The Exchanges

Q So once you had the idea that you wanted to be involved in owning businesses and private equity as you're coming out of business school, how did you grow into learning what aspect of private equity you wanted to play?

A Good question. Any aspect was probably my answer. And this comes back to and lessons learned in retrospect. I spent the better part of my first year at business school trying to get a job, literally sending out resumes. This is before email. So it's not just send an email. This is go to the research library, try to identify companies, find their names, figure out who the people are. And then you had to call them on the telephone. Got a okay summer job when I was in business school. Did not get an offer to return, and then spent my entire second year of business school interviewing, not exaggerating, probably had over a hundred phone interviews, 50 interviews, graduated from Harvard Business School without a job, and ultimately, in the late August of 1995, got a job in real estate private equity with a firm called Colony Capital in Los Angeles. It was a great opportunity. Hadn't been to Los Angeles once in my life. Said yes, took the job, and moved out to Los Angeles to begin my career. So yes, what private equity? Any private equity.

AI assessment note: “Any aspect was probably my answer.”

Q Then as you brought your experiences together, what did you crystallize as your strategy at Kinderhook?

A So when we raised the first fund, it was really buy value, back great managers, and grow. When the great financial recession hit in 2008, a lot of companies went through some very hard times. We had a portfolio of companies that also had some bumps in the road. We have never been big users of financial leverage. Our strategy has been to give our executive teams the flexibility to grow and invest. So as a result, you leverage that three times, you lose half of your EBITDA, you're at six times, and you can survive. If you leverage that six times and you lose half your EBITDA, you're at 12 and you're bankrupt. So we started taking advantage of those over leveraged situations to strengthen our portfolio and came through the great financial recession with some very strong companies, and that led to a focus on consolidations. But just as importantly, we learned that you really needed to be experts in industries to be able to add value and create value in a private equity portfolio. And so we Quickly honed in on where we had the most experience, the deepest bench of executives in relationships, and focus on three core industry groups, and that's healthcare services, where Chris leads the effort, automotive, aftermarket, and light manufacturing, where Tom leads the effort, and then environmental and industrial services, which is what I do.

AI assessment note: “Quickly honed in on where we had the most experience... focus on three core industry groups”

Q I'd love to dive in a little bit on your most recent acquisition, which has been one of the more colorful names in the headlines. Stuart, why don't you walk me through this opportunity and how it came to pass?

A Stuart Healthcare Was a company acquired by a private equity firm in 2010 or 12 called Cerberus. They acquired a group of struggling hospitals and through a series of acquisitions over a 10 or 12 year period, built up a multi-state hospital, private, for-profit hospital company. And while they were doing that, like many health systems, they also acquired the providers in those communities as part of their ownership. So they had both a hospital system, Florida, Arizona, Western PA, Massachusetts being the biggest, where they had hospitals and a network of providers. Over the course of the last several years, Cerberus sold the business through a leverage recap, and that leverage on the businesses with a lack of reimbursement ultimately led the business to file for bankruptcy. But in December of 23, Stewart, prior to bankruptcy, looked to sell their provider group. So they took all of their providers, put them under a basket of ownership called stewardship within Stewart and tried to sell it. We looked at that opportunity. We bid to acquire those assets. United Healthcare ultimately agreed to acquire those assets for eight hundred fifty million dollars, and in May, Stewart filed for bankruptcy. Everyone thought that United was going to proceed with the acquisition of the stewardship hospitals at this eight hundred fifty million dollars, and right around Memorial Day, it began to l…

AI assessment note: “We got called back in early June of 2024. If we were still interested”

Q What was your respective paths from those initial jobs to finding your way into what Kinderhook's become?

A Started my first job out of college with Morgan Stanley in their mergers and acquisitions group. This was the early nineties and worked awfully long hours on lots of transactions. I think what woke me up to private equity, we had pagers back in that day, and the assignments associates would page you to call them to get an assignment when something came up. And one Friday, six o'clock, right on time, The pager goes off. Oh, so shit. Walked onto his office. He says, Rob, KKR wants to do a buyout of Quaker Oats. We need you to put together this analysis, full comps, DCF, precedent multiples, and we need it by Monday morning. Ok, so I spend pretty much the next 60 hours straight in the office finalizing this analysis, and no one ever asked for it. What I realized at that moment is that some enterprising young man was on his way to the Hamptons, had a brain fart about taking Quaker Oats private, and called Morgan Stanley, and I worked all weekend while he was having fun and going to parties and nice dinners, and when he came home on Monday, he probably had some new idea from some interesting conversation he had over the weekend in the Hamptons, and I said, geez, I like to be on that side of the business. I've worked down at Salomon Brothers, down at Seven World Trade, and Salomon at the early nineties, I was in training when the bond scandal hit, and the cadre of senior professional…

AI assessment note: “Started my first job out of college with Morgan Stanley in their mergers and acquisitions”

Q How do you think about what success looks like in this investment?

A Well, success here will be one, improves quality scores. So we will drive up the KEDIS scores, STAR scores across our network that will be tangible and it'll be seen. It's one of the metrics. These are the state, local, federal government standards where they measure quality. And our goal is always starts with quality. Two will be patient population growth, so census growth for our providers. If we can get their census from taking care of, I'm just making up numbers, a hundred patients to a 150 patients on their patient panel, that means we have broader reach and broader access to the community, and then growing those providers, because ultimately, again, it's a free market. Providers choose. Providers that are with us, they can quit. They can go across the street, and if you're in Massachusetts and go work for Beth Israel or Mass General, they don't have to work for stewardship. They choose to work with stewardship because of being good partners. So that network in the last 18 months has shrunk. People have left and chose to leave stewardship because of the leadership, bankruptcy, whatever. Our success will be growing that network and having people be choosing our business going forward. So those will be the metrics of success and it'll be tangible in patient experience, provider satisfaction, and ultimately the financial success of the business.

AI assessment note: “success here will be one, improves quality scores... Two will be patient population growth”

Q Rob mentioned you always thought you were going to work together. At what point in time did you guys come back to working together?

A The conduit in this was our Harvard Business School suite mate, Tom Tuttle, who's our third founding partner of Kinderhook and has been a great friend for 30 plus years now. Tom was an entrepreneur as well, started a group called Global Emerging Markets. They were a broker advisor, early days of the pipes business, and Tom found a number of small investment opportunities as a result of his business model of looking to find small cap Public companies to make private investments in. Some of those public companies had subsidiaries and divisions that ultimately were worthy of acquisition, and Tom called Chris and I and said, hey guys, I have an opportunity. What do I do? You're in private equity. Help me figure out how to buy this business. That was the genesis of Kinderhook. We lend Tom some relationships on the lending side, on the legal advisory side, And Tom pulled together a couple of small transactions in the late nineties. He bought the fire troll aerial fire retardant business from early industries, small deal. He passed the hat around his friends and family, raised two million dollars of equity capital to buy that business in 1998. Chris and I collectively put 75,000 dollars into that, which was all the money in the world for us. And it turned out to be a home run. Tom had, over the next three, four years, put together four more small transactions, and that ultimately beca…

AI assessment note: “raised two million dollars of equity capital to buy that business in 1998.”

Q How do you think about the return on investment in those investments you'll be making in the business when it's already a low margin business?

A That's a great question. Where the leverage in the business comes from is from scale. So where the incremental margin is what's known as full risk contracts, this value-based care, people have heard this term floated around. The reason that value-based care works, it's because it provides alignment between the patient and the provider. So that's the purpose of value-based care. It's something that the government has talked about Accountable care organizations. That's a government incentive program to create patient provider alignment. MIPS was another one. DCE was another one. There's multiple programs over the last 15 years that the federal government CMS has implemented to create patient provider alignment. Very few of them have succeeded. Value-based care is the effort really of the market to do exactly that. And the reason it makes sense is because ultimately as a provider, by taking risk, You put yourself in the position and think about primary care where you're trying to make sure that the patient is taking care of themselves before there's a billable event. So sharing in the savings of that cost is what value-based care is. It creates an economic alignment between the patient's health and cost containment that allows providers, doctors to make more money. And those shared savings go across the network that allow us to invest in the growth of the networks. And the more of…

AI assessment note: “Where the leverage in the business comes from is from scale.”

Q All right, guys, I want to make sure I get a chance to ask you a couple of closing questions so we can go with both of you. Hopefully it won't be the exact same answer. We'll see. What is your favorite hobby or activity outside of work and family? Chris, why don't you go ahead?

A I love to fish, and fishing is fun. It takes talent. It's a little bit mysterious. You don't really know what you're going to pull up. You don't know if you're going to be successful. You don't know what factors affect your success. Is it weather? Is it me? Is it the bait? So do a fair amount of fishing, both fly fishing, saltwater and freshwater, and offshore fishing as well, but really enjoy the fly fishing and casting for fish. Trolling for fish can be fun, but it's really more fun to actually Fish and be out there, and it gives you time away. You're on a river, you're out on a boat, you're away from your phone, you're away from a big group of people, so it's a real change from what we're doing or I'm doing every day. Same answer.

AI assessment note: “I love to fish, and fishing is fun.”

Q What do you think works in making investment decisions when you clearly have a partnership from birth that's not going away anytime soon?

A Ultimately, you can't blame the other person when things don't go well. And at Kinderhook, I believe one of the biggest reasons we've been successful and had the stability of our team, we've done bad deals. We're not immune from bad deals. It's because we have done the bad deal. IE the firm, and it's our responsibility to fix it. If there's a pattern of laziness, a pattern of lack of concern, a pattern of just poor decision-making over years, we have fired some people over the 20 years that we've been doing this, but from a culture of accountability, hey, we're accountable for the deals, and when the investment committee, which is Tom, Rob, and Chris, but it's the firm, because we all have ownership, we all have carry, we make that investment, we own it, and it's our job to make sure we have the best outcome, we grow the business, and I think That mentality of shared responsibility, shared accountability, that Rob and I, that's our life. Like it or not, judge it or not, people look at us as one. It's the circus show. So I think those are some of the strengths that come from the circus.

AI assessment note: “That mentality of shared responsibility, shared accountability, that Rob and I, that's our life.”

Q So outside of being attached to the hip in these jobs, what were you guys like growing up together?

A Very much your stereotypical identical twins. Left-handed, I'm right-handed, we are mere twins. You do become a bit of the sideshow, and our friends had great fun asking us to switch classes. Can you go take your brother's test? Ok, no one ever really knew. Switch on the girls. Ok, sure, that's fun for you guys. You do become pretty tight. Rob and I, we shared a bedroom for 19 years, we were roommates for 26 years. So Donald and we obviously grew up together. We went to college together, played sports together, and ended up when we moved to the city and took our banking jobs. We were roommates in the city and then roommates when we returned to business school. So we have been 26 years, so the real separation anxiety occurred when we were adults. Maybe it never sank in. Now we live about eight miles apart and our kids pretty much grew up going to the same school. It's a unique thing. I think it's a real asset. It's something that we appreciate That our firm and our team appreciates. There's pros and cons, but one of the things that we talk about a lot is consistency. Despite the fights, we're brothers like any other brothers we fight. The stability and the foundational core values of what we're trying to achieve, those things don't change, and I think it's been very helpful to us over the course of our careers. Our grandmother, when we were born, looked at us and said to our mot…

AI assessment note: “Very much your stereotypical identical twins... we shared a bedroom for 19 years”

Q As you describe that value change, the system's not great. Each of these three important buckets aren't making a lot of money. How do you think strategically about where you can invest so that you can make attractive returns in a system that is fairly unwieldy?

A The market of today is really around providers because it gets back to there aren't enough doctors to service all the patients that now have access to healthcare. So introducing technology to help scale what a doctor can do by freeing up their time to focus on patients as opposed to paperwork is part of what leverages costs, as well as what people call mid-levels. So nurse practitioners, PAs, physician assistants, People that are not trained to hold a medical degree, but have training to deliver basic healthcare needs and can serve patients so that doctors can stratify their delivery of healthcare by hiring mid-levels, and they can see the sickest patients in triage, and bringing those resources and scaling doctors is a great opportunity, and that's something that you see smart practices and private equity, that innovation, understanding how to work with the payers to make that billable, et cetera, is all very important. People want healthcare, but they don't always think about that it has to be paid for, and the billing system and the payment system is a big part of it. Another big area of investment is in revenue cycle management and the collection system around healthcare.

AI assessment note: “The market of today is really around providers because it gets back to there aren't enough doctors”

Q So if you break each of those down, the concept of buying value, how do you go about, in a very competitive market, trying to find opportunities where you can buy things cheaply?

A We definitely want to buy value, but I would say it's more about buying good platforms, and as Rob continues to reiterate, invest in people. So we always say that we invest in people, not in companies, and we don't buy companies that we don't believe we have a strong executive to lead and utilize our operating partner. When you think about private equity broadly, and it's a very competitive market, there's now tens of thousands of private equity firms in the United States, and everybody does, just like we talk about investment banking or anything else, the same thing. It's about the team, the general partner. Who's the team? How do they build that team? It's about deal flow. How do you find deals, opportunities to invest in? It's ever more competitive. And it's about operating partners. And every firm has operating partners and operating partner strategy. And Kinderhook's success from our vantage point is that it's how you operate in those three legs of the stool and how you be very successful with each of those legs of the stool. And it's intentional. So our team, a lot of great things about our team. The thing I think we're most proud of is that our team has been built from within. So everybody that's a managing director today has been with the firm and started as an associate has been promoted internally. We don't bring in lateral hires. Over 21 years that we've been in busi…

AI assessment note: “We definitely want to buy value, but I would say it's more about buying good platforms”

Q When you want to back management teams, how do you go about the assessment?

A 75, 70% of the time when we buy a company, we're putting in one of our operating partners as the CEO. The other 25, 30%, we're back in the incumbent management team. We will put our existing operating partners onto the board. We want to make sure there's that continuity and that training and that stability. And one of the great successes that we have had is that we have been able to keep our operating partners with us Over multiple deals, multiple companies, multiple funds. Over the course of our 20 years and eight funds that we've been doing this, we started inviting our operating partners who had some success to invest in our fund. If you look, the last two funds, operating partners invested a hundred million dollars. They're paying full fees, full carry. They believe in what we do, and they love being a part of our organization. So this is a real strategic asset, and I think a real difference maker in how we drive success

AI assessment note: “75, 70% of the time when we buy a company, we're putting in”