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funds of funds specialGetting access in ventureland

Privately SpeakingSteve Klinsky dives deep

RussiaSlow thaw

FundraisingThe end of Mowbray

Latin AmericaA region revisited

Private equity and politicsLone Star battles in Korea

US mid-marketWhy GPs are scared of BDCs

Investor relationsCommunication must improve

On the recordStephen King, CCMP Capital Asia

Plus:The Private Equity Annual Review 2006

The PEI European Mid-marketSupplement 2005

MARCH 2006 ISSUE 43

The global magazine for private equity

Cover(43).qxp 28/2/06 1:47 pm Page 1

Knowledge seeker Before Steven Klinsky’s New Mountain Capital makes an investment,it does a ‘deep dive’ into the mass of data surrounding its industryof interest. This strategy mirrors Klinsky’s own zeal for intelligencegathering and for making money from growth, not leverage. DavidSnow profiles one of Wall Street’s smartest – and nicest – investors.

photography by thomas bugarin

privately speaking

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page 40 private equity international march 2006

In the early 1990s, back when he was still single,friends of Steven Klinsky knew where to find him afterhours and on weekends – at the office.

“I’d come to work at odd hours and Steve was oftenthere,” remembers Tom Lister, a former colleague ofKlinsky’s at seminal New York private equity firmForstmann Little, and now a partner in the New Yorkoffice of Permira. “He’d often be sitting there with asheet of paper trying to sketch out his theory on some-thing. He’d become convinced of a point of view andpursue it in a fairly dogged way.”

When not engaged in deepanalysis at his desk, Klinsky,who became a partner atForstmann Little at the age of30, would often haunt thenearby Coliseum Books onWest 57th Street, searching formaterial to feed his voraciousreading appetite.

The pursuit of knowledge hascharacterised almost everyaspect of Klinsky’s life, butmost manifestly it has led himto investment success, bothd u r i n g h i s t e n u r e w i t hForstmann Little, where heplayed a leading role in some ofthat firm’s best deals, and morerecently at the helm of hisgrowing private equity firm,New Mountain Capital.

Today, Klinsky is confidentthat his firm is ideally struc-tured and staffed for success.Limited partners, who haveswarmed into New Mountain’sfunds, clearly agree – yet another example of Klinsky’scalculations paying off in a big way.

deep dives

One of New Mountain’s secrets to success may be theresult of a fairly rudimentary impulse on the part ofKlinsky – he tries to hire people that are like himself.They must excel at research and intellectual rigor, butthey must also be “nice”, he says, “people who can worktogether.” Klinsky alludes to Goldman Sachs in the early1980s as a culture he’d like to emulate at New Mountain.

Klinsky is very smart and also very nice. He habitu-ally walks visitors to the elevator bank outside theglass doors of New Mountain’s offices and waits withthem until they are on their way back down the 49

floors to the lobby. He is quickto tell stories about his fouryoung children. A photogra-pher who recently climbed upon a delicate chair in Klinsky’soffice to get a shot madeKlinsky nervous, but notvisibly annoyed.

“He is a very, very solidguy,” says Lister. “People reallylike to work for him.”

But just being nice doesn’t cutit at New Mountain. Klinskysays he hires people who “havea real focus on intellectualhonesty” and who have thestamina for what Klinsky calls“deep dives” – very thorough,often years-long data collec-tions and analyses of targetedbusiness sectors. Klinsky saysthat given the choice between aprofessional with deal experi-ence, and one with stellar

research skills, he’ll pick the research pro every time.“By research, I don’t mean sitting in the library,” hesays. “I mean really being able to understand companiesfundamentally and in a very deep way. That comesahead of deal doing.”

Each year, Klinsky and his team identify seven or eight“new ideas” that will get the deep-dive treatment. Theseideas must have several attributes that fit through theNew Mountain filter for an attractive business sector –its strongest companies do well within any type ofeconomy, they are high growth, they have strong freecash flow, and they have high barriers to entry.

For example, by the time New Mountain waslaunched in early 2000, Klinsky had become enam-oured of the for-profit education sector in the USbecause of its relative immunity to recessions and

“I’d come towork at odd

hours and Stevewas often there.He’d often be

sitting there witha sheet of papertrying to sketch

out his theory onsomething.”

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march 2006 private equity international page 41

potential for explosive growth, thanks in part toAmerica’s growing wage gap between workers withhigher education and those without.

Over the course of a year, Klinsky, Steffey and asmall team of New Mountain researchers confirmedtheir thesis, built relationships with education andstudent loan regulators, and created a database of morethan 4,000 properties in the space. “I think it’s still thebest database out there,” says Klinsky with pride.

New Mountain brought on board Scott Steffey, thevice chancellor of the State University of New York, asan executive in residence. The firm later brought inRob Silberman, the former president and chief oper-ating officer of CalEnergy Company, as a second exec-utive in residence.

At the end of 2000, New Mountain had settled onone company – Strayer Education, a publicly tradedoperator of graduate and undergraduate degreeprogrammes with campuses in and around the

Washington DC area. New Mountain invested $110million (€92 million) in the form of convertiblepreferred securities convertible at $26. A co-investor,DB Capital Partners, invested $35 million. Silbermanbecame and remains CEO of Strayer.

By 2005, Strayer had grown from 14 to 35 campusesand seen its revenue double. The firm’s share pricerocketed to more than $100 and New Mountain hasreaped approximately $500 million in cash profitsfrom the sale of its preferred stock. New Mountainsold the last of its Strayer holdings in August.

In a conversation with areporter soon after theStrayer deal closed in 2001,Klinsky responded to aq u e s t i o n a b o u t o t h e rp r i v a t e e q u i t y f i r m sinvesting in the for-profiteducation space by saying,“Well, we already did theStrayer deal, and that wasthe best of the lot.”

New Mountain has aneven bigger hit in NationalMedica l Hea l th Card ,another publicly tradedcompany, which managespharmacy benefits. A NewMountain team spent threeyears examining the phar-macy benefit managementspace before zeroing in onNational Medical at thee n d o f 2 0 0 3 . N e w

Mountain bought 55 percent of the company byinvesting $80 million in convertible preferred shareswith a 7 percent cash yield, convertible at $11.50.Following two strategic acquisitions identified by NewMountain, and a rebuilding of National Medical’sboard and management team, the company’s stock nowtrades near $30.

Klinsky calls 2005 the firm’s “best year ever” fornew deals, with a total of almost $500 million of equityinvested in Deltek Systems, a provider of software forproject-based businesses; MailSouth, a mailedmarketing company targeting rural and suburbanneighborhoods; and Validus Holdings, a Bermuda rein-surance platform led by Aquiline Capital.

going public

New Mountain’s success right out of the starting blockhas made it very popular with investors. At the end of

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page 42 private equity international march 2006

2004, the firm held a final close on its second privateequity fund, rounding up $1.55 billion but turningaway an additional $2.5 billion in LP demand. “Wereally didn’t think it was appropriate to take all $4billion,” Klinsky says.

In forming New Mountain, Klinsky gained an earlyconvert in the California Public Employees’ RetirementSystem, which not only backed his debut fund but alsoacquired a small stake in the carry of New Mountain’sdebut, $770 million fund. Klinsky was introduced tothe staff of the pension giant by CalPERS’ consultantsat Grove Street Advisors, who were aware of his trackrecord at Forstmann Little.

Klinsky says he is “agnostic” about fund size. Hesays the hardest part is finding talented people tomatch the dollars capable of being raised. “We can putout unlimited amounts of money,” says Klinsky. “Butthe question is, can we put out unlimited amounts ofmoney at our quality standards?”

Klinsky is a fervent believer, however, in the qualityof research that his firm produces, enough so that itpains him to miss opportunities just because New

Mountain Capital is primarily a private equity fund.Although Klinsky declines to discuss the topic, citingregulatory prohibitions, public filings and recentpublished reports reveal that New Mountain haslaunched a public markets vehicle called NewMountain Vantage – Klinsky’s first hedge fund, for lackof a better term.

In short order, New Mountain Vantage has raisedmore than $750 million to take long-term, concen-trated positions in public companies. The idea for thefund was first suggested to New Mountain in 2003 byCalPERS, which was eager to put more money behind“corporate governance” investing, where moneymanagers exert some form of transformational influ-ence on portfolio companies. The pension invested$200 million in New Mountain Vantage. The fund willtake advantage of New Mountain’s “deep dives” byinvesting in the stock companies that fit all of Klinsky’scriteria of an attractive opportunity, but where acontrol investment is not available.

Directly overseeing New Mountain Vantage are twonew managing directors, both recruited from Lehman

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Brothers. At Lehman, Andrew Wellington and DavidDiDomenico managed over $3 billion of publiclytraded institutional and mutual fund assets.

As yet, there are no plans for a London office, anAsia fund, or a real estate fund. “We’re not in the fundof the week club,” he says.

Klinsky, adds, however, that he expects to see NewMountain’s funds grow in size, and that given carefulplanning and the right set of people and circumstances,he wouldn’t shun geographic expansion.

Klinsky differs from most of his GP peers on anothertopic, too – leverage. Although he says he doesn’t wantto appear to “be on a soapbox” on the subject – acharge often leveled at his former boss, Ted Forstmann– he is fond of reminding investors, reporters –everyone – that his firm accomplishes its returnswithout much debt, if any. “Some people still thinkthat if there isn’t debt on the deal, it isn’t a privateequity deal,” he says. “We don’t think that debt andprivate equity are synonymous. We’re focused ongrowing the enterprise value of a company. If we can,

we’d rather make a very high return without debt, withless risk.”

Klinsky notes that neither Strayer nor NationalMedical were levered. In fact, Strayer now has $120million of cash on hand. He says that he isn’t againstleverage, and in fact notes that he was an early devel-oper of the dividend recapitalisation while working atGoldman Sachs in his 20s. But Klinsky’s personal viewon leverage seems to be that it isn’t sporting; it doesn’tmeet his rigorous standard for adding value: “Let’s saya company is worth $100 million and you take a $90million dividend out. You haven’t actually created anyreturn at all,” he argues. “You could have just startedwith $10 million of equity on day one. There’s nothingmagic to it. What I don’t support is shoving tons andtons of debt on a company and thinking you’re makingmoney.”

retail roots

Had history taken a different course, Steven Klinskywould likely have been an extremely successful retailer

of women’s clothing today. Klinsky’s grandfather,Albert Klinsky, founded a women’s clothing store inDetroit during the Great Depression. Albert’s, as theretailer was called, eventually grew to more than 100outlets under the management of Klinsky’s father anduncle. Steven worked in the stores as a teenager andexpected to stay in the family business, but Albert’swas sold in 1978, while the would-be retail heir was ingraduate school. (Many of the New Mountain dealpros also grew up in family businesses, a backgroundthat tends to instill a stewardship ethos that Klinskyhighly prizes.)

Klinsky tore through his schooling and quickly endedup a Wall Street star. He completed his undergraduatestudies at the University of Michigan after only twoyears and then earned a joint law and business degreefrom Harvard. At Harvard, Klinsky studied a then-emerging type of investment – the leveraged buyout.His interest was based in part on the thought that heand his father might purchase another business.

Instead, after graduating in 1981, Klinsky went to

Goldman Sachs, where he pursued LBOs for the firm.His work at Goldman drew the attention of ForstmannLittle, which hired Klinsky in 1984.

Forstmann Little was and remained during its longreign at the top of the private equity food chain a smallfirm. It was co-founded in 1978 by two brothers, Tedand Nick Forstmann, and Brian Little. Nick hadworked at Kohlberg Kravis Roberts, while Ted was alawyer and investment banker. Little was a formerMerrill Lynch banker.

The firm gained a great deal of attention on WallStreet in the 1980s for a series of leveraged buyouts,and was involved in the famous takeover battle for RJRNabisco. But the firm made its biggest dollar gains inthe 1990s when there wasn’t nearly as much leverageavailable. “The real breakthrough in the 1990s wasthat we started to focus much more on high qualitycompanies with what were then considered conserva-tive capital structures versus other firms,” says Klinsky.

One Forstmann Little deal in particular that enrichedthe firm, and in which Klinsky was a key player, wasGeneral Instrument Corporation. Forstmann Little

“We don’t think that debt and private equity are synonymous. We’re focused ongrowing the enterprise value of a company. If we can, we’d rather make a very

high return without debt, with less risk.”

PEI_43(master2).QXD 28/2/06 6:42 pm Page 43

invested approximately $180 millionin the maker of cable and satellitetelevision equipment in 1990. Nineyears later, the firm cashed out itsremaining shares, realising a totalprofit of $1.65 billion, or more thannine times its initial investment.(Current US Defense SecretaryDonald Rumsfeld, who was CEO ofGeneral Instrument from 1990 to1993, also did well.)

Some of the partners at ForstmannLittle had originally resisted the deal,put off by General Instrument’smany disjointed divisions. It wasKlinsky who pushed hard for it, anddid so based on his own analysis. A1993 article in Fortune magazinerecounted a confrontation betweenthe younger and older partner: “Onefoggy June night, Klinsky drove toForstmann’s house in East Hampton,New York. He demanded: ‘If we’renot going to buy this, what will webuy? It has everything we said wewanted when we raised money.’ Hespread papers on a table. ‘Lay thesenumbers against your rhetoric.’”

“Steve stayed after it for a longtime,” says Lister of the GeneralInstrument deal. “He was verydisciplined in how he did hisanalytics.”

Lister also points to a 1994 dealthat got away as further proof ofKlinsky’s uncanny analytic abilities –Western Union, a then-bankrupt wiretransfer company which, after aprotracted bidding war, was eventu-ally sold to Atlanta credit cardprocessor First Financial Managementfor $1.19 billion. “Steve was relentlessin going after [Western Union],” saysLister. “First Financial wasn’t going tolet us win. But Steve’s instincts wereright. It ended up being worth $10billion.”

Whether or not it was the resultof analysis or luck, Klinsky leftForstmann Little at precisely theright time. His departure came inJune 1999. On August 30, 1999,Forstmann Little announced a $1b i l l i o n P I P E i n v e s t m e n t i nMcLeodUSA, the first of two majortelecom investments that would

prove the undoing of an otherwisehighly successful firm.

Klinsky founded New Mountaintogether with Robert Grusky, aformer executive from the principalinvestment team of Goldman Sachs,and David Wargo, a well knownsecurities analyst and founder ofWargo & Co.

head and heart

Fostering the pursuit of knowledge isa personal mission for Klinsky asmuch as it is a business plan. Whilestill at Forstmann Little, Klinskyfounded what has become a majorafter-school tutoring programme forlow-income children in New YorkCity’s public schools. In 1999, Klinskyfounded Victory Schools, an educa-tion consulting group. Victory helpedestablish New York City’s first charterschool, or privately managed publicschool. Victory Schools now providesservices to 12 schools throughoutN e w Yo r k , D e l a w a r e a n dPhiladelphia.

Victory Schools is not yet prof-itable, meaning Klinsky has indirectlypropped up the operations of a dozenlower-income schools out of his ownpocket.

Klinsky now plays no golf, littletennis and, other than for his educa-tional interests, isn’t seen asfrequently on the social circuit asother GPs of his stature. Most of hisscarce free time is spent with family,he says.

The family, it turns out, may beKlinsky’s one valuable asset towhich he devoted almost no initialanalysis. According to a 1995 NewYork Times profile of his wedding,Klinsky first saw his future wifefrom a moving cab, immediatelyordered the driver to halt, and leaptout to introduce himself. Not thekind of due diligence that wouldpass muster at New Mountain, but adeep dive nonetheless. n

page 44 private equity international march 2006

“I mean really being able to understandcompanies fundamentally and in a very deep way.

That comes ahead of deal doing.”

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