn’t see an industry dump coming. He said the sector had become more professional with less cavalier capital structures.
“I don’t see a hard landing or a crisis in private equity,” he said. “Companies are much less indebted than in the old days. In 1981, the buyout had 19 parts debt and only one part equity. So people threw away the keys to bad deals.”