Dealmaker Steven Klinsky had a front-row seat to the most dramatic takeover drama Wall Street has ever seen: the merciless, multibillion-dollar battle for control of RJR Nabisco.
From that battle in the 1980s, he learned a formative lesson: Stay away from the highly leveraged takeovers orchestrated by reckless debt junkies. The results were a quiet success.
His New Mountain Capital has focused on building mid-cap companies in predictable industries using modest debt. Returns have been robust and investors are rewarding the results: the New York-based group has raised $15.4 billion for its seventh buyout fund, exceeding the $12 billion target set last year – marking a recent breaks the trend of poor fundraising across the sector.
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 have fallen short of their targets.
It’s part of a rare successful streak in recent years among buyout groups that deviated from pursuing peak valuation deals during 2021’s frenzied markets and instead consistently returned money to investors.
“I am against the old private equity model of 40 years ago, where people thought you borrow as much as possible, play golf and then see within five years whether it all works,” Klinsky said in an interview with the Financial Times.
The group is known for its ability to grow small companies in sectors such as healthcare, software and manufacturing into market leaders. He does this by introducing his products to new markets or by making acquisitions.
“New Mountain’s judicious use of leverage and focus on building businesses in faster-growing parts of the economy have insulated the firm from the harshest impact of the Federal Reserve’s rate hikes,” said Maxwell Snyder, vice president of alternatives at NewEdge Wealth, an investor in the firm’s funds.
Fundraising for the private equity sector slowed dramatically in 2022 as interest rates rose rapidly and public equity valuations fell, causing large investors to become overexposed to private assets and pull back from investing in new funds.
The industry’s challenges have been compounded by a slowdown in dealmaking and initial public offerings, making it difficult for PE groups to exit their investments even as public markets soar to new highs. In 2023, buyout firms distributed the smallest amount of cash relative to what they asked for from investors since the 2008 financial crisis, according to Bain & Co.
However, New Mountain has returned more capital than it invested in recent years. Since January 2021, the company has sold more than 20 businesses, returning more than $10 billion in cash to its investors thanks to blockbuster deals like Signify Health, a healthcare IT company.
The 2017 buyout fund returned 1.16 times what investors committed by the end of 2023, making it the rare fund that year to return excess money to investors, according to documents published by public pension funds. When the fund’s remaining unsold investments are included, it generated a profit of 2.4 times.
New Mountain’s assets under management have more than doubled to $55 billion since 2018, when Klinsky sold a minority stake in the group to Blackstone, cementing his billionaire status. The investment allowed him and his partners to invest $1.4 billion in their new fund. It has also given them the financial leverage to remain private and resist partnering with a larger asset manager, Klinsky added.
A partner in his early 30s at Forstmann Little, an early pioneer of the $4 trillion private equity industry, Klinsky became a top lieutenant to Ted Forstmann as the prolific financier explored a bid for RJR Nabisco. It was the seminal deal of the go-go 1980s, described later in the book Barbarians at the gate.
Klinsky played a memorable role in the saga.
Ross Johnson, RJR’s CEO, had approached Forstmann about working together as a “white knight” to counter a takeover attempt led by KKR. After hearing Johnson’s pitch, Forstmann consulted Klinsky, a trusted number cruncher, to see if it was workable. “I think he is completely insane,” Klinsky says in the book.
Forstmann never bid on RJR, which was sold to KKR for $29 billion but quickly became an emblem of the private equity industry’s hubris as it struggled under the crippling weight of takeover debt.
When he left Forstmann Little in 1999 to start his own private equity firm, Klinsky decided on a different approach.
Many of the companies New Mountain buys are family-owned businesses that have never made an acquisition or set up operations outside the US. In many deals, New Mountain forges new business strategies.
This style has helped the company earn huge windfalls at a time when many rivals are facing an industry reckoning.
In 2017, New Mountain took a step toward so-called “value-added care,” in which 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 the company to CVS for $8 billion.
It has also had success with technology investments. Klinsky’s firm acquired a small logistics software company called RedPrairie in 2010 for $550 million. Under new management, the company has been planning acquisitions and building artificial intelligence tools that have made it a leader in identifying supply chain bottlenecks. In 2021, it sold the renamed company, Blue Yonder, to Panasonic for $8 billion, netting more than $5 billion for its investors and employees at the company.
Another big windfall was Avantor, a pharmaceutical chemical company that New Mountain acquired from Mallinckrodt in 2010 for less than $300 million. Klinsky’s company pushed Avantor into specialty chemicals that yield higher margins. In 2019, it listed Avantor, which now trades at a valuation of $15 billion. New Mountain has made profits of more than $3 billion, according to the FT’s calculations.
Klinsky said he prefers to invest partly in these mid-market companies because they offer much greater growth opportunities for his 200-plus dealmakers and consultants.
“[A] A $500 million company might be a leader in a key niche industry, but there are so many things management hasn’t done. . . If you’re a $10 billion company, you’ve probably done almost everything that was smart to do,” he said. Such companies are easier to sell to corporate buyers and other acquisition firms, he added.
Although private equity is under pressure from the slowdown in dealmaking, Klinsky does not see an impending decay in the sector. He said the industry has become more professional with less indifferent capital structures.
“I don’t see a hard landing or crisis in private equity,” he said. “The companies are much less leveraged than before. In 1981, a buyout had 19 parts debt and only one part equity. So people threw away the keys to bad deals.”