Legends of Private Equity: Biggest Hits and Misses

Steven B. Klinsky

managing director, founder and chief executive officer, New Mountain Capital LLC

Business school: Harvard University MBA 1979, JD 1981, in joint business/law program.

How broke into private equity: Klinsky wrote his graduate law and business thesis on Kohlberg Kravis Roberts & Co.‘s 1979 buyout of Houdaille Industries Inc., the first LBO of a major public company.

Why a legend:

He was co-founder of Goldman Sachs & Co.’s Leveraged Buyout Group in 1981, where he helped execute more than $3 billion of transactions in the nascent industry. Klinsky joined Forstmann Little and Co. as an associate partner in 1984, and became a general partner in 1986. He helped to oversee seven private equity and debt partnerships totaling more than $10 billion in capital. He was the most senior partner of Forstmann Little outside of the Forstmann family for a majority of the 1990s. He left Forstmann Little in 1999, founded New Mountain Capital LLC in January 2000.

Words to live by:

“Risk doesn’t create returns. Making businesses better creates returns.”

Best investment:

Pre-New Mountain: General Instrument Corp., a leader in cable and set-top boxes, was acquired by Forstmann Little in 1990 for $1.5 billion, then grew to $15 billion valuation under Forstmann Little ownership. The company, which built a lot of the technology that supports today’s thousand-channel cable systems, was sold to Motorola in 1999. At New Mountain: Strayer Education Inc., a university system for working adults, was a 2001 investment and New Mountain’s first. The firm took the company from $400 million in revenue to $1.8 billion in a three year period, entirely debt free. The company increased its number of campuses, overhauled the management team, and accelerated online educational programs. New Mountain exited in 2005. Strayer is publicly traded today.

Biggest missed opportunity:

Klinsky had a handshake on a deal in the 1980s to acquire the MTV-Nickelodeon family of cable channels for $400 million, but they got sold to somebody else. His firm also had a contract in the 1990s to bring Western Union out of bankruptcy for $300 million. But the bankruptcy court called for an auction, and the firm lost to a higher bidder. Both companies are worth more than $10 billion today.

Biggest investment mistake: His companies have never had a bankruptcy, nor a missed payment. In the 1980s at Forstmann Little, Klinsky was buying more highly leveraged, lower growth companies based on price. The lesson was to go for higher quality companies and go for growth. That was the General Instrument strategy and the strategy at New Mountain.

Favorite business book: “Good to Great: Why Some Companies Make the Leap… and Others Don’t,” by Jim Collins.

Social media: No. But his firm does have a social responsibility policy for the firm and its portfolio companies, which have created over 7,000 jobs.

Plans to retire:


David Morgenthaler

founding partner, Morgenthaler

Business school: Morgenthaler became a commanding officer during World War II after receiving both a BS and MS degree in mechanical engineering from MIT and did not attend business school. However, he’s an advocate of the curriculum, especially in the areas of entrepreneurship and leadership, and has served on the advisory committees at business schools of Case Western, Carnegie Mellon and MIT.

How broke into private equity: Morgenthaler cut his teeth buying companies in the 1960s as the head of Foseco, a manufacturer of specialty chemicals backed by J.H. Whitney & Co. He started his firm, Morgenthaler Associates, in 1968 at the end of the first big wave of conglomeration in the United States.

Why a legend: For the first 13 years or so Morgenthaler invested his own money in upstart technology companies, often alongside co-investors. The Cleveland-based firm formed its first venture fund around 1981, raising $20 million from those same co-investors. “No one turned us down,” Morgenthaler recalled in a recent interview with Buyouts. In 1984 Morgenthaler brought on board Paul Brentlinger, a senior finance executive at Harris Corp., to begin buying small companies. Over the years the firm developed three main specialties–IT venture investments, life sciences venture investments and later-stage buyouts. The firm, with more than $3 billion under management, has backed more than 300 companies. Morgenthaler himself has served as a director, chairman or president of more than 30 companies. From 1977 to 1979 he served as the president and then chairman of the National Venture Capital Association.

Words to live by: Paraphrasing Warren Buffet, Morgenthaler said that when you back executives with an excellent reputation in an industry that has a bad reputation it’s usually the industry that ends up preserving its reputation. Pick opportunities that are doable, he advises. “There are some tasks that are too difficult to pull off for any executives.”

Best investment: That would be Manufacturing Data Systems, a computer-controlled tools company that Morgenthaler got into at 22 cents on the dollar in 1969 and sold for the equivalent of $64 per share 11 years later. Morgenthaler notes that the company endured “a couple of desperation financings” before hitting its stride. “Know when not to give up,” Morgenthaler advised. But, he added, “It’s very expensive never to give up.”

Biggest missed opportunity:

One of the firm’s partners argued for an investment in YouTube about six years ago. Other partners talked him out of it. “That was painful,” said Morgenthaler, although he points out it was “after I had gone emeritus.”

Favorite business book:

Morgenthaler has no ready answer, but he points to his long-time friendship with the late Sir John Templeton, the mutual fund pioneer, as a significant influence. For years Morgenthaler would have four or five lunches or dinners per year with Sir John. His philosophy, said Morgenthaler, was to eschew top-down views in favor of searching through a market for bargain-priced securities. If he couldn’t find bargains, he considered the market overpriced. Morgenthaler remembers his wife in early 2000 asking Sir John what he thought of stock prices (just as the Nasdaq peaked). According to Morgenthaler, he replied that he never saw a market so overpriced and that his U.S. investments consisted of Treasury bills and inflation-protected securities.

Retirement plans:

Morgenthaler, 91, still plays an advisory role at his firm, but the most recent fund that he was managing partner of was a 1995 fund, and he stopped serving on boards about 10 years ago.

Alan Patricof

founder, Apax Partners LP; founder and managing director, Greycroft LLC

Business school: Columbia business school, 1957

How broke into private equity: While working for a family office in the late 1960s,Patricof was involved in the startup of three private companies: Datascope Corp., Linn Broadcasting and New York magazine. The experience led him to realize that many family offices had a small portion of their portfolios in startup companies, without necessarily having the resources or desire to monitor them appropriately. He launched Alan Patricof Associates around 1970 to manage these assets on behalf of family offices.

Why a legend: During the 1970s Patricof led the evolution of his eponymous firm into a manager of institutional money. By the 1980s the firm had expanded into Europe, becoming one of the first U.S. venture shops to open offices in the United Kingdom, France and Germany. As the firm raised larger funds, it also began investing in later-stage deals, such as middle-market buyouts and, eventually, mega-buyouts. By the early 1990s, the firm was doing business as Apax Partners in Europe–a name adopted by the U.S. arm about a decade later. Today the firm has more than $40 billion under management, with 12 offices around the world. By the early 2000s, Patricof felt it was time to move on and get back to his roots doing venture deals. In 2001 he stepped back from operational duties at Apax Partners to focus on a small group of venture deals. In 2006 Patricof launched a new firm, Greycroft LLC, closing a debut venture fund of $75 million that same year. The firm last year closed on a second fund of $130 million. Patricof has also been involved in the formation of the Fanisi Venture Capital Fund earmarked for investments in East Africa.

Words to live by: “I always say, give me a talented entrepreneur with no product–I’ll take that any time over a product without good leaders.”

Best investment:

Could it be Apple Computer? America Online? Office Depot? Those were all Patricof deals, but he points to Cellular Communications Inc. as his best and “most proud” investment. Launched in 1981, the company became one of the first to acquire a cellular license through the FCC’s lottery process. An investment of $1 million turned into “many many millions” before he largely exited the business in 1994, Patricof said.

Biggest missed opportunity:

Starbucks. “When it was starting [1971] I was living in New York and I couldn’t understand how the world needed another coffee shop since we had them on every corner,” said Patricof. ” Obviously I was wrong.”

Favorite business book:

“Security Analysis” by Benjamin Graham and David Dodd. One of the lessons Patricof took from this book is that companies ultimately will be valued based on free cash flow and dividends. Keeping that in the back of his mind served him well during the height of dot-com madness back in the late 1990s. “We were victims like everyone else,” said Patricof. But the book “saved us from worse tragedies.”

Social media: Follow him @alanjpatricof

Retirement plans: Patricof, 76, has no plans to retire.

Wilbur Ross

chairman and CEO, WL Ross & Co.

Business school: Harvard University School of Business Administration, 1961

How broke into private equity: “1975, helping to restructure Federal Express while at New Court Securities Corp., the predecessor of Rothschild Inc.,” Ross wrote in an e-mail to Buyouts.

Why he’s a legend: Ross, 73, might be the most experienced and respected turnaround artist still generating headlines today. Just recently he turned heads when BankUnited Inc., a failed Florida Bank that his firm bought in 2009 alongside The Carlyle Group, Blackstone Group and Centerbridge Partners, filed to raise $300 million in an initial public offering. Previously, Ross generated great returns investing in the American steel industry, the Japanese banking market and the automobile industry. Before founding WL Ross & Co. in 2000, Ross honed his restructuring skills during a 24-year career at Rothschild Inc., where he advised creditors of such troubled companies as Eastern Air Lines and Texaco. In 2006, his firm became a part of Invesco Ltd, the publicly traded investment manager.

Words to live by: “I’d rather back a mediocre idea that was brilliantly executed than a poorly executed brilliant idea.”

Best investment: International Steel Group

Biggest missed opportunity: “Not starting my own fund sooner.”

Biggest investment mistake: “A European auto parts company that liquidated because the banks would not provide any further assistance even though we and the customers were willing to do so,” Ross wrote. “The moral is that when you borrow from weak banks, the decisions are not always made rationally.” (Ross declined to name the company.)

Favorite business book: “Biography of Georges Doriot, ‘Creative Capital: Georges Doriot and the Birth of Venture Capital,’ by Spencer E. Ante. He [Doriot] was my mentor at HBS.”

Social media: “Not a user.”

Retirement plans: “Only when it is no longer fun; not in the foreseeable future.”

Stephen A. Schwarzman

chairman, CEO and co-founder, The Blackstone Group

Business school: MBA from Harvard Business School ‘72

How broke into private equity: “I started working with companies in private equity in 1981, as an investment banker at Lehman Brothers, and proposed my first buyout there in 1982,” Schwarzman wrote in an e-mail to Buyouts. “I then started The Blackstone Group in 1985. We began raising our first fund in 1986 and closed with $850 million in 1987.”

Why a legend: Schwarzman’s career got off to a sizzling fast start, getting elected a managing director at Lehman Brothers by the age of 31. In the late 1970s and early 1980s, he worked in the investment bank’s M&A department, and in 1983 and 1984 he was chairman of the firm’s M&A committee. Together with Peter G. Peterson, Schwarzman founded The Blackstone Group with a balance sheet of $400,000 in 1985. They went on to close their first fund, an $800 million pool, in 1987. Today the firm, which went public in 2007, employs 1,300 professionals in 17 offices around the world, overseeing more than $100 billion in assets for public pension funds and other investors.

Words to live by: “The first decision in every investment involves preserving your capital.”

Best investment: “The best investment decision was starting Blackstone with my partner Pete Peterson,” Schwarzman wrote. “Our steadfast refusal to accept failure or rejection was what ultimately led to the firm’s success.”

Biggest missed opportunity: “Not convincing Larry Fink and his team at Blackrock to stay at Blackstone.”

Biggest investment mistake: “It is my experience that you can learn more from your mistakes than your successes if you take the necessary step of analyzing what went wrong,” Schwarzman wrote. “Losing 100 percent of the equity we invested in Edgcomb Corp. in 1989 was an early mistake that led to the transformation of our investment process at Blackstone. That failure caused me to re-evaluate how we made investment decisions and implement a more disciplined process that we have used to evaluate every investment decision since. We have depersonalized the process and added a great deal of rigor around the evaluation of risk.”

Favorite business book: “Daniel Yergin’s ‘The Prize,’ about how oil revolutionized the world. It tells the story of how some remarkable entrepreneurs effected a sea change in the global economy through the development of an exceptionally high impact industry. It is largely the tale of the secondary impacts and the advances across society that oil enabled.”

Social media: “I do not personally engage in social media but I stay abreast of developments and am fascinated by how it is changing communication.”

Retirement plans:

“I love what I do and have no plans to retire any time soon,” Schwarzman, 63, wrote.

Carl Thoma

managing partner, Thoma Bravo, LLC

Business school:

Stanford 1973

How broke into private equity:

“Spring of 1974 by joining First Chicago National Bank, a Chicago holding private equity subsidiary,” Thoma wrote in response to questions from Buyouts. “My first job consisted of looking for investment opportunities, doing due diligence and working with portfolio companies–the same things I am doing today.”

Why a legend:

Thoma began his career at First Chicago Equity Group before joining the late Stanley Golder in 1980 to create Chicago buyout shop Golder Thoma & Co. In 1984, with the addition of Bryan Cressey, the firm became Golder Thoma & Cressey, and eventually, with the elevation of Bruce Rauner to partner, Golder Thoma Cressey Rauner. In 1998, the partners split, with Thoma and Cressey starting Thoma Cressey Equity Partners, and Golder and Rauner starting GTCR Golder Rauner. Since then, Cressey has moved on to start the health-care focused shop Cressey & Co., while Thoma and Partner Orlando Bravo raised $822 million for their own fund for investing in financial services, education, consumer and distribution.

Words to live by:

1) “Time is the enemy,” wrote Thoma. “The longer an investment is held, the more difficult it is to achieve superior returns. Be decisive, act quickly and measure results.” 2) “Develop industry-specific expertise. Contacts, sector-specific knowledge, and a sense of industry history are keys to achieving timely success. Hire CEOs who know their industries.” 3) “Act before the deal closes. Do enough upfront research and negotiation to have performance and ‘best practices’ metrics, optimal organizational structure and other targets set in place. This makes it possible to grow the company from day one.” 4) “Worry, worry, worry. The time spent nervously pondering all possible negative surprises–and how to respond to them–is time well spent. Think ahead, plan ahead, and act on your ‘gut’ so as to prevent calamity.”

Best investment:

“Paging Network, which we built into the world’s largest paging company,” wrote Thoma, “and Global Imaging, where we started with one acquisition and 10 years later had completed over 50 acquisitions in the office copier business and then sold to Xerox for over $1 billion.”

Biggest missed opportunity:

“Being too conservative in getting out of many companies earlier than I should have because exit multiples continued to go up.”

Biggest investment mistake:

“Nerve Wire,” Thoma wrote. “We thought we would out smart the dot-com bubble by focusing on the people that provided infrastructures or the merchants that sold goods to the gold miners. Unfortunately when the dot-com melted down, the meltdown was so severe that even the merchants and infrastructure providers melted down as well.”

Favorite business book:

“Any of Jim Collins‘s books, which cause you to step back and look at management in the big picture.”

Social media:

“Occasionally I use Facebook for personal and family. Not business.”

Retirement plans:

“Why retire when you’re having fun? I currently have no plans to retire.”