January 23, 2012
Interviewed by: David Snow
Video Clip
Login to view full video

Proud of Private Equity

The founder of private equity heavyweight New Mountain Capital is proud of his firm’s brand of private equity and he has the data to back it up.

Beginning in 2009, Steven Klinsky instructed his team to regularly compile detailed data about portfolio-company job creation, salary levels, and research & development spend. The exercise, says Klinsky in an exclusive interview with Privcap, was motivated by a desire to be “on the record about our business… We’ve always thought that private equity is a socially positive activity.”

 

The founder of private equity heavyweight New Mountain Capital is proud of his firm’s brand of private equity and he has the data to back it up.

Beginning in 2009, Steven Klinsky instructed his team to regularly compile detailed data about portfolio-company job creation, salary levels, and research & development spend. The exercise, says Klinsky in an exclusive interview with Privcap, was motivated by a desire to be “on the record about our business… We’ve always thought that private equity is a socially positive activity.”

 

David Snow, Prvicap: Steve, welcome to Privcap.  Thank you for joining us today.

Steven Klinsky, New Mountain Capital: Thank you, David.

Snow: Your firm has really been at the forefront of a trend that’s just now really getting al ot of momentum in private equity, and that’s measuring the impact that your activities have on the broader society; jobs, the environment. I’m really interested to learn about how your firm does that.

So your firm regularly and systematically measures the impact that it has on its portfolio companies from jobs and even an environmental point of view. How did the idea of doing that come about at New Mountain Capital?

Klinsky: Well, we’ve always thought that private equity is a socially positive activity.  To own a business and work for that business and build the business is something that we think it socially good. After the financial market collapse in ’08, there was a lot of general anger about business questions, what does business do, what does private equity do, so with nobody asking us, we just wanted to be on the record about our own business. So starting in early 2009, I asked the team to say look, go back to the companies that we own, why we’ve owned them, and measure how many jobs we’ve added or created, how much we spent on R&D and those type of measures, so we could just be on record for ourselves what we actually do.

Snow: So specifically, what are you measuring? There are jobs and what else?

Klinsky: We measure how many jobs are added or created and any job losses, what the average salary for those jobs is, how much we spend on research and development, software development, and capex, whether we’ve ever had a bankruptcy, or we’ve never had a bankruptcy because we’ve never missed an interest payment. So those are the keys, which were just common sense ways to track that we’re building businesses, not destroying businesses.

Snow: What kinds of resources, systems, or people are necessary in order to do that on a consistent basis?

Klinsky: It is actually we think quite simple, so it wasn’t meant to be some giant project.  We ask each of our portfolio companies to pull the information together. We estimate it takes them five to ten hours because these are regularly tracked items. And then we put it together at our level, which maybe takes another 10 or 15 hours, and publish the statement. So it’s not a very time consuming effort.

Snow: Well, now that you’ve been doing it since, as you say, 2008, what have you learned about the impact that your investments have had on these areas that maybe surprised you or you found to be quite interesting?

Klinsky: Well, it didn’t really surprise us, but I just think it may surprise people who don’t have a good view of private equity. So for example, my firm, which is not the largest firm in the world, has added or created over 8,600 jobs not of any job losses.

Snow: Since?

Klinsky: Of the companies that we’ve owned. So these are all the companies we’ve owned since the firm started in 2000, but only for the period that we’ve owned them. So these companies, after we’ve sold them, have gone on to add I think 1000s of more jobs.

Snow: You’re not measuring?

Klinsky: We’re not measuring all the good stuff that happens after we exit. We’re only measuring what happens during the years where we’re actually owning the business and have a say over the business.

So I think it’s been about over 20,000 jobs in total of which 8,600 were added under our watch, or created under our watch. The median salary I think has been $55,000, which is very significantly ahead of the national average.  We had spent at the end of last year, at the end of ’10, close to $1 billion in R&D and software and capex. It will be a lot more this year.  And again, never had a bankruptcy, never missed an interest payment.

The number keeps growing over time, but I don’t think it’s a surprise. I think it just clarifies what we had kind of believed.

Snow: Now, your firm, New Mountain Capital, is known as a growth investor, which means you’re finding companies at a certain stage in their life, you’re being fairly light with leverage, or you don’t use leverage at all. Do you think that the results would’ve been different as far as job creation had you been more of a traditional buyout firm?

Klinsky: Well, there is something like 1,600 buyout firms in the country, or private equity firms in the country, so it’s like restaurants. You’re going to have some restaurants that are great in one and you may have another one that’s closed by the Board of Health. No one can speak for every private equity firm. Our style, because we think it’s both the best risk reward and something we’re proud to do, is to not over lever and weaken companies.  It’s to try to make companies stronger and to build new mountains in industries that we invest. So I think we have a particularly good style, but I’m sure that there are many other private equity firms who can make similar measurements and claims, and I just think it’s important for people to be on the record for how their own firm performs.

Snow: I think there was a study done that was in part sponsored by the World Economic Forum about private equity’s impact and job growth. It found that in many cases there’s a little bit of job loss because No. 1, some private equity firms tend to buy companies in need of a turnaround, and No. 2, there is leverage. Are you familiar with those results?

Klinsky: Yeah, there’s a variety of studies about private equity impacts generally. And there’s one that there’s a little bit of cut at the beginning, but once that cut is done, jobs are actually created even more rapidly. For example, my own firm was not part of that study, so we have an extremely positive story that wasn’t included in those numbers, and I don’t know what numbers they used and what they did. I think you could look at a lot of particularly growth-oriented private equity firms and think they’ve really done a great job for these companies.

Snow: Real quick, political question. Obviously we’re talking about private equity here, but obviously Mitt Romney’s run for the White House has placed a hot spotlight on the private equity industry. You must not be surprised or you must be very familiar with the kinds of questions and challenges that are being thrown his way, and the kind of negative image of the private equity guys, one who strips and flips a company.

Klinsky: Right. Well, I think it’s going to be important for Mitt Romney or Bain Capital to present the same sort of information that we are already presenting. We clearly started to present our information totally independent of any presidential race by somebody else. The same way any other business, whether it’s private equity or public equity, should be able to talk about what they’ve done for building businesses and helping society. Hopefully you’ll have a great story there, too.

Snow: Now, you said that one of the initial reasons why you decided to go through the exercise of measuring the impact that you’ve had on your portfolio companies is you wanted to be on the record and be upfront about how you invest and what the implications of those investments are. But are there any other benefits that you have found have come from that?  For example, are you LPs pleased to have this level of information?

Klinsky: You know it was interesting. No LP asked us to do it, and so we didn’t do it in response to an LP request. I think LPs are like any other good citizens of the world who want to have their money not just be high return and low risk, but also be used in the right way. So I do think they like it. It wasn’t a requirement or something they asked for, but I think everybody wants to be proud of where they invest and how they spend their time. And those who back up and allow us to build businesses, sharing the credit for that success.

Snow: You must be very familiar with a growing movement among investors, which is ESG asking their investments managers to kind of check that box, whether it’s substantive or some might claim window dressing. I’m wondering if you can talk about the effect that you think that this ESG program is going to have on private equity?

Klinsky: Well, ESG means different things to different people. So some people have formal principals, and they espouse formal principals. I think what really matters is substantively what have you done, so what do your companies do. I mean for example, our real social value is we have the we are saving the lives of the neo-natal infants and the critical care neo-natal places. We’re making software that helps society. We do all sorts of things as the actual products of our businesses. And then incidentally, when you’re growing businesses, it creates jobs, it helps society, and you want to show you’re not a polluter, you’re not wrecking society.

So I just think there’s just fundamentally good principals of citizenship, and whether you call it ESG or our has nothing to do with the ESG movement. What really drove it is I have four young kids at home and they say what do you do for a living dad, and I like to say well, we buy businesses, we make them better. It’s not what a great layoff we had today, son, or we liquidated that desk. So it’s more of just what I think business is about whether it’s private equity or not.

Snow: Have you been contacted by other firms who are interested in learning about how you set your program?

Klinsky: We’re very open to anybody. It’s not our job to proselytize other firms. For example, a year ago, I did join the Private Equity Industry Association, which changed its name to the Private Equity Growth Capital Counsel. I’m head of the growth capital wing of it. I’ve told them we’ll help in any way. If anybody wants to duplicate this effort, we will open the playbook and help in any possible way we can. I do think there are some wonderful stories of businesses being built by private equity firms, and it’s just important to get that message out.

Snow: And again, you mentioned that this isn’t a lot of work or necessarily a lot of effort, but why do you think other firms have not already gotten to where you’ve gotten as far as reporting on those numbers?

Klinsky: I don’t know. I think a lot of people never really thought about it. I went to law school as well as business school. I thought at one point in my life of being a constitutional lawyer.  ’ve always wanted to do things that I was proud of, and I am proud of private equity and certainly the way we do it, and so it was something I was sensitive to. I think maybe other firms will be more sensitive to it as time goes on.

Snow: Do you think that in five to ten years the public and policymakers will have a different view of private equity or whatever the term is used then?

Klinsky: Well, I mean to the extent they have a negative one and I hope they have a different view. I think one of the things that’s important is I think a lot of people in politics don’t realize that the company in their home district that they love so much and is doing so well is owned by a private equity firm. Like for example, we have a company down south that won Employer of the Year in the State of North Carolina. Now, the local congressman probably doesn’t know it’s a New Mountain Private Equity company. He just thinks of it as a really great company in his district.

So part of it I think is to connect the businesses that are actually in their home districts that they love and realize that those are actually backed and built by private equity firms.

Snow: And of course, a big mandate of the Private Equity Growth Capital Council is to try to get these GPs to reach out to the local politicians and make sure they’re aware.

Klinsky: So that they’re aware, again, that the company in their home district that’s adding jobs and that they think is wonderful is not Main Street versus Wall Street, but that what private equity is doing, in my opinion, is taking capital and business skill and bringing it to Main Street. And rather than being in just one industry, which most people only are good in one industry, we’re supposed to be good in 20 or 30 different industries over a 10 year period. And if you can do that again and again and again across industries, I think that’s a pretty high form of business. And so I think a lot of this is just getting people to know what the facts are.

Snow: One more quick question. You’re measuring job creation, you’re measuring R&D spend. What else do you think private equity firms, such as yours, could be measuring, or could be tracking that would be useful?

Klinsky: Well, I mean obviously one of the major things we do is produce very significant gains to keep the pension fund alive, to pay the retirees when they retire, to build the college endowment, that’s always been tracked very carefully. So the returns we generate, the losses we avoid has already been tracked. And then the fact that we’re doing it in a socially positive way is the other element of that. But fundamentally, people have always tracked are you keeping the pensioners, keeping their benefits going or not.

Snow: Well, Steve, thanks so much for joining us today, and I hope we can have you back as we continue to talk about the impact of private capital.

Klinsky: Well, thank you, David. Thanks very much for having me.

Register now to watch this video and access all content.

It's FREE!

  • CHOOSE YOUR NEWSLETTERS:
  • I agree to the Privcap terms of use and privacy policy
  • Already a subscriber? Sign In

  • This field is for validation purposes and should be left unchanged.