Private Eye: New Mountain’s post-fundraise staffing shifts pay dividends

Michael Tyler, then senior investment analyst-private markets at Public School Employees’ Retirement System of Pennsylvania, wrote in a March 2013 investment recommendation that New Mountain Capital “has not lost a person at or above the VP level since the start of Fund II,” a vintage 2005 pool.

It was a noteworthy achievement for the New York buyout shop given the importance of team stability to partnerships that last 10 years or more.

But since the recommendation by PSERS staff to commit up to $100 million to New Mountain Partners IV LP, the firm has seen three top executives leave after their positions were eliminated, according to a source close to the firm. It was part of an effort to thin the firm’s top administrative ranks in favor of hiring and promoting more heavily on the deal-making side of the firm. In fact, New Mountain Capital has added about 21 people altogether over the past year, including two managing directors, and promoted nine, including two to the managing director role.

The shift appears to have paid off.  In a challenging market to find deals, our source close to the firm said New Mountain has already deployed about $1.5 billion of its $4.13 billion fund, which closed in the fourth quarter of 2014, in some seven transactions. According to Canada Pension Plan Investment Board, the fund had generated a 1.1x investment multiple as of June 30, which given the fund’s youth could easily translate into a healthy net IRR. “The team is bigger [and] stronger than ever, producing by far the best returns the firm has ever had,” our source said.

Since year-end 2014, at least four managing directors have left full-time roles (three due to eliminated positions, according to our source), although some maintained titles as senior advisers:

• Douglas Londal, formerly president and chief operating officer and now partner and head of private equity at MSD Capital;
• Adam Collins, formerly chief financial officer;
• Tom Morgan, formerly managing director and as of January managing partner at Greylock Capital Partners; and
• Paula Bosco, formerly chief compliance officer and chief regulatory counsel.

Londal and Bosco declined to comment on the reason for the departures. I was unable to reach Collins or Morgan in time for comment.

The timing was not ideal in one respect. Investors that committed to Fund IV would not have been able to anticipate the full extent of the changes.

“There’s always concerns when you’ve got turnover,” a second source close to the firm said. “I wouldn’t say that LPs are not concerned.” However, the source said New Mountain Capital has a “deep team of professionals,” has added to that depth recently with a number of new hires and promotions, and is off to a strong start with its fourth fund. The source said he saw no common thread to the departures. “I think it’s just a natural progression in the firm.”

In fact, New Mountain Capital made a deliberate decision to evaluate its staffing after closing its fourth fund — part of a strategic review designed in part to clarify responsibilities and increase accountability, our first source said. The review led to some fairly easy calls, such as consolidating from two chief financial officers to one. None of the departures triggered provisions in the limited partnership agreement, such as a key-person clause.

New Mountain informed investors of several staffing changes in a letter toward the end of 2014, while the firm also disclosed the transitions of Londal, Collins and Morgan this January in an amendment to its Form ADV brochure filed with the SEC. Our first source said most investors had “no reaction,” while a few indicated regret for the loss of a particular executive that they had liked.  Having seen the results several months later, our first source said, “LPs are the happiest they’ve been in my memory.”

All told, New Mountain Capital, which also manages a BDC and a hedge fund, lists about 17 managing directors on its website, along with 13 senior advisers, 20 directors and vice presidents, 15 associates and 24 professionals in finance, operations and compliance. Among the more recent additions and promotions:

• Alberto “Joe” Delgado joined this year as managing director from CCMP Capital Advisors bringing expertise in industrial, energy, business services and distribution deals;
• Joseph Hartswell joined this year as a managing director and chief compliance officer;
• Jonathan Waggoner joined this year as a director after serving as chief operating officer and chief revenue officer for online retailer Rue La La;
• Alex Abularach and James W. Stone III, who both joined in 2011, were promoted to managing director positions;
• Adam Weinstein, a managing director who joined the firm in 2005, now serves as sole CFO and also plays a role in marketing, compliance and investor relations; and
• Lloyd “Buzz” Waterhouse, former CEO of McGraw-Hill Education, joined as a senior adviser/operating executive.

Meantime, New Mountain Capital continues to produce that greatest of salve for any investor concerns about shifts in staffing: big distributions. Our first source said the firm has generated more than $2 billion in cash over the past year. Its $2.23 billion sale this summer of Fund III portfolio company SNL Financial to McGraw-Hill Financial generated a 6x multiple of its original investment and an IRR of more than 65 percent, as reported earlier.

Depending on the pre-sale holding valuation, the lucrative exit may well give a lift to the performance of the vintage 2007 Fund III, which as of March 31 was generating an 8.2 percent net IRR and a 1.4x investment multiple for backer California Public Employees’ Retirement System. Its vintage-2005 second fund was doing even better, having generated a 13.7 percent net IRR and 2.1x investment multiple as of the same date.

The firm has also been able to maintain a longtime point of pride: None of its portfolio companies has ever filed for bankruptcy or missed an interest payment.

Action Item: See performance data for Fund II and III here: http://bit.ly/1fCUgYC

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