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Speaker 1: This is Master's in Business with Barry rid Holds on

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Speaker 1: Bloomberg Radio.

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Speaker 2: This week on the podcast, I have an extra special guest.

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Speaker 2: Michael Fish is co founder and CEO of American Securities.

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Speaker 2: They're one of the older private equity firms around, been

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Speaker 2: in business since nineteen ninety four. They run over twenty

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Speaker 2: seven billion dollars in assets. If you're at all interested

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Speaker 2: in what it's like to run a private equity firm

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Speaker 2: that doesn't just buy up companies and parcel them out,

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Speaker 2: but rather partners with management, keeps the teams in place

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Speaker 2: on the companies they buy, and just facilitates the improvement

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Speaker 2: of the company, how it operates, how they're able to

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Speaker 2: bring expertise both in along with capital and whatever necessary

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Speaker 2: debt is, as well as a network of experts. Then

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Speaker 2: I think you're going to find this to be a

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Speaker 2: fascinating conversation. There aren't a lot of companies and there

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Speaker 2: aren't a lot of people that have the historical perspective

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Speaker 2: on the rise of private equity like Michael Fish does.

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Speaker 2: I found this conversation to really be intriguing, and I

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Speaker 2: think you will also with no further ado. My discussion

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Speaker 2: with American Security CEO, Michael Fish.

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Speaker 1: Thank you Berry. It's a pleasure to be here.

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Speaker 3: It's a pleasure to have you.

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Speaker 2: So let's talk a little bit about your background BA

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Speaker 2: in economics from Dartmouth. You get a Stanford NBA. What

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Speaker 2: was the original career plan? Were you always thinking about

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Speaker 2: going into finance?

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Speaker 1: The original career plan was to be employed to provide

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Speaker 1: a safety net for my mother and my two sisters. Right.

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Speaker 1: But if I had a plan as to how to

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Speaker 1: do that when I went to college, it was learn

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Speaker 1: as much as I could, as fast as I could,

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Speaker 1: and get a BA and then become an accountant and

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Speaker 1: a lawyer, because then I figured I could always be

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Speaker 1: deployed either managing the numbers or doing law and get

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Speaker 1: those two degrees.

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Speaker 2: That that's not the direction you ended up going though.

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Speaker 2: What was it that made you say, Hey, this finance

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Speaker 2: thing looks like it's fun and interesting.

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Speaker 1: Well, it's, you know, like life, it's a serendipitous series

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Speaker 1: of things. I met a terrific man at Dartmouth named

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Speaker 1: John Hennessy Junior. He was the ex deean of the

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Speaker 1: Tuck School, the business school at Dartmouth College, and I

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Speaker 1: took a freshman seminar with him because I needed a course,

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Speaker 1: and he became a mentor. And he once asked me,

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Speaker 1: when you just asked me? And I explained him, get

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Speaker 1: the CPA, get the law degree, I'd always be employable.

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Speaker 1: And he kind of said, hmm, I'm higher. Have you

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Speaker 1: thought about an MBA?

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Speaker 2: Really? That's very interesting, though, says the person at Tuck

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Speaker 2: Business School.

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Speaker 1: Right exactly. And he ultimately encouraged me to apply to

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Speaker 1: the three to two program. They had a dormant program

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Speaker 1: left over from the Korean War. You know, business schools,

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Speaker 1: of course have favored people with experience.

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Speaker 2: So five years gives you undergraduate and graduate is that the.

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Speaker 1: Time you basically do three years as an undergrad. You

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Speaker 1: apply to the Tuck school. If you get in and

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Speaker 1: it hadn't taken anyone in over a decade, then you

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Speaker 1: do your senior year effectively as the first year MBA

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Speaker 1: do the second year, and you get both degrees in

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Speaker 1: five years.

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Speaker 3: Wow.

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Speaker 1: And he encouraged me to apply. He wrote a recommendation

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Speaker 1: for me, and I guess, surprising, not surprisingly after that.

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Speaker 3: I did get in, But you went to Stanford, not Tuck.

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Speaker 1: So I trotted down the street to call to his

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Speaker 1: assistant made an appointment, all sweaty and nervous, and went

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Speaker 1: to thank him for his gracious recommendation. And he said,

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Speaker 1: in the way of good mentors, well do you want

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Speaker 1: to go? And I'm thinking he's the x dan of

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Speaker 1: the business school, like, this is a trick question. And

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Speaker 1: I gave him the deer in the headlights look, and

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Speaker 1: he said, well, let me let's let me imagine we

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Speaker 1: got three letters here. We got a letter to get

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Speaker 1: into Tuck, a letter to get into Harvard, and a

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Speaker 1: letter to get into Stanford. And I said well, and

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Speaker 1: I thought to myself, well, I know he went to Harvard, right,

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Speaker 1: And he said, Dean Attuck is a trick question. And

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Speaker 1: I said something like, well, I guess Harvard or Stanford.

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Speaker 1: And he said, well, then we're done. And I said,

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Speaker 1: but I'm not into Harvard and Stanford. He said, well

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Speaker 1: you will be.

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Speaker 2: That's very funny. So in between Dartmouth and Stanford you

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Speaker 2: work for Goldman Sachs doing M and A early eighties.

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Speaker 3: How is that?

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Speaker 2: How did that help prepare your path to private equity?

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Speaker 1: Well, that same man the next year I trotted down

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Speaker 1: and he's said, well, okay, we're applying to Harvard and Stanford,

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Speaker 1: aren't you? And when do I write my letter of recommendation?

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Speaker 1: So he did, and I was fortunate to be accepted

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Speaker 1: to both and that was very important because when this

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Speaker 1: was the dawning of what is now a big analyst

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Speaker 1: program across the country in all banks and investment banks.

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Speaker 1: But back then, in nineteen eighty three, the entire analyst

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Speaker 1: program of Goldman Sachs was twenty five people, and that

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Speaker 1: was a big expansion from the prior year before, and

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Speaker 1: it had only been in existence for two years, so

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Speaker 1: Wall Street was so much smaller. Barry, you remember, back

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Speaker 1: in nineteen eighty three, Goldman Sacks had about thirty thousand

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Speaker 1: total employees, fifteen hundreds.

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Speaker 3: They were a private partnership. They weren't even public.

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Speaker 1: YEP.

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Speaker 3: Very different world.

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Speaker 1: And the entire merger department of Goldman Sachs in nineteen

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Speaker 1: eighty three was thirty two people. That's amazing, and I

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Speaker 1: like to say none were lowered to the ground than me,

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Speaker 1: a first year analyst, which meant I was below ground.

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Speaker 2: And how did you end up at Bain and Company

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Speaker 2: in Paris?

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Speaker 1: What was that like? Well, in the time that I

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Speaker 1: was working at Goldman Sachs. In mergers, there were a

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Speaker 1: bunch of big public companies who were on We were

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Speaker 1: on M and a retainer they call it. So the

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Speaker 1: public companies looking to buy lots of acquisitions, and they

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Speaker 1: would have us running the numbers with their people for them,

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Speaker 1: as they would have Bain and Company in two of

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Speaker 1: these situations doing the strategic work alongside their management team.

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Speaker 1: So I got to know the work and we would

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Speaker 1: jointly make presentations to the senior management team or their

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Speaker 1: board if a deal went far. And I got to

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Speaker 1: see firsthand what Bain was doing in strategic consulting and

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Speaker 1: understand their view of business separate from the numbers. And

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Speaker 1: so when I did go out to Stanford, I wanted

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Speaker 1: to spend my summer learning that better and in Paris,

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Speaker 1: and Bain was kind enough to offer me a job

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Speaker 1: to facilitate.

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Speaker 2: I have to imagine that Paris in the mid eighties

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Speaker 2: was just delightful.

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Speaker 1: It was not tough duty. I was very lucky to

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Speaker 1: be there and grateful all summer.

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Speaker 2: So you come out of Stanford, you enter the LBO world,

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Speaker 2: what we now call essentially private credit and private equity.

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Speaker 2: What was it like in the late nineteen eighties, how

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Speaker 2: to be the wild West. It really wasn't a mature

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Speaker 2: industry the way it is today.

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Speaker 1: Well buryer again like Wall Street. It was all so

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Speaker 1: much smaller. In nineteen eighty three, by my reckoning, the

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Speaker 1: entire global institutional private equity business was less than a

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Speaker 1: billion dollars of committed capital.

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Speaker 3: That's unbelievable, large nothing.

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Speaker 1: The largest fund then was KKR with one hundred and

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Speaker 1: seventy five million dollars. The second largest fund was forcement

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Speaker 1: Little with one hundred and fifty I.

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Speaker 2: Mean these are transaction levels. Today those entire funds are

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Speaker 2: like partial transaction.

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Speaker 1: They'd be less than I'm sure ten or twenty percent

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Speaker 1: of what KKR would put into many private equity deals.

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Speaker 2: So you're doing LBO, you're doing M and A. How

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Speaker 2: did those experiences lead to a career in private equity?

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Speaker 1: So there was almost no M and A activity. There

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Speaker 1: was no M and A departments in any investment bank

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Speaker 1: really until the very late seventies. Because the today where

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Speaker 1: we talk about return on equity, your margins with your

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Speaker 1: stock price. Back then, if you were in business in

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Speaker 1: you know, the real world, they said how many people

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Speaker 1: work for you? And if you started your career on

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Speaker 1: a line became a line manager or foreman, became a

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Speaker 1: plant manager maybe, or a division manager, so on up

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Speaker 1: the line. If people ask you how many people work

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Speaker 1: for you, and you said, well, I sold a business,

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Speaker 1: you know, I had a thousand, but now I'm at

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Speaker 1: you know, eight hundred. When you barry, you're not a

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Speaker 1: good manager. I thought you were a manager. So literally

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Speaker 1: nobody sold in and the only things that got sold

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Speaker 1: were bankruptcies. The odd company that went bankrupt would need

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Speaker 1: to get sold. But there wasn't an active M and

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Speaker 1: A business. There wasn't a leverage finance business, all the

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Speaker 1: things we know now. So when I was at Goldman

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Speaker 1: Sachs doing M and A from eighty three to eighty five,

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Speaker 1: there came to be some people looking at the M

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Speaker 1: and A business was started to boom, be a fraction

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Speaker 1: of what it is now. But there came to be

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Speaker 1: in certain situations buyers that were bootstrap buyers, that were

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Speaker 1: we would call them today. They then leveraged buyout financiers,

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Speaker 1: and now we call it the private equity industry. And

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Speaker 1: so I came to see some of these entities at

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Speaker 1: the very early stages KKR would be one, but there

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Speaker 1: were others and a lot of entrepreneurs trying to do

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Speaker 1: the same thing, because wealthy families were often these bootstrap buyers.

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Speaker 1: And honestly, it was almost like a religious war between

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Speaker 1: two views of the world. EPs earnings per share that

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Speaker 1: all public companies would look at to evaluate mergers and

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Speaker 1: cash flow ebit DA, which didn't exist as a term,

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Speaker 1: believe it or not back then, but ibadiya cash flow

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Speaker 1: was how these these bootstrap buyers would look at it.

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Speaker 1: And this seemed kind of interesting and new and different,

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Speaker 1: and I became interested in how they did what they

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Speaker 1: did and how they valued it and the differences between

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Speaker 1: that and ebit DA. So sorry then, EPs.

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Speaker 2: So in nineteen ninety four, you and your co found

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Speaker 2: Chuck Klein launch what is the present version of American Securities?

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Speaker 2: What was the catalyst for launching the firm?

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Speaker 3: Then?

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Speaker 2: What kind of business were you hoping to build?

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Speaker 1: Well, it was more than just Chuck and I. So

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Speaker 1: we had the great gift of the Rosenwaldt family. So

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Speaker 1: I had worked for two private equity firms when I

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Speaker 1: got out of Stanford, so I'd really gotten a little

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Speaker 1: bit of experience. I was still young, Hope. I still

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Speaker 1: am young today, but I'd gotten a little bit of experience,

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Speaker 1: and I met Chuck, and Chuck was then the senior

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Speaker 1: financial advisor to the William ROSENWALDT family and the William

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Speaker 1: Rosenwald family. Julius was the genius behind Sears Roebuck and

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Speaker 1: so they had largesse from the Rosenwald fortune.

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Speaker 2: So, in other words, this after building, helping to build

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Speaker 2: Seers and run Seers for a number of years, this

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Speaker 2: was we would call that today a family office of.

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Speaker 1: It absolutely was. It was called w R. S. William

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Speaker 1: Rosenwald family Associates. Julius Rosenwald, who was the eminence grease

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Speaker 1: behind the growth of Sears the way Ray crock was

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Speaker 1: with McDonald genius for the Catalog and Downtown department stores.

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Speaker 1: Sears Alton got taken public. He passed away in the

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Speaker 1: nineteen thirties. Bill was his youngest son. Bill separated his

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Speaker 1: money from that of his siblings and came to New

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Speaker 1: York and right after World War Two set up his

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Speaker 1: family office modeled along the lines of the Rockefeller family,

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Speaker 1: and he's founded the name. He registered the name American

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Speaker 1: Securities Corporation, the first corporate owned broker dealer. All the

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Speaker 1: other ones had been private partnerships, but he had capital

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Speaker 1: and didn't want to have it at risk, and that

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Speaker 1: family office had done were then called bootstraps, all sorts

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Speaker 1: of investments, not just the stocks and bonds common of

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Speaker 1: wealthy families of the day, but actually buying businesses, some

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Speaker 1: very very successful businesses that were still private, that were

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Speaker 1: private when I bought them. Now one of them is

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Speaker 1: public and as a equity market cap of thirty five

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Speaker 1: billion dollars. But Chuck was their senior financial advisor, so

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Speaker 1: he's buying selling stocks. And Chuck and I hit it

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Speaker 1: off on our first breakfast on the Upper East Side

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Speaker 1: here in New York, and he kindly asked me if

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Speaker 1: I would come join him, saying that he would if

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Speaker 1: he wanted me to come join him. He was fifty five,

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Speaker 1: he wanted to retire when he's sixty. Families take a

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Speaker 1: while to get used to somebody, so he wanted me

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Speaker 1: to work with him and then he'd retire. And I

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Speaker 1: said to Chuck, I really like you, but that's not

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Speaker 1: really what I want to do. But I got a

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Speaker 1: different idea. You be my partner. We'll set up a

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Speaker 1: private equity firm, and the Rosewold family will be our

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Speaker 1: lead investor, and that's what I want to do.

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Speaker 2: And everybody signed on and said, let's go. That's the

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Speaker 2: launch of the modern version of American securities.

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Speaker 1: It's more complicatan that because Chuck was a very cautious investors.

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Speaker 1: So what Chuck actually said was, Okay, well, come work

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Speaker 1: with me for a year and assuming that works out, well,

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Speaker 1: then we'll go raise this private equity firm.

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Speaker 3: Right.

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Speaker 1: So I joined the Rosenwald family in the spring of

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Speaker 1: nineteen ninety three, and we we did some investing together

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Speaker 1: for the first year, and we raised our private equity

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Speaker 1: fund the next year.

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Speaker 2: I almost feel compelled to point out to younger listeners

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Speaker 2: who may not be familiar with what Sears was back

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Speaker 2: in the day. But I'm not exaggerating when I say

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Speaker 2: Sears was the Amazon of its time. It was America's

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Speaker 2: largest retailer. Every major city, every major town had a Sears.

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Speaker 2: They were dominant, weren't they.

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Speaker 1: Oh? Absolutely. I like to say I hadn't thought about

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Speaker 1: think about Amazon. I like to say they created the

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Speaker 1: walton esque fortune, ok the first half of the nineteen

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Speaker 1: hundreds because they were Walmart at least and maybe Amazon two.

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Speaker 1: They had a one third market share of certain product

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Speaker 1: sales in the entire country. And they were also an

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Speaker 1: amazing they picked. Julius successfully leveraged two really great trends.

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Speaker 1: One was the urbanization of America and the downtown department store,

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Speaker 1: which was so prevalent then and then almost on a

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Speaker 1: different axis to the catalog which was mailed. The Sears

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Speaker 1: Catalog was mail to homes across the country and it

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Speaker 1: allowed anyone in any community of any background to buy

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Speaker 1: exactly what the city slickers were buying, or vice versa.

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Speaker 1: And that was and they were. Interestingly, I think it's

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Speaker 1: true to say the first non utility, non railroad that

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Speaker 1: was thought stable enough to be allowed to be a

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Speaker 1: public company. Huh. Only utilities and railroads at the beginning

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Speaker 1: of the stock market were thought stable enough.

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Speaker 2: So last question about that. That's really fascinating, and there's

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Speaker 2: a whole long history of things that Sears spun out.

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Speaker 2: I think the Discover card came from Sears and All

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Speaker 2: State Insurance and a couple of banks. I mean, it

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Speaker 2: was just one different entity after another.

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Speaker 1: That's absolutely true. And the family separately is responsible. The

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Speaker 1: Rosenwald family for Blue Cross and Blue Shield. Oh really,

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Speaker 1: for the Museum of Science and Industry in Chicago. Uh huh.

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Speaker 1: Julius Rosenwald was an important trustee of Tuskegee University and

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Speaker 1: friend of I think it's Booker t. Washington. I mean,

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Speaker 1: the family's philanthropic legacy is staggering.

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Speaker 2: That's really fascinating. You know, it's funny. I'm very aware

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Speaker 2: of the audience age, and it's arranged from people listening

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Speaker 2: who might be in college or grad school and people

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Speaker 2: who have are retired, and I sort of feel like,

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Speaker 2: all right, some of you youngsters may not know. This

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Speaker 2: was literally the biggest retailer of its day, whether you

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Speaker 2: want to compare it to Walmart for the stores or

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Speaker 2: Amazon the catalog not all that different from online shopping.

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Speaker 2: They were just massive and failed to pivot when the

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Speaker 2: time came. So hey, everything is temporary, right, last question

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Speaker 2: about the launch of the firm, So ninety four, it's

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Speaker 2: still early days for private equity. Not a lot of transactions,

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Speaker 2: not a lot of money under management. When you're out

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Speaker 2: pitching this to institutional investors in the middle of a

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Speaker 2: giant bull market, let me add inequities. What was what

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Speaker 2: was the response, did people understand that this was a

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Speaker 2: different type of investing and potentially a diversifier, or did

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Speaker 2: they look at you kind of funny?

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Speaker 1: Well berry to paint where we were in the arc

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Speaker 1: of private equity. So as we were talking before it did,

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Speaker 1: it didn't exist until the very late seventies at best,

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Speaker 1: and then was you know, from five firms to ten firms,

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Speaker 1: two hundred firms in the nineteen eighties, and so it

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Speaker 1: was growing. And when we went to raise our first

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Speaker 1: fund again we had the great benefit of the support

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Speaker 1: of the William Rosenwald family. They were a committed lead investor.

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Speaker 1: But I had been involved in some transactions and had

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Speaker 1: and those transactions had happily gone well. Chuck Klin and

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Speaker 1: the family had been involved in a bunch of transactions.

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Speaker 1: So we had some form of a track record that

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Speaker 1: we could talk to people about and a very specific

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Speaker 1: investment objective about what we were planning to do. And

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Speaker 1: so there were certainly there weren't that many, and we

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Speaker 1: did talk to a lot of people, but we were

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Speaker 1: grateful to have a college endowment, a publicly traded insurance company,

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Speaker 1: a publicly traded company, corporation's pension fund, and some wealthy

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Speaker 1: individuals join our first fund, which was a mighty seven

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Speaker 1: one point four million dollars at the final closing.

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Speaker 2: Well, so you mentioned you had some specific objectives back

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Speaker 2: in nineteen ninety four.

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Speaker 3: What were those objectives?

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Speaker 1: Well, building on the the investment legacy of the Rosenwald

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Speaker 1: family and some of the things that I had been

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Speaker 1: doing and thinking about, we agreed that we were only

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Speaker 1: going to buy the market leading company, the number one

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Speaker 1: market share company in its niche. I mean, obviously these

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Speaker 1: would be modest sized companies given the size of our fund,

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Speaker 1: but the number one market share company, we would look

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Speaker 1: to only buy that company an industry which was GDP

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Speaker 1: growth or better, we would look to only support the

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Speaker 1: existing CEO. We wanted to support them, Meaning you're.

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Speaker 2: Not coming in cleaning house and installing your own guys.

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Speaker 3: You're looking for a management team you want to work with.

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Speaker 1: We had then and we have still today, a relationship focus.

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Speaker 1: And you know, changing and it's practical, changing executives is risky.

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Speaker 1: We believe that if we're coming in and feel aligned

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Speaker 1: and simpatico with the management team and particularly the CEO

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Speaker 1: running the business that delivered the earnings that we're valuing

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Speaker 1: the business on if we could just help them be

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Speaker 1: the same or better, we'd have only good outcomes for investors.

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Speaker 1: And why take the risk of changing management. We'd rather

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Speaker 1: just look for a new situation. And we wanted to

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Speaker 1: have relatively modest leverage. We tended at the beginning to

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Speaker 1: capitalize our companies with less debt than other investors.

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Speaker 3: Huh, really really intriguing.

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Speaker 2: So let's talk a little bit about twenty seven billion dollars,

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Speaker 2: one hundred and eighty full time professionals. What is the

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Speaker 2: secret to successfully growing a private equity firm? For you?

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Speaker 3: Coming up on your thirtieth year?

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Speaker 1: Great people, you know, I like to say money is

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Speaker 1: the ultimate commodity. So our product, if you will, is money.

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Speaker 1: That's what we invest and so if we're going to

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Speaker 1: outperform for our investors, it's going to be the people

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Speaker 1: that we've attracted, our investment philosophy, and maybe some processes

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Speaker 1: that we've employed.

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Speaker 2: So you've done plenty of deals over that thirty year period.

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Speaker 2: What stands out anything really memorable? Any transactions that stick

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Speaker 2: with you?

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Speaker 1: You know when I think about that, we've certainly had

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Speaker 1: the great pleasure to be involved with some great businesses,

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Speaker 1: but it's really the people that stick out the most. It's,

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Speaker 1: you know, life is people, and we are in the

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Speaker 1: people business managers, investors, lenders, bankers, the whole ecosystem. And

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Speaker 1: it's the special relationships which we're proud to have created.

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Speaker 1: And some of the CEOs from our very first fund,

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Speaker 1: our very first deals, you know, twenty eight years ago,

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Speaker 1: are still close friends of mine. I'll be going to

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Speaker 1: Florida to spend a weekend with one of our first

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Speaker 1: CEOs and his wife staying with them next month. Huh.

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Speaker 2: That's really interesting. So let's stay focused on that concept

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Speaker 2: of people and partnering with management rather than just taking

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Speaker 2: over a company and cleaning house. Is this relatively uncommon

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Speaker 2: in the industry. I have to imagine other companies see

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Speaker 2: the value of this, Or when you first started doing this,

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Speaker 2: was it kind of a one off?

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Speaker 1: We weren't really sure when anyone else was doing At

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Speaker 1: the beginning, You're just kind of doing it and hoping

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Speaker 1: it works out. As it turns out, You're absolutely right.

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Speaker 1: There is a consulting firm which did a study a

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Speaker 1: few years ago that twenty five percent of the CEOs

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Speaker 1: are gone at closing in most partly the average private

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Speaker 1: equity transaction, fifty percent are gone by two years and

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Speaker 1: only twenty five percent are there after four years. In

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Speaker 1: contrast to that, now, for our thirty year existence, are

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Speaker 1: what I call CEO win rate is over eighty percent,

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Speaker 1: meaning eighty percent of the men and women who were

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Speaker 1: running the business before we showed up, we're running it

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Speaker 1: at exit or are running it today if we still

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Speaker 1: own it.

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Speaker 2: So this is really very different if if the typical firm,

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Speaker 2: they're in half the situations, they're gone either closing or

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Speaker 2: two years later.

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Speaker 1: We are walking the talk in terms of management partnership,

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Speaker 1: and we really believe in it.

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Speaker 2: So when you're evaluating a company, this is more than

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Speaker 2: EBADA or earnings per share or something like that. You're

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Speaker 2: really doing your due diligence on the management team and

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Speaker 2: how effective they are, and hey, are these people we

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Speaker 2: want to get into bed with and do business with?

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Speaker 1: All those things we have, we add a very important

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Speaker 1: management dimension to the basic you know, product services, customers,

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Speaker 1: raw material suppliers and so on.

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Speaker 3: How do you evaluate that?

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Speaker 2: Because that's Listen, when you look at EBAD, it's numbers

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Speaker 2: on an Excel spreadsheet or Google sheets or whatever you're

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Speaker 2: using when you're evaluating people, it's much squishier and qualitative.

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Speaker 2: How do you make that how do you institutionalize that process?

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Speaker 1: Well, you know, it's very it's very bespoke. Every person

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Speaker 1: is different. Different of our colleagues are different, even though

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Speaker 1: we all share this same belief in CEO partnership and

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Speaker 1: management team partnership. And it's really just deciding you want

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Speaker 1: to work together. We're not perfect, our management teams aren't perfect.

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Speaker 1: But can we make I like to say my favorite

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Speaker 1: equation is one plus one equals three. Can we work

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Speaker 1: with a management team and together be great partners and

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Speaker 1: do something different together? And we bring certain resources that

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Speaker 1: some other firms don't have. The largest group of our

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Speaker 1: one hundred and eighty people that you cited are so

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Speaker 1: called resources group. These are full time operating professionals. They're

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Speaker 1: not virtual, they're not consultants, they're not ten ninety nine,

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Speaker 1: and they are W two colleagues. And so we have

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Speaker 1: a lot of resources we can bring to our companies

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Speaker 1: in purchasing, procurement, strategy, it hr you name it. And

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Speaker 1: some executives are excited by that. They want the help,

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Speaker 1: they want fresh set of eyes on certain problems, or

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Speaker 1: extra extra arms and legs on problems. And some people say,

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Speaker 1: you know, we got that, we know what we do,

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Speaker 1: and you just put up the money, and we're better

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Speaker 1: partners for the former than the latter.

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Speaker 2: So you describe a lot of your investments as platform investments,

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Speaker 2: and you've made seventy eight of these platform investments over the.

439
00:24:30,640 --> 00:24:32,560
Speaker 3: Last thirty years.

440
00:24:32,720 --> 00:24:35,359
Speaker 2: Tell us a little bit bit about that phrase, and

441
00:24:36,400 --> 00:24:39,720
Speaker 2: then we'll get into the subsequent three hundred and five

442
00:24:39,920 --> 00:24:42,160
Speaker 2: add on investments that followed.

443
00:24:42,840 --> 00:24:45,760
Speaker 1: Well, a platform investment for us is really the first

444
00:24:45,760 --> 00:24:49,239
Speaker 1: big investment. It's we're investing in a company with the

445
00:24:49,240 --> 00:24:52,160
Speaker 1: management team. We're typically the control investor, so we'll own

446
00:24:52,200 --> 00:24:54,919
Speaker 1: more than fifty one percent, sometimes almost one hundred percent

447
00:24:55,040 --> 00:24:57,119
Speaker 1: of the company, but the management will always be an

448
00:24:57,160 --> 00:25:00,560
Speaker 1: investor with us. And that is and that first unique

449
00:25:00,560 --> 00:25:03,760
Speaker 1: investment is a so called platform. Some investments will never

450
00:25:04,119 --> 00:25:07,280
Speaker 1: have add on acquisitions. They can grow organically or other ways.

451
00:25:08,160 --> 00:25:12,440
Speaker 1: But many acquisitions do find smaller competitors or sometimes mergers

452
00:25:12,440 --> 00:25:14,639
Speaker 1: of equals, and we then build them with add on

453
00:25:14,720 --> 00:25:18,000
Speaker 1: what are called add on acquisitions, into the existing platform.

454
00:25:18,160 --> 00:25:20,119
Speaker 1: And so that three hundred would be a lot of

455
00:25:20,119 --> 00:25:23,360
Speaker 1: add ons, and sometimes they're very small, sometimes they're material.

456
00:25:23,440 --> 00:25:24,640
Speaker 1: It just depends on the company.

457
00:25:24,880 --> 00:25:28,320
Speaker 2: So when you're putting money into a company, is this

458
00:25:29,080 --> 00:25:32,720
Speaker 2: you're obviously buying shares from somebody. Are you also providing

459
00:25:33,080 --> 00:25:37,040
Speaker 2: a level of operating capital? How much in a typical structure,

460
00:25:37,640 --> 00:25:41,320
Speaker 2: what is previous owners selling and what is money that

461
00:25:41,440 --> 00:25:44,320
Speaker 2: goes for future deployment.

462
00:25:45,200 --> 00:25:50,040
Speaker 1: It greatly depends. The interesting thing about us is we

463
00:25:50,119 --> 00:25:55,119
Speaker 1: are very attractive to founder CEOs. Almost half of the

464
00:25:55,200 --> 00:25:58,000
Speaker 1: investments in our most recent fund, half of the companies

465
00:25:58,000 --> 00:26:03,359
Speaker 1: we've purchased, we purchased from founder CEOs who continue to

466
00:26:03,359 --> 00:26:05,879
Speaker 1: be the CEO and in many cases rolled over an

467
00:26:06,000 --> 00:26:09,760
Speaker 1: enormous amount of money into this company that we now control,

468
00:26:09,800 --> 00:26:12,720
Speaker 1: where they're still being the CEO. So I like to

469
00:26:12,760 --> 00:26:16,159
Speaker 1: think of those as very choosy investors. They really care

470
00:26:16,200 --> 00:26:18,800
Speaker 1: about their company because they founded it, They really care

471
00:26:18,840 --> 00:26:21,280
Speaker 1: about their company because they're running it, And they really

472
00:26:21,280 --> 00:26:22,960
Speaker 1: care about their company because they're going to maintain a

473
00:26:23,040 --> 00:26:27,280
Speaker 1: very big personal investment. And in a lot of those situations,

474
00:26:27,320 --> 00:26:30,359
Speaker 1: they are happy and excited to partner with us as

475
00:26:30,400 --> 00:26:32,440
Speaker 1: we are them, And I think they're attracted by the

476
00:26:32,520 --> 00:26:36,080
Speaker 1: resources we bring other than money to the second part

477
00:26:36,119 --> 00:26:38,720
Speaker 1: of your question on what is the capital structure and

478
00:26:38,720 --> 00:26:44,040
Speaker 1: what's the money? Typically the capital structure the money that

479
00:26:44,080 --> 00:26:47,080
Speaker 1: we put up and oftentimes lenders's if it's a debt

480
00:26:47,119 --> 00:26:51,399
Speaker 1: free business goes to selling shareholders. But as part of that,

481
00:26:51,520 --> 00:26:53,840
Speaker 1: of course, you want to capitalize a company with undrawn

482
00:26:53,920 --> 00:26:58,639
Speaker 1: lines of credit so called revolvers or delay draw term loans,

483
00:26:58,720 --> 00:27:01,919
Speaker 1: other terms like that. There's liquidity to run the business

484
00:27:01,960 --> 00:27:05,360
Speaker 1: on a day to day basis, survive a rainy day,

485
00:27:06,400 --> 00:27:08,639
Speaker 1: and also grow the business as makes sense, if it

486
00:27:08,680 --> 00:27:11,399
Speaker 1: is by out on acquisition or new customer acquisitions or

487
00:27:11,640 --> 00:27:13,119
Speaker 1: new plants we're building, whatever.

488
00:27:13,520 --> 00:27:17,439
Speaker 2: So I want to separate the platform initial investments with

489
00:27:17,560 --> 00:27:20,480
Speaker 2: the add ons. What are you looking for when you're

490
00:27:20,520 --> 00:27:24,639
Speaker 2: making a platform investment. What is it that gets you

491
00:27:24,720 --> 00:27:28,840
Speaker 2: excited about a particular company or not so excited and saying, hey,

492
00:27:28,880 --> 00:27:31,160
Speaker 2: this isn't exactly for us.

493
00:27:31,520 --> 00:27:33,600
Speaker 1: So going back to what we started thirty years ago,

494
00:27:33,800 --> 00:27:37,160
Speaker 1: we're looking for the number one market share player or.

495
00:27:37,160 --> 00:27:39,840
Speaker 2: So that's persistent. In other words, the original ideas are

496
00:27:39,880 --> 00:27:42,720
Speaker 2: still driving your investment strategies.

497
00:27:42,840 --> 00:27:46,159
Speaker 1: We work really hard to get better tactically and execution

498
00:27:46,320 --> 00:27:49,639
Speaker 1: wise and with our scale advantages now, but the fundamental

499
00:27:49,680 --> 00:27:53,080
Speaker 1: investment philosophy hasn't changed. We're looking for that market share

500
00:27:53,200 --> 00:27:57,040
Speaker 1: leader which has a sustainable competitive advantage. We hope that

501
00:27:57,080 --> 00:28:00,719
Speaker 1: we can invest behind and see stability so that there

502
00:28:00,760 --> 00:28:02,360
Speaker 1: won't be a loss of capital.

503
00:28:02,640 --> 00:28:04,439
Speaker 3: And above average GDP growth.

504
00:28:04,480 --> 00:28:07,119
Speaker 1: And we're looking for that company to exist, as you said,

505
00:28:07,240 --> 00:28:11,359
Speaker 1: in an industry that is growing at GDP or better.

506
00:28:11,760 --> 00:28:14,200
Speaker 1: Now we use terms like is there a tailwind?

507
00:28:15,320 --> 00:28:19,280
Speaker 2: Huh, So we'll talk a little bit about sectors in

508
00:28:19,600 --> 00:28:20,400
Speaker 2: a few moments.

509
00:28:21,760 --> 00:28:23,520
Speaker 1: I'm sorry, Berry, and I have to add. And we're

510
00:28:23,560 --> 00:28:25,280
Speaker 1: looking to back the existing management team.

511
00:28:25,400 --> 00:28:26,639
Speaker 3: They're going to stick around.

512
00:28:26,800 --> 00:28:29,360
Speaker 1: We want the CEO to want to be our partner.

513
00:28:29,560 --> 00:28:32,480
Speaker 1: I mean, we obviously know a lot of managers, but

514
00:28:32,560 --> 00:28:35,000
Speaker 1: we really get excited if the CEO is going to

515
00:28:35,000 --> 00:28:36,080
Speaker 1: be our partner going forward.

516
00:28:36,080 --> 00:28:40,720
Speaker 2: So competitive edge, better than average growth, a management team,

517
00:28:40,800 --> 00:28:44,520
Speaker 2: you like, that doesn't sound like the worst sort of

518
00:28:44,560 --> 00:28:49,040
Speaker 2: investment that those sound like pretty attractive things. How many

519
00:28:49,120 --> 00:28:53,440
Speaker 2: companies are out there that check all your boxes? You?

520
00:28:53,760 --> 00:28:55,960
Speaker 1: I mean quite? I mean it's a lot are a

521
00:28:55,960 --> 00:28:58,000
Speaker 1: little depending on how big your screen is, but we

522
00:28:58,560 --> 00:29:01,200
Speaker 1: it depends on the year but we will typically see

523
00:29:01,920 --> 00:29:04,840
Speaker 1: three hundred and fifty to four hundred and fifty companies

524
00:29:05,200 --> 00:29:09,640
Speaker 1: that look like they might be suitable. This number is

525
00:29:09,680 --> 00:29:13,360
Speaker 1: a rough guess, but we probably do very detailed work,

526
00:29:13,440 --> 00:29:18,960
Speaker 1: sometimes without side consulting firms and other advisors on maybe

527
00:29:19,040 --> 00:29:23,640
Speaker 1: forty of those, and we will make you know, final

528
00:29:23,800 --> 00:29:29,800
Speaker 1: contract offers on probably around ten. That's rough guess, and

529
00:29:29,800 --> 00:29:33,040
Speaker 1: it changes every year. And we're only buying i should say,

530
00:29:33,360 --> 00:29:37,240
Speaker 1: US headquartered businesses. That's all we've ever aspired to do,

531
00:29:37,280 --> 00:29:40,640
Speaker 1: and it's something overseas all here. Many of our companies

532
00:29:40,680 --> 00:29:43,680
Speaker 1: have international operations. Some are truly global companies, some are not.

533
00:29:44,080 --> 00:29:46,440
Speaker 1: But the key thing for us is that they're US

534
00:29:46,480 --> 00:29:50,120
Speaker 1: headquartered because this is where we know people, we know

535
00:29:50,160 --> 00:29:51,720
Speaker 1: the laws, we know the language. We should have a

536
00:29:51,720 --> 00:29:55,080
Speaker 1: competitive advantage and we can be close and still try

537
00:29:55,080 --> 00:29:57,480
Speaker 1: to have a family life. If we're travel all over

538
00:29:57,520 --> 00:29:59,440
Speaker 1: the world, there should be someone who has our advantages

539
00:29:59,480 --> 00:30:05,440
Speaker 1: and say Beijing, Berlin, Buenos Aires and Bombay, that should

540
00:30:05,440 --> 00:30:08,080
Speaker 1: be not us, Whereas we have those advantages here as

541
00:30:08,080 --> 00:30:09,080
Speaker 1: American securities.

542
00:30:09,120 --> 00:30:11,600
Speaker 2: And so when you look hence the name, and so

543
00:30:11,640 --> 00:30:14,160
Speaker 2: when you look at doing any of those three hundred

544
00:30:14,200 --> 00:30:18,680
Speaker 2: and five add ons. At that point, you're familiar with

545
00:30:19,160 --> 00:30:22,800
Speaker 2: much more familiar with the company. You've already put prior

546
00:30:22,880 --> 00:30:25,680
Speaker 2: capital into it. What are you looking to accomplish with

547
00:30:26,080 --> 00:30:28,719
Speaker 2: those add ons? Is it just a matter of getting

548
00:30:28,760 --> 00:30:32,560
Speaker 2: liquidity the insiders who want some and you and larger position,

549
00:30:32,840 --> 00:30:35,120
Speaker 2: or is it hey, they could use a little more

550
00:30:35,160 --> 00:30:37,640
Speaker 2: capital and we're happy to participate.

551
00:30:37,800 --> 00:30:40,160
Speaker 1: So the add ons are all about building the existing

552
00:30:40,200 --> 00:30:43,960
Speaker 1: business or the platform initial investment to use the phrase

553
00:30:44,000 --> 00:30:47,760
Speaker 1: you were using, and so there, it's not about a

554
00:30:47,760 --> 00:30:50,200
Speaker 1: capital it's not about getting liquidity for anyone who's an

555
00:30:50,200 --> 00:30:53,760
Speaker 1: existing investor. Sometimes there will be a smaller competitor that

556
00:30:53,880 --> 00:30:57,400
Speaker 1: the company wants to sell to us. Sometimes there will

557
00:30:57,440 --> 00:31:03,840
Speaker 1: be size business in an adjacent industry where there's synergies

558
00:31:04,080 --> 00:31:06,280
Speaker 1: that we can save money on purchasing, let's say, by

559
00:31:06,280 --> 00:31:10,800
Speaker 1: having a bigger scale platform. It really depends on the company.

560
00:31:11,400 --> 00:31:14,840
Speaker 2: So you guys have been doing this sort of platform

561
00:31:14,880 --> 00:31:18,000
Speaker 2: investment and add on investment pretty much from the beginning.

562
00:31:18,480 --> 00:31:23,640
Speaker 2: Have you seen other companies other private equity firms seemingly

563
00:31:23,720 --> 00:31:27,360
Speaker 2: imitate or at least has this said differently? Has this

564
00:31:27,440 --> 00:31:29,960
Speaker 2: strategy become more popular over the years.

565
00:31:30,400 --> 00:31:34,560
Speaker 1: Oh, I think absolutely, Barry. I think almost everybody in

566
00:31:34,680 --> 00:31:37,880
Speaker 1: private equity generally, when they make their first investment, they

567
00:31:37,880 --> 00:31:42,080
Speaker 1: are looking at what might be able to acquire. In addition,

568
00:31:43,640 --> 00:31:47,840
Speaker 1: investment bankers always market this now in their materials. When

569
00:31:47,880 --> 00:31:50,360
Speaker 1: you're looking at company, this company can grow by buying

570
00:31:50,440 --> 00:31:52,760
Speaker 1: all these companies. This is real or imagined, but it

571
00:31:52,760 --> 00:31:55,920
Speaker 1: gets marketed, and really it's something I think everyone in

572
00:31:55,960 --> 00:31:58,880
Speaker 1: the private equity industry is pretty much thinking about every

573
00:31:58,880 --> 00:32:01,520
Speaker 1: time they make initial investment. Is their growth through acquisition

574
00:32:01,560 --> 00:32:04,640
Speaker 1: as well as organic really intriguing.

575
00:32:04,840 --> 00:32:08,440
Speaker 2: So let's talk about the modern world and what you're

576
00:32:08,600 --> 00:32:11,080
Speaker 2: dealing with. I have a quote of yours that I

577
00:32:11,120 --> 00:32:15,720
Speaker 2: really liked. Five hundred basis points of rate increases changes

578
00:32:15,800 --> 00:32:19,120
Speaker 2: a lot. Can you explain to us, yes, five hundred

579
00:32:19,160 --> 00:32:21,880
Speaker 2: BIPs it does change a lot. What does it mean

580
00:32:21,920 --> 00:32:22,880
Speaker 2: for your work?

581
00:32:23,880 --> 00:32:26,719
Speaker 1: Well, eighteen months ago, just to put this in perspective,

582
00:32:27,000 --> 00:32:32,000
Speaker 1: eighteen months ago, private equity firms generally could borrow senior

583
00:32:32,000 --> 00:32:35,880
Speaker 1: debt for their companies at around six six and a

584
00:32:35,920 --> 00:32:40,800
Speaker 1: quarter percent all in. So if you borrowed one hundred

585
00:32:40,840 --> 00:32:46,840
Speaker 1: dollars of debt, you paid six dollars and twenty five

586
00:32:46,920 --> 00:32:49,840
Speaker 1: cents let's say of interest every year on that debt that.

587
00:32:50,200 --> 00:32:53,280
Speaker 2: Was whatever, I forget the name of what replaced Libor

588
00:32:53,400 --> 00:32:55,880
Speaker 2: plus three percent or so something like that two and

589
00:32:55,920 --> 00:32:56,560
Speaker 2: a half percent.

590
00:32:56,760 --> 00:33:01,920
Speaker 1: Software has replaced Libor and then basically it was libor

591
00:33:02,040 --> 00:33:08,320
Speaker 1: softra at about four fifty. Depends on the perceived credit

592
00:33:08,400 --> 00:33:11,280
Speaker 1: quality of the company and syndication markets at that time,

593
00:33:11,640 --> 00:33:14,640
Speaker 1: so it was basically the initial base rate was almost

594
00:33:14,760 --> 00:33:17,520
Speaker 1: zero's you're at a fifty basis points with software plus

595
00:33:17,560 --> 00:33:21,960
Speaker 1: that four fifty, let's say, and fees amortized in and

596
00:33:22,000 --> 00:33:24,320
Speaker 1: you get to let's say six six and a quarter,

597
00:33:24,680 --> 00:33:29,120
Speaker 1: and today and eighteen months later that your people like

598
00:33:29,240 --> 00:33:31,960
Speaker 1: us are paying more like ten and a quarter.

599
00:33:32,360 --> 00:33:33,200
Speaker 3: That's a big number.

600
00:33:33,240 --> 00:33:35,720
Speaker 1: And that's the five percent more or five hundred basis

601
00:33:35,760 --> 00:33:38,680
Speaker 1: points you were talking about. So instead of paying six

602
00:33:38,760 --> 00:33:41,640
Speaker 1: dollars and twenty five cents, you're now paying ten dollars

603
00:33:41,640 --> 00:33:45,000
Speaker 1: and twenty five cents in interest. And you know, it's

604
00:33:45,000 --> 00:33:46,640
Speaker 1: either a lot or a little, depending on whether you

605
00:33:46,640 --> 00:33:50,560
Speaker 1: have the money or not. If one didn't capitalize the

606
00:33:50,560 --> 00:33:55,720
Speaker 1: capital structure planning to have a cushion that was that big,

607
00:33:56,480 --> 00:34:00,560
Speaker 1: that higher interest rate can be a barrier to continuing

608
00:34:00,600 --> 00:34:03,080
Speaker 1: to pay interest or amortize, you know, pay back that

609
00:34:03,200 --> 00:34:09,680
Speaker 1: debt over time. And there are other problems like inflation

610
00:34:10,360 --> 00:34:14,360
Speaker 1: where and supply chain issues, both of which caused many companies,

611
00:34:14,400 --> 00:34:17,720
Speaker 1: even healthy, growing companies, to need more cash for working capital.

612
00:34:18,640 --> 00:34:20,239
Speaker 1: You know, if you were selling something where the raw

613
00:34:20,280 --> 00:34:22,760
Speaker 1: material cost used to be a dollar, and because of inflation,

614
00:34:22,840 --> 00:34:24,959
Speaker 1: after a couple of years, it's now a dollar twenty five,

615
00:34:25,920 --> 00:34:29,000
Speaker 1: that's twenty five percent more money in working capital for

616
00:34:29,080 --> 00:34:32,560
Speaker 1: the same number of units. And if you were your

617
00:34:32,560 --> 00:34:35,840
Speaker 1: supply chains might have come from Asia and it takes

618
00:34:35,920 --> 00:34:39,239
Speaker 1: longer because they're not quite sufficient, harder to get containers,

619
00:34:39,480 --> 00:34:42,520
Speaker 1: so you actually need more units. This can add up

620
00:34:42,560 --> 00:34:46,040
Speaker 1: as well. So between interest and working capital, even companies

621
00:34:46,080 --> 00:34:49,720
Speaker 1: that are flat or growing can have cash flow problems

622
00:34:49,760 --> 00:34:51,400
Speaker 1: if they didn't plan to have enough liquidity.

623
00:34:51,640 --> 00:34:54,759
Speaker 2: So when we look at the public markets, most of

624
00:34:54,800 --> 00:34:58,480
Speaker 2: the major public corporations that were carrying any sort of

625
00:34:58,520 --> 00:35:02,560
Speaker 2: debt all refine financed before this we're up and rates,

626
00:35:02,600 --> 00:35:07,200
Speaker 2: so what they're carrying is fairly low interest rates. What

627
00:35:07,239 --> 00:35:10,680
Speaker 2: did you see in the private sector where people taking

628
00:35:10,680 --> 00:35:14,760
Speaker 2: advantage of low rates to to you know, recapitalize whatever

629
00:35:14,760 --> 00:35:19,040
Speaker 2: their obligations were at the lowest possible carrying costs.

630
00:35:18,719 --> 00:35:24,440
Speaker 1: Well public or private Barry the companies are always refinancing.

631
00:35:24,520 --> 00:35:26,880
Speaker 1: You have a first issue is are you refinancing with

632
00:35:26,960 --> 00:35:30,319
Speaker 1: floating rate debt or fixed rate debt? So if I

633
00:35:30,360 --> 00:35:34,000
Speaker 1: had a five year senior debt credit facility of let's

634
00:35:34,040 --> 00:35:39,680
Speaker 1: say liboard then software now plus four fifty, that whether

635
00:35:39,760 --> 00:35:42,239
Speaker 1: I refinanced it now or then that that's five and

636
00:35:42,280 --> 00:35:44,480
Speaker 1: a half six sorry, six and a quarter percent debt

637
00:35:44,520 --> 00:35:46,840
Speaker 1: that's now ten and a quarter. But if I issued

638
00:35:46,880 --> 00:35:50,240
Speaker 1: bonds or fixed rate debt, then I would be insulated

639
00:35:50,239 --> 00:35:53,200
Speaker 1: from their rate increase. So it's it's firstly, did you

640
00:35:53,239 --> 00:35:56,520
Speaker 1: issue fixed rate debt or floating And if it was floating,

641
00:35:56,560 --> 00:35:59,920
Speaker 1: some people still bought hedges. The hedge market's pretty efficient

642
00:36:00,080 --> 00:36:03,720
Speaker 1: for two three years. Hard to hedge farther than that, right,

643
00:36:03,800 --> 00:36:05,799
Speaker 1: And so when those hedges run out, even if you

644
00:36:05,880 --> 00:36:08,600
Speaker 1: were conservative, and so you really have been boring at

645
00:36:08,640 --> 00:36:10,440
Speaker 1: six and a quarter for the last eighteen months as

646
00:36:10,520 --> 00:36:13,000
Speaker 1: rates have come up. When your hedge runs out, it's

647
00:36:13,040 --> 00:36:15,160
Speaker 1: gonna be ten and a quarter if rates stay the

648
00:36:15,200 --> 00:36:16,080
Speaker 1: same as they are today.

649
00:36:16,200 --> 00:36:19,880
Speaker 2: I mean most companies are not Apple. I remember Apple

650
00:36:19,880 --> 00:36:22,200
Speaker 2: floated a bond deal at like two to and a

651
00:36:22,280 --> 00:36:25,360
Speaker 2: quarter some crazy number for thirty years. Yep, right, sold

652
00:36:25,400 --> 00:36:29,160
Speaker 2: a ton of it. I'm gonna imagine private companies don't

653
00:36:29,160 --> 00:36:32,640
Speaker 2: have that sort of ability to float debt, but they

654
00:36:32,719 --> 00:36:37,840
Speaker 2: certainly can issue some sort of fixed rate. Did you see,

655
00:36:38,200 --> 00:36:40,680
Speaker 2: Like what was the fixed rate world like on the

656
00:36:40,719 --> 00:36:42,960
Speaker 2: private side when things were dirt cheap.

657
00:36:44,840 --> 00:36:51,040
Speaker 1: Typically on the private side eighteen months ago, you wouldn't

658
00:36:51,080 --> 00:36:56,400
Speaker 1: have borrowed, but few people borrowed first lean. In the

659
00:36:56,400 --> 00:37:01,520
Speaker 1: private markets, they would sometimes issue bonds. And so in

660
00:37:01,600 --> 00:37:05,160
Speaker 1: one company we know, well, that company managed to issue

661
00:37:05,239 --> 00:37:08,279
Speaker 1: six percent bonds. So that was fixed rate.

662
00:37:08,320 --> 00:37:11,919
Speaker 2: Six percent sounds attractive eighteen months ago. Now it looks

663
00:37:11,960 --> 00:37:12,879
Speaker 2: like a bargain for them.

664
00:37:13,320 --> 00:37:15,320
Speaker 1: Yes, it was attractive eighteen months ago because it was

665
00:37:15,360 --> 00:37:17,319
Speaker 1: fixed rate. If you were a conservative, you had no risk.

666
00:37:17,440 --> 00:37:21,640
Speaker 1: And now now that same company, if it came to market,

667
00:37:21,760 --> 00:37:25,880
Speaker 1: would be issuing those bonds for at least twelve percent.

668
00:37:26,600 --> 00:37:29,760
Speaker 2: So we've seen a lot of again in the public markets,

669
00:37:30,320 --> 00:37:35,320
Speaker 2: multiple compression stocks were pretty pricey in the low rate era.

670
00:37:35,960 --> 00:37:36,719
Speaker 3: Rates have gone up.

671
00:37:36,760 --> 00:37:40,879
Speaker 2: We're stone, it's see multiple compression. How are the higher

672
00:37:40,960 --> 00:37:44,880
Speaker 2: rates affecting valuations amongst private companies.

673
00:37:45,480 --> 00:37:49,560
Speaker 1: So there's two issues that are affecting valuations. One is

674
00:37:49,640 --> 00:37:52,239
Speaker 1: the amount, just what's called the quantum, the amount of

675
00:37:52,280 --> 00:37:54,879
Speaker 1: debt you can borrow, expressed as a multiple of your

676
00:37:54,880 --> 00:37:58,719
Speaker 1: free cash flow or your ebit DA. Until eighteen months ago,

677
00:38:01,120 --> 00:38:04,799
Speaker 1: a reasonably solid, stable business could borrow between six and

678
00:38:04,880 --> 00:38:10,680
Speaker 1: six and a half times it's trailing EBITDA, and sometimes

679
00:38:10,960 --> 00:38:13,480
Speaker 1: pro form projected this year it would be a little higher.

680
00:38:13,480 --> 00:38:16,000
Speaker 1: You could borrow that same number off what you hope

681
00:38:16,040 --> 00:38:20,640
Speaker 1: to achieve in the year you're in. Now that six

682
00:38:20,719 --> 00:38:23,800
Speaker 1: and a half is more like five for a good company,

683
00:38:23,960 --> 00:38:25,640
Speaker 1: and it could be four and a half if the

684
00:38:25,680 --> 00:38:28,000
Speaker 1: company is perceived to have a little bit of a blemish,

685
00:38:28,520 --> 00:38:32,080
Speaker 1: and the adjustments that might move it higher are harder

686
00:38:33,040 --> 00:38:36,399
Speaker 1: for lenders to support. So one thing that constrains value

687
00:38:36,440 --> 00:38:41,399
Speaker 1: is you fundamentally, all things being equal, if you bought

688
00:38:41,400 --> 00:38:45,799
Speaker 1: a company with six times leverage three or four years ago,

689
00:38:46,200 --> 00:38:48,839
Speaker 1: and now a private equity firm is trying to sell it,

690
00:38:48,840 --> 00:38:51,759
Speaker 1: it probably cannot sell it with that much leverage. The

691
00:38:51,800 --> 00:38:54,400
Speaker 1: buyer is going to be having five times, and that

692
00:38:54,480 --> 00:38:56,800
Speaker 1: means more equity. And if you have the same equity.

693
00:38:56,920 --> 00:38:58,920
Speaker 1: If you have a bigger equity check that will be

694
00:38:58,920 --> 00:39:00,759
Speaker 1: in a lower rate turn in the X. That can

695
00:39:00,800 --> 00:39:03,360
Speaker 1: impact price. And as we've talked a lot about, the

696
00:39:03,440 --> 00:39:05,800
Speaker 1: higher interest rate is also a big impact because instead

697
00:39:05,840 --> 00:39:09,080
Speaker 1: of paying in the one hundred dollars of debt at

698
00:39:09,120 --> 00:39:12,400
Speaker 1: six fifty, let's say six fifty of interest a year,

699
00:39:12,480 --> 00:39:14,680
Speaker 1: now it's ten to fifty because rates are higher. So

700
00:39:14,760 --> 00:39:18,400
Speaker 1: those two things constrain value where earnings hasn't even if

701
00:39:18,400 --> 00:39:21,000
Speaker 1: earning's grown, and it may make it hard to get

702
00:39:21,040 --> 00:39:23,960
Speaker 1: all of the money out where in a sale today

703
00:39:24,160 --> 00:39:26,160
Speaker 1: if earnings are flat or only up a little bit.

704
00:39:26,280 --> 00:39:30,080
Speaker 2: So let's look at valuation in a historical perspective, and

705
00:39:30,120 --> 00:39:33,760
Speaker 2: again most of my frame of reference are the public markets.

706
00:39:34,960 --> 00:39:40,000
Speaker 2: Pre financial crisis, stocks were at least reasonably priced, and

707
00:39:40,080 --> 00:39:45,040
Speaker 2: certainly before the mid nineties reasonably priced. And then since

708
00:39:45,120 --> 00:39:49,080
Speaker 2: the financial crisis, everything seems to have gotten everything priced

709
00:39:49,080 --> 00:39:52,680
Speaker 2: in dollars and credit seems to have gotten more expensive,

710
00:39:52,680 --> 00:39:57,799
Speaker 2: including stocks. Did you see anything take place similarly in

711
00:39:57,880 --> 00:40:01,120
Speaker 2: private markets when we're looking at the nineties, the two

712
00:40:01,200 --> 00:40:02,560
Speaker 2: thousands to twenty tens.

713
00:40:03,880 --> 00:40:06,960
Speaker 1: Oh, there's so many forces going on very I mean,

714
00:40:07,120 --> 00:40:10,359
Speaker 1: now and just think about the big impact of the

715
00:40:10,400 --> 00:40:13,279
Speaker 1: five or six largest tech companies as a percent of

716
00:40:13,719 --> 00:40:18,000
Speaker 1: the growth in stock markets, and the average company, particularly

717
00:40:18,080 --> 00:40:20,960
Speaker 1: smaller public companies, are down, not up, even though the

718
00:40:20,960 --> 00:40:24,160
Speaker 1: stock market's up. So at any one time, I like

719
00:40:24,280 --> 00:40:28,800
Speaker 1: to say, no one should ever invest in us because

720
00:40:28,840 --> 00:40:34,400
Speaker 1: they think we're good macroeconomists, because macroeconomists are often wrong,

721
00:40:34,920 --> 00:40:37,600
Speaker 1: especially at inflection points when we need them to be right.

722
00:40:37,960 --> 00:40:41,000
Speaker 1: That particular company at a moment in time, with its

723
00:40:41,000 --> 00:40:44,640
Speaker 1: forces and its management team, and that's what we spend

724
00:40:44,680 --> 00:40:46,440
Speaker 1: all of our time trying to analyze. We try to

725
00:40:46,440 --> 00:40:49,560
Speaker 1: be macro aware, but really micro focus.

726
00:40:49,760 --> 00:40:51,920
Speaker 2: That makes a lot of sense. And look at the

727
00:40:51,960 --> 00:40:57,200
Speaker 2: financial crisis middle of two thousand and eight. Most economists

728
00:40:57,280 --> 00:40:59,759
Speaker 2: didn't see a recession coming, even though we were right

729
00:40:59,800 --> 00:41:02,200
Speaker 2: in the middle of the worst one in a long time.

730
00:41:03,200 --> 00:41:08,960
Speaker 2: So macro aware, micro focused I like that description. So

731
00:41:09,120 --> 00:41:11,759
Speaker 2: let let's talk about some of the challenges of the

732
00:41:11,880 --> 00:41:17,399
Speaker 2: current environment. Bankruptcies just hit a thirteen year high. What

733
00:41:17,480 --> 00:41:21,279
Speaker 2: sort of risks does this create for your portfolio companies?

734
00:41:22,440 --> 00:41:25,880
Speaker 2: Or is this really companies that aren't doing as well

735
00:41:26,239 --> 00:41:29,680
Speaker 2: that eventually succumb to the more challenging environment.

736
00:41:34,239 --> 00:41:38,200
Speaker 1: It's it's all facts and circumstances. Certainly, you're absolutely right

737
00:41:38,520 --> 00:41:42,000
Speaker 1: that bankruptcies are up, and most people think they're going

738
00:41:42,080 --> 00:41:44,960
Speaker 1: to keep rising, and I think they're right. And that's

739
00:41:45,000 --> 00:41:48,200
Speaker 1: nothing more than we've just talked about the cash needs

740
00:41:48,200 --> 00:41:51,560
Speaker 1: of the average business for more money and inventory, for

741
00:41:51,719 --> 00:41:56,160
Speaker 1: higher interest rates, and in some many businesses constrain growth

742
00:41:56,200 --> 00:41:59,040
Speaker 1: and at some point that can that can reach a

743
00:41:59,080 --> 00:42:04,359
Speaker 1: breaking point, and so those forces will have bankruptcies rise,

744
00:42:04,560 --> 00:42:07,640
Speaker 1: just as lower interest rates will have that debate in

745
00:42:07,719 --> 00:42:09,120
Speaker 1: the natural cycle of business.

746
00:42:10,040 --> 00:42:13,680
Speaker 2: And my assumption is, since you're looking at companies and

747
00:42:13,800 --> 00:42:18,080
Speaker 2: management teams, you're probably not all that interested in these

748
00:42:18,320 --> 00:42:22,279
Speaker 2: bankrupt companies or distressed assets. Doesn't seem to really fit

749
00:42:22,560 --> 00:42:24,400
Speaker 2: the way I think of your model.

750
00:42:24,920 --> 00:42:29,200
Speaker 1: There are many private equi firms that focus on so

751
00:42:29,280 --> 00:42:34,359
Speaker 1: called bankruptcy, distressed and whatnot, and private credit providers. We

752
00:42:34,400 --> 00:42:38,480
Speaker 1: are trying to avoid those and trying to buy good business.

753
00:42:38,480 --> 00:42:40,640
Speaker 1: On the journey from good to great or great to greater,

754
00:42:41,120 --> 00:42:43,319
Speaker 1: once in a while we will look at what i'll

755
00:42:43,320 --> 00:42:46,840
Speaker 1: call good company, bad balance sheet. The fundamental company is

756
00:42:46,880 --> 00:42:49,000
Speaker 1: a good company and has been. It has all the

757
00:42:49,120 --> 00:42:54,120
Speaker 1: characters who like market leadership, margins, stability, some tailwinds, and

758
00:42:54,719 --> 00:42:57,319
Speaker 1: great management team, but it just had too much debt.

759
00:42:57,800 --> 00:43:01,520
Speaker 1: So we may try to provide an investment to a

760
00:43:01,560 --> 00:43:04,359
Speaker 1: company like that where when it comes out of bankruptcy

761
00:43:04,480 --> 00:43:06,560
Speaker 1: or its debt problem, it's a great company with the

762
00:43:06,640 --> 00:43:08,719
Speaker 1: right capital structure. But most of our most of our

763
00:43:08,760 --> 00:43:09,960
Speaker 1: things are not that.

764
00:43:09,960 --> 00:43:11,000
Speaker 3: That's really interesting.

765
00:43:11,480 --> 00:43:14,600
Speaker 2: So let's talk a little bit about the private equity industry.

766
00:43:15,640 --> 00:43:19,840
Speaker 2: We saw a lot of investors kind of rush in

767
00:43:19,840 --> 00:43:23,560
Speaker 2: in twenty twenty two when public markets stocks, am bonds

768
00:43:24,200 --> 00:43:28,680
Speaker 2: we're doing poorly. And since then there's been lots of

769
00:43:28,760 --> 00:43:35,880
Speaker 2: talk about how we price private holdings. What do you

770
00:43:35,920 --> 00:43:40,480
Speaker 2: think about this chatter about extending pretend or quarterly marks

771
00:43:40,560 --> 00:43:44,320
Speaker 2: not being very accurate or precise. And I'm not referring

772
00:43:44,360 --> 00:43:47,080
Speaker 2: to any of your companies, I'm talking generally.

773
00:43:47,239 --> 00:43:48,200
Speaker 3: This has been.

774
00:43:50,040 --> 00:43:53,600
Speaker 2: Chatter that's been in a lot of news.

775
00:43:54,560 --> 00:43:58,520
Speaker 1: So private equity, as you were talking about before, has

776
00:43:58,560 --> 00:44:03,120
Speaker 1: been growing now now for thirty five years. So as

777
00:44:03,200 --> 00:44:06,480
Speaker 1: the ecosystem keeps growing, there are more companies owned by

778
00:44:06,480 --> 00:44:09,600
Speaker 1: private equity, There are more good things, and there are

779
00:44:09,640 --> 00:44:12,600
Speaker 1: sometimes more bad things. So it's just it's just growing

780
00:44:12,719 --> 00:44:16,719
Speaker 1: so I think the trend to more people investing in

781
00:44:16,719 --> 00:44:21,719
Speaker 1: private equity has grown dramatically and it's it's continuing to grow.

782
00:44:22,320 --> 00:44:26,640
Speaker 1: And the institutional investors often are thinking, if you're a

783
00:44:26,640 --> 00:44:30,040
Speaker 1: big state pension fund, I want ten percent, twenty percent,

784
00:44:30,080 --> 00:44:32,840
Speaker 1: If you're some college endowments, forty percent in private equity.

785
00:44:33,160 --> 00:44:36,480
Speaker 1: But whatever is that percentage, they're targeting that and they've

786
00:44:36,520 --> 00:44:39,880
Speaker 1: allocated their assets to have that percentage invested in private equity.

787
00:44:41,120 --> 00:44:45,480
Speaker 1: So two big forces that affect all of these institutions

788
00:44:46,080 --> 00:44:50,600
Speaker 1: is one, what's the value of those private equity investments.

789
00:44:51,120 --> 00:44:53,319
Speaker 1: So if you targeted if you had a dollar to

790
00:44:53,360 --> 00:44:56,400
Speaker 1: invest and you targeted ten percent in private equity, and

791
00:44:56,440 --> 00:45:01,800
Speaker 1: those investment doubled, now you have twenty cents in private

792
00:45:01,800 --> 00:45:04,680
Speaker 1: equity instead of ten on your dollar, so your quote

793
00:45:04,719 --> 00:45:09,560
Speaker 1: over allocated. That's really good in a sense because your

794
00:45:09,560 --> 00:45:12,640
Speaker 1: private equity portfolios are up, but it's still a problem

795
00:45:13,000 --> 00:45:17,960
Speaker 1: because you're overallocated, so you stop making new commitments. The

796
00:45:18,000 --> 00:45:20,960
Speaker 1: same thing happens in a different way with your dollar

797
00:45:21,600 --> 00:45:23,839
Speaker 1: if that dollar is based on the value of all

798
00:45:23,880 --> 00:45:26,000
Speaker 1: of your holdings and the stock market say drops by

799
00:45:26,040 --> 00:45:29,319
Speaker 1: ten percent, now you only got ninety cents. If your

800
00:45:29,360 --> 00:45:31,680
Speaker 1: private equity is at ten cents, you're over allocated, and

801
00:45:31,719 --> 00:45:34,480
Speaker 1: if it's at twenty, you've got a real problem. And

802
00:45:34,520 --> 00:45:37,319
Speaker 1: it's really both those factors. They're called the numerator and

803
00:45:37,360 --> 00:45:44,280
Speaker 1: the denominator effect. That has caused some institutions to slow

804
00:45:44,320 --> 00:45:47,319
Speaker 1: down their commitments to private equity to get those back

805
00:45:47,360 --> 00:45:50,120
Speaker 1: in balance, because, as you know, the stock market was

806
00:45:50,160 --> 00:45:52,880
Speaker 1: down not this year, but last year, and private equity

807
00:45:52,960 --> 00:45:56,080
Speaker 1: values continue to be up. So that's one set of forces.

808
00:45:56,800 --> 00:45:59,279
Speaker 1: The second thing you raised is you know, how is

809
00:45:59,320 --> 00:46:02,279
Speaker 1: private equity valued. The stock market gets valued every day,

810
00:46:02,520 --> 00:46:04,759
Speaker 1: every stock you can see when it trades, every tick

811
00:46:06,160 --> 00:46:09,840
Speaker 1: the way private equity gets valued. And all private equity

812
00:46:09,840 --> 00:46:11,680
Speaker 1: firms in the United States with more than one hundred

813
00:46:11,680 --> 00:46:15,360
Speaker 1: and fifty million dollars of capital under management are registered

814
00:46:15,400 --> 00:46:19,640
Speaker 1: with the SEC. And one of the requirements is that

815
00:46:19,800 --> 00:46:24,680
Speaker 1: all private equity firms value their holdings every quarter and

816
00:46:24,760 --> 00:46:29,120
Speaker 1: that at least annually. Those valuations are typically subjected to audit.

817
00:46:29,200 --> 00:46:31,239
Speaker 1: As part of the audit process, the audits look at

818
00:46:31,280 --> 00:46:36,239
Speaker 1: those valuations. Now they're private companies, so you got what

819
00:46:36,320 --> 00:46:39,080
Speaker 1: a timing lag, if you will, So every quarter, so

820
00:46:39,200 --> 00:46:42,240
Speaker 1: let's say on March thirty first, the quarter ends. Private

821
00:46:42,280 --> 00:46:44,760
Speaker 1: equity firms takes time to get numbers from your companies,

822
00:46:44,800 --> 00:46:47,359
Speaker 1: and so there's typically forty five days where you try

823
00:46:47,400 --> 00:46:50,560
Speaker 1: to figure out what the value was on March thirty first,

824
00:46:50,600 --> 00:46:53,440
Speaker 1: and then you send those values to your investors. So

825
00:46:53,520 --> 00:46:57,439
Speaker 1: if you're invested in private equity March thirty one, by

826
00:46:57,520 --> 00:47:01,000
Speaker 1: May fifteenth, you will get to know what the private

827
00:47:01,000 --> 00:47:04,760
Speaker 1: equity firm valued those investments on. So that's a lag.

828
00:47:05,000 --> 00:47:09,200
Speaker 1: So people talk about the lag, and that's one inherent issue.

829
00:47:09,560 --> 00:47:12,239
Speaker 1: And the second is since it's not if we know

830
00:47:12,280 --> 00:47:14,359
Speaker 1: what's trading in the public market, so you know that

831
00:47:14,360 --> 00:47:16,799
Speaker 1: that was the trade yesterday. Whether someone paid too much

832
00:47:16,880 --> 00:47:19,600
Speaker 1: or too little, you know that was the trade. And

833
00:47:19,640 --> 00:47:22,200
Speaker 1: as we say, for every buyer who thinks they're getting

834
00:47:22,200 --> 00:47:24,560
Speaker 1: a deal, there's a seller who is happy with the price.

835
00:47:24,600 --> 00:47:28,520
Speaker 1: So there's a market the valuations being done by each

836
00:47:28,520 --> 00:47:31,360
Speaker 1: private equity firm. You don't really have that market test

837
00:47:31,520 --> 00:47:37,600
Speaker 1: except when it's sold. And so some people talk about

838
00:47:37,760 --> 00:47:41,480
Speaker 1: is the value real my personal belief In general, it's

839
00:47:41,560 --> 00:47:44,000
Speaker 1: very real. The sec comes in, looks at it, the

840
00:47:44,040 --> 00:47:48,480
Speaker 1: auditors bless it, and investors are sophisticated in general, so

841
00:47:49,040 --> 00:47:52,120
Speaker 1: they're pretty real, although people can cast dispersions, but often

842
00:47:52,160 --> 00:47:56,759
Speaker 1: that's the lag happening. You know, if you're if at

843
00:47:56,800 --> 00:47:59,799
Speaker 1: April thirtieth, after this notional March thirty one, the market

844
00:48:00,280 --> 00:48:03,359
Speaker 1: ten percent, you say, my private equity stuff's down ten percent. Well,

845
00:48:03,400 --> 00:48:06,560
Speaker 1: the valuation you get May fifteenth is as of March

846
00:48:06,640 --> 00:48:08,759
Speaker 1: thirty one, it's not going to be shown down because

847
00:48:08,800 --> 00:48:09,759
Speaker 1: it's not supposed to be.

848
00:48:09,920 --> 00:48:11,359
Speaker 3: You won't get that till the next quarter.

849
00:48:11,400 --> 00:48:13,480
Speaker 1: So the third thing, just I mean, just say last thing.

850
00:48:13,560 --> 00:48:17,600
Speaker 1: While the institutions have backed up new commitments in private equity,

851
00:48:17,640 --> 00:48:22,200
Speaker 1: which actually seems to be thawing as we're speaking, individuals,

852
00:48:22,480 --> 00:48:28,440
Speaker 1: individual investors are dramatically underinvested in private equity versus institutions,

853
00:48:28,480 --> 00:48:31,160
Speaker 1: and that is an even bigger pool of capital, if

854
00:48:31,160 --> 00:48:33,920
Speaker 1: you will, on the sidelines or now trying to invest

855
00:48:33,960 --> 00:48:37,520
Speaker 1: in private equity. And so that's another wave of flow.

856
00:48:37,680 --> 00:48:40,160
Speaker 1: So most people expect private equity to keep growing.

857
00:48:40,600 --> 00:48:44,040
Speaker 2: So you mentioned transactions are obviously the easiest way to

858
00:48:44,960 --> 00:48:48,800
Speaker 2: measure valuation. What are you seeing in terms of deal making?

859
00:48:49,320 --> 00:48:54,359
Speaker 2: Are private equity firms still making as many investments as

860
00:48:54,360 --> 00:48:57,120
Speaker 2: they were in recent years, and what are you seeing

861
00:48:57,120 --> 00:48:59,120
Speaker 2: on the other side, what about exits.

862
00:49:00,120 --> 00:49:02,960
Speaker 1: You know, we had a detailed conversation a few moments

863
00:49:03,000 --> 00:49:05,279
Speaker 1: ago about interest rates and their impact, and you were

864
00:49:05,320 --> 00:49:11,480
Speaker 1: talking about some companies declaring bankruptcy more often, and I

865
00:49:11,520 --> 00:49:15,880
Speaker 1: think that trend continues. And in terms of volume, deal

866
00:49:15,960 --> 00:49:19,480
Speaker 1: volume is about half of what it was two years ago.

867
00:49:19,400 --> 00:49:22,000
Speaker 2: Meaning new investments into existing companies.

868
00:49:21,719 --> 00:49:24,960
Speaker 1: And sales both because they're two sides at the same coin. Often,

869
00:49:25,000 --> 00:49:28,000
Speaker 1: I mean there are you can take companies public to exit,

870
00:49:28,040 --> 00:49:31,120
Speaker 1: and you can sell to public companies, but the private

871
00:49:31,280 --> 00:49:35,279
Speaker 1: buyer to private buyer is an active, active market, and

872
00:49:36,440 --> 00:49:42,200
Speaker 1: it's roughly down fifty percent. So new investments are down

873
00:49:42,400 --> 00:49:45,440
Speaker 1: and realizations are down, but the ones that are happening

874
00:49:46,000 --> 00:49:51,080
Speaker 1: are actually happening at prices close to, if not entirely,

875
00:49:51,120 --> 00:49:53,560
Speaker 1: as much as they were eighteen twenty four months ago.

876
00:49:53,840 --> 00:49:56,840
Speaker 2: So prices are holding up, just total volumes.

877
00:49:56,520 --> 00:49:59,160
Speaker 1: So far, prices are holding up now.

878
00:49:59,200 --> 00:50:05,000
Speaker 2: Obviously there's an implication there that the best companies are

879
00:50:05,040 --> 00:50:07,800
Speaker 2: getting a price. And if you have a little a

880
00:50:07,840 --> 00:50:10,960
Speaker 2: little hair on the deal or a blemish not so much.

881
00:50:11,040 --> 00:50:15,360
Speaker 1: Barry, you show yourself to be an astute observer or

882
00:50:15,480 --> 00:50:18,520
Speaker 1: keen understanding of how the world works. That's exactly what happens.

883
00:50:19,000 --> 00:50:22,960
Speaker 1: The average we see, which let's say is down maybe

884
00:50:23,239 --> 00:50:26,960
Speaker 1: half a multiple point, maybe three quarters of multipoint is

885
00:50:28,200 --> 00:50:30,480
Speaker 1: this year compared to two years ago, is only the

886
00:50:30,480 --> 00:50:33,600
Speaker 1: ones that's sold which are going to be the better companies.

887
00:50:34,040 --> 00:50:36,400
Speaker 1: So the multiple drop is a little more than shown

888
00:50:36,440 --> 00:50:38,120
Speaker 1: in the numbers quality adjusted.

889
00:50:38,360 --> 00:50:39,279
Speaker 3: You're exactly right.

890
00:50:39,640 --> 00:50:42,120
Speaker 2: I look at the world through the lens that everything

891
00:50:42,160 --> 00:50:45,200
Speaker 2: is survivorship biased, so that you're seeing the winners, you're

892
00:50:45,200 --> 00:50:47,560
Speaker 2: not seeing the ones that didn't close. And that is

893
00:50:48,560 --> 00:50:52,120
Speaker 2: that's something that's that's never far from my thoughts. So

894
00:50:52,680 --> 00:50:57,000
Speaker 2: let's focus on some of the sectors that American Securities

895
00:50:57,040 --> 00:51:00,440
Speaker 2: really likes. You're big in services, You're you're being in

896
00:51:00,520 --> 00:51:06,920
Speaker 2: consumer and healthcare, but you're especially formidable in industrials. Tell

897
00:51:07,000 --> 00:51:09,680
Speaker 2: us about those sectors and what's been the appeal.

898
00:51:11,040 --> 00:51:13,480
Speaker 1: Well, you're absolutely right. For the thirty year history of

899
00:51:13,520 --> 00:51:16,839
Speaker 1: the firm, roughly sixty percent of our investments have been

900
00:51:16,880 --> 00:51:20,600
Speaker 1: in so called industrials and the rest have been consumer

901
00:51:20,680 --> 00:51:29,040
Speaker 1: services and healthcare. With respect to industrials, I'm not sure

902
00:51:29,080 --> 00:51:32,399
Speaker 1: why it is the case, but lots of people don't

903
00:51:32,440 --> 00:51:33,200
Speaker 1: find it sexy.

904
00:51:33,960 --> 00:51:37,920
Speaker 2: I mean, you think about what a big industrial manufacturer does.

905
00:51:38,920 --> 00:51:43,880
Speaker 2: It's hard, it's dirty, it's complicated. As opposed to some

906
00:51:44,160 --> 00:51:47,799
Speaker 2: new software app that all the kids love. There's a

907
00:51:48,000 --> 00:51:53,160
Speaker 2: very different set of audiences for those businesses there is.

908
00:51:53,320 --> 00:51:57,480
Speaker 1: But you know, we need our industrial base, and interestingly

909
00:51:57,520 --> 00:52:01,480
Speaker 1: in this country it actually grows faster than the overall

910
00:52:01,600 --> 00:52:04,320
Speaker 1: GDP by a point or two for the last twenty years.

911
00:52:05,360 --> 00:52:06,160
Speaker 3: It's amazing.

912
00:52:06,239 --> 00:52:10,480
Speaker 1: It's a vibrant source of transactions and it's been very

913
00:52:10,520 --> 00:52:13,720
Speaker 1: successful for us. And we have to some extent built

914
00:52:13,719 --> 00:52:16,239
Speaker 1: our resources group and some of our internal functions to

915
00:52:16,280 --> 00:52:19,640
Speaker 1: help those management teams and those companies be better. That

916
00:52:19,719 --> 00:52:22,720
Speaker 1: are industrial companies. And the thing that we like about

917
00:52:22,719 --> 00:52:26,600
Speaker 1: it is because we're very focused on creating the best

918
00:52:26,719 --> 00:52:30,920
Speaker 1: risk adjusted returns we can. So we like stable businesses

919
00:52:32,440 --> 00:52:34,880
Speaker 1: and we when we do our due diligence with an

920
00:52:35,000 --> 00:52:38,360
Speaker 1: established business industrial business, if you will, you can understand

921
00:52:38,400 --> 00:52:42,120
Speaker 1: its manufacturing process and how that compares to its competitors.

922
00:52:42,560 --> 00:52:45,799
Speaker 1: You can understand its suppliers and how it purchases raw

923
00:52:45,840 --> 00:52:48,960
Speaker 1: materials and how that compares favorably or not to competitors.

924
00:52:49,160 --> 00:52:51,440
Speaker 1: And you can understand the customers, and particularly if you're

925
00:52:51,440 --> 00:52:54,480
Speaker 1: buying the number one market share player, you can really

926
00:52:54,600 --> 00:52:57,839
Speaker 1: see the industry and know what customers are thinking. So

927
00:52:57,920 --> 00:53:02,959
Speaker 1: we see stability in that and in a relatively large

928
00:53:03,000 --> 00:53:06,680
Speaker 1: number of situations, we're able to see the indicitia of

929
00:53:06,719 --> 00:53:10,279
Speaker 1: a successful investment equity investment, we hope because of that

930
00:53:10,360 --> 00:53:13,399
Speaker 1: stability and the ability to do due diligence, where other

931
00:53:13,440 --> 00:53:15,640
Speaker 1: people in the venture world, for example, are just looking

932
00:53:15,640 --> 00:53:18,000
Speaker 1: at how big is the runway and if we build it,

933
00:53:18,000 --> 00:53:19,960
Speaker 1: they will come, and God bless them they many of

934
00:53:19,960 --> 00:53:23,080
Speaker 1: those folks have done terrific investing for their investors. But

935
00:53:23,160 --> 00:53:24,960
Speaker 1: that's not what we do. We're looking at what is

936
00:53:25,719 --> 00:53:28,600
Speaker 1: and what can continue to be the case, and how

937
00:53:28,680 --> 00:53:30,800
Speaker 1: might we be able to help management make it better.

938
00:53:30,960 --> 00:53:35,720
Speaker 2: So you mentioned industrials have been growing faster than GDP

939
00:53:35,840 --> 00:53:39,680
Speaker 2: over the past twenty years, an era, as we previously discussed,

940
00:53:40,040 --> 00:53:43,520
Speaker 2: a very low interest rates. What does that mean for

941
00:53:43,680 --> 00:53:46,600
Speaker 2: the next ten or twenty years for industrials. How do

942
00:53:46,719 --> 00:53:50,160
Speaker 2: you think about the sector today in a higher inflation,

943
00:53:50,320 --> 00:53:51,800
Speaker 2: higher interest rate environment.

944
00:53:52,080 --> 00:53:56,520
Speaker 1: Well, you know, all businesses are dealing in an active market, right,

945
00:53:56,560 --> 00:53:59,840
Speaker 1: they have active competitors their customers are thinking how to

946
00:53:59,880 --> 00:54:03,440
Speaker 1: do the best for themselves. Suppliers likewise, and so the

947
00:54:03,480 --> 00:54:07,800
Speaker 1: forces that will have made a company survive and perhaps

948
00:54:07,880 --> 00:54:10,719
Speaker 1: thrive over the last twenty years are likely to be

949
00:54:10,760 --> 00:54:13,680
Speaker 1: pretty consistent and the product of market based forces, and

950
00:54:13,760 --> 00:54:18,240
Speaker 1: so the really good companies will should keep doing well

951
00:54:18,520 --> 00:54:22,400
Speaker 1: irrespective of the environment. Sometimes it's easier, sometimes it's harder,

952
00:54:22,560 --> 00:54:25,560
Speaker 1: but again it's more the microeconomic forces that are going

953
00:54:25,640 --> 00:54:29,440
Speaker 1: to matter for that company than a general macroeconomic something.

954
00:54:29,920 --> 00:54:32,480
Speaker 2: So let me let me tack in a slightly different direction.

955
00:54:34,040 --> 00:54:37,200
Speaker 2: A lot of your site talks about citizenship being a

956
00:54:37,239 --> 00:54:42,879
Speaker 2: good corporate steward, and you have discussions of deverstitating, inclusion, philanthropy, esg.

957
00:54:44,000 --> 00:54:47,759
Speaker 2: How do you work that sort of focus into.

958
00:54:47,480 --> 00:54:49,640
Speaker 3: What you do on the private equity side.

959
00:54:51,800 --> 00:54:54,839
Speaker 1: Well, some of it's some of it's related, and some

960
00:54:54,920 --> 00:54:58,920
Speaker 1: of it enables the other stuff. So we grew out

961
00:54:58,920 --> 00:55:02,960
Speaker 1: of the Rosenwaldt family. Rosemol family had a terrific philanthropic legacy,

962
00:55:03,440 --> 00:55:06,879
Speaker 1: and we're terrific citizens and cared about communities and we

963
00:55:06,920 --> 00:55:11,280
Speaker 1: try to do the same. So we we have lots

964
00:55:11,280 --> 00:55:14,360
Speaker 1: of programs that are philanthropic that are enabled by the

965
00:55:14,400 --> 00:55:17,280
Speaker 1: success of our businesses. We give us a fixed percent

966
00:55:17,320 --> 00:55:22,280
Speaker 1: of our annual profits to charities every year as an example.

967
00:55:22,800 --> 00:55:24,239
Speaker 1: But there are other things that we're trying to do

968
00:55:24,239 --> 00:55:28,640
Speaker 1: every day with our businesses. You know, so called ESG. Environmental,

969
00:55:28,680 --> 00:55:32,760
Speaker 1: social and governance factors we think are not only good

970
00:55:32,840 --> 00:55:35,320
Speaker 1: for the planet, but they enable ebitt the a growth.

971
00:55:35,440 --> 00:55:38,320
Speaker 1: And so being a good steward is about being efficient.

972
00:55:38,680 --> 00:55:40,319
Speaker 1: You don't want to waste energy, and you want to

973
00:55:40,320 --> 00:55:42,879
Speaker 1: reduce it if you can. You want to. You don't

974
00:55:42,960 --> 00:55:45,239
Speaker 1: certainly don't want your employees to get hurt on the job.

975
00:55:45,600 --> 00:55:48,680
Speaker 1: So every monthly book from every one of our companies

976
00:55:48,760 --> 00:55:51,000
Speaker 1: for years and years and years, starts with safety. It's

977
00:55:51,040 --> 00:55:53,000
Speaker 1: the most important thing. We want employees that are showing

978
00:55:53,080 --> 00:55:55,080
Speaker 1: up to know that they and their loved ones now

979
00:55:55,080 --> 00:55:57,520
Speaker 1: we're in a safe environment. I mean, and this seems

980
00:55:57,560 --> 00:55:59,839
Speaker 1: like how everyone should be acting. But and I hope

981
00:55:59,840 --> 00:56:01,600
Speaker 1: they We certainly are too.

982
00:56:01,960 --> 00:56:04,120
Speaker 2: There's been a lot of studies on governance and it

983
00:56:04,200 --> 00:56:07,360
Speaker 2: turns out that companies and there's a little bit of

984
00:56:07,360 --> 00:56:11,359
Speaker 2: a chicken and egg question here issue here, but companies

985
00:56:11,400 --> 00:56:16,480
Speaker 2: that have broad governance with a variety of people in

986
00:56:17,160 --> 00:56:22,359
Speaker 2: board positions and senior management positions tend to outperform, at

987
00:56:22,440 --> 00:56:25,600
Speaker 2: least in the public markets, companies that, for example, have

988
00:56:25,719 --> 00:56:29,080
Speaker 2: no women on their boards of directors. Do you ever

989
00:56:29,120 --> 00:56:32,759
Speaker 2: think about this when you're considering an investment or Is

990
00:56:32,760 --> 00:56:37,080
Speaker 2: that the sort of thing that gets facilitated post investment?

991
00:56:38,320 --> 00:56:41,160
Speaker 1: Well, we think about we think about being a good

992
00:56:41,280 --> 00:56:44,400
Speaker 1: steward and a good corporate citizen and investing in businesses

993
00:56:44,400 --> 00:56:48,120
Speaker 1: that enable us to do that. Going in period full

994
00:56:48,160 --> 00:56:50,880
Speaker 1: stop the boards. Every one of our companies has an

995
00:56:50,920 --> 00:56:54,680
Speaker 1: independent board, so the CEOs on the board. Typically we're

996
00:56:54,719 --> 00:56:56,520
Speaker 1: the controlling shaffers who are on the board, but we

997
00:56:56,560 --> 00:57:00,560
Speaker 1: actually create a unique board for every company and try

998
00:57:00,600 --> 00:57:03,680
Speaker 1: to model the best of diversity in all its forms

999
00:57:03,760 --> 00:57:05,560
Speaker 1: and diverse members on those boards.

1000
00:57:05,640 --> 00:57:08,239
Speaker 2: So this isn't just the sort of thing that is

1001
00:57:09,280 --> 00:57:13,840
Speaker 2: you know, green dressing or whatever. Greenwashing is the phrase

1002
00:57:13,880 --> 00:57:18,120
Speaker 2: of the day. There's an actual corporate advantage to having

1003
00:57:18,200 --> 00:57:21,080
Speaker 2: a diverse board. Is that a fair way to look

1004
00:57:21,120 --> 00:57:21,400
Speaker 2: at it?

1005
00:57:21,600 --> 00:57:24,960
Speaker 1: I think. I think the studies use sites show that

1006
00:57:25,040 --> 00:57:31,240
Speaker 1: diversity is profitable. Okay, diversity is profitable for investors. And

1007
00:57:31,480 --> 00:57:33,600
Speaker 1: the great thing about being a private company is there's

1008
00:57:33,640 --> 00:57:38,120
Speaker 1: a whole reduced liability structure for outside directors. So we

1009
00:57:38,160 --> 00:57:40,160
Speaker 1: often find, and I think this is broadly true for

1010
00:57:40,240 --> 00:57:43,360
Speaker 1: the private equity industry. There is a lot of people

1011
00:57:43,440 --> 00:57:46,640
Speaker 1: who are great people and very experienced and can add

1012
00:57:46,680 --> 00:57:49,680
Speaker 1: value to boards, that are actively interested in joining the

1013
00:57:49,680 --> 00:57:53,040
Speaker 1: boards of private companies, maybe even more so than public companies.

1014
00:57:53,240 --> 00:57:56,640
Speaker 2: All right, so let me shift gears again. You were

1015
00:57:56,680 --> 00:57:59,840
Speaker 2: a lecturer. You began at Stanford in two thousand and six,

1016
00:58:00,120 --> 00:58:00,760
Speaker 2: still doing that.

1017
00:58:01,080 --> 00:58:03,439
Speaker 1: Well, it's really one day a year.

1018
00:58:03,520 --> 00:58:06,040
Speaker 3: There was a test lecture a terrific.

1019
00:58:06,400 --> 00:58:09,840
Speaker 1: Man professor when I was there. I became his research

1020
00:58:09,840 --> 00:58:12,200
Speaker 1: assistant and he asked me to come one day and

1021
00:58:12,240 --> 00:58:15,000
Speaker 1: talk about private equity. So I go to Stanford one

1022
00:58:15,040 --> 00:58:16,919
Speaker 1: day a year since two thousand and six.

1023
00:58:17,520 --> 00:58:22,720
Speaker 2: And you're involved in a number of other philanthropies, the

1024
00:58:22,760 --> 00:58:29,080
Speaker 2: eleven sixty two Foundation, the Atlantic Council, just a run

1025
00:58:29,120 --> 00:58:34,400
Speaker 2: of this, Northwell Health, Board of Trustees of Princeton Theological Seminary.

1026
00:58:34,720 --> 00:58:36,240
Speaker 2: Tell us a little bit about what you do on

1027
00:58:36,280 --> 00:58:38,000
Speaker 2: the philanthropic side.

1028
00:58:39,880 --> 00:58:42,600
Speaker 1: Well, you know, being a good corporate citizen isn't just

1029
00:58:42,680 --> 00:58:44,520
Speaker 1: talking about it. You got to walk to talk. And

1030
00:58:44,640 --> 00:58:48,400
Speaker 1: so I think it's important to give of one's time

1031
00:58:48,440 --> 00:58:53,040
Speaker 1: and one's treasure to these institutions, and I'm proud to

1032
00:58:53,040 --> 00:58:53,720
Speaker 1: be able to do it.

1033
00:58:54,200 --> 00:58:56,640
Speaker 3: So I only have you for a few more minutes.

1034
00:58:57,040 --> 00:59:01,200
Speaker 2: Let's jump to our speed round and just ask you

1035
00:59:01,200 --> 00:59:03,320
Speaker 2: some of the same questions we ask all of our guests,

1036
00:59:03,800 --> 00:59:06,760
Speaker 2: starting with what what have you been streaming these days?

1037
00:59:06,800 --> 00:59:09,080
Speaker 2: Tell us what's kept you entertained?

1038
00:59:11,040 --> 00:59:15,520
Speaker 1: Well, very I watch so little personal media of any form.

1039
00:59:15,920 --> 00:59:19,120
Speaker 1: What I what I do watch is typically with my kids,

1040
00:59:19,800 --> 00:59:23,400
Speaker 1: and the Witcher is a big fan favorite for them,

1041
00:59:24,040 --> 00:59:27,000
Speaker 1: as are whatever Star Wars spin off at the moment.

1042
00:59:27,640 --> 00:59:30,200
Speaker 2: Let's talk about mentors. You mentioned one of your early

1043
00:59:30,280 --> 00:59:33,080
Speaker 2: mentors who helped shape your career.

1044
00:59:34,200 --> 00:59:37,280
Speaker 1: Oh, I've been blessed with so many. I'd feel bad

1045
00:59:37,360 --> 00:59:41,000
Speaker 1: naming some, but I mentioned a couple of PhD professors.

1046
00:59:41,000 --> 00:59:44,760
Speaker 1: There's people I've worked with. Uh, there's you know, Chuck Klin,

1047
00:59:44,880 --> 00:59:47,919
Speaker 1: with whom I founded American Securities, who's a dear, dear

1048
00:59:48,440 --> 00:59:50,520
Speaker 1: mentor and important figure in my life. But there's I'm

1049
00:59:50,520 --> 00:59:52,040
Speaker 1: really blessed with a lot of people who've tried to

1050
00:59:52,040 --> 00:59:52,320
Speaker 1: help me.

1051
00:59:52,560 --> 00:59:53,640
Speaker 3: Let's talk about books.

1052
00:59:53,680 --> 00:59:55,360
Speaker 2: What are some of your favorites and what are you

1053
00:59:55,440 --> 00:59:56,440
Speaker 2: reading right now?

1054
00:59:57,000 --> 01:00:00,760
Speaker 1: You know pleasure. Reading is a sad asualty of my

1055
01:00:00,880 --> 01:00:04,560
Speaker 1: day job, but occasionally I do get to steal sometime.

1056
01:00:05,200 --> 01:00:09,160
Speaker 1: There's a terrific book that's so elegant and peaceful called

1057
01:00:09,160 --> 01:00:12,880
Speaker 1: A Gentleman in Moscow, about a man held in a

1058
01:00:12,880 --> 01:00:17,400
Speaker 1: hotel for decades. That is a really a read I

1059
01:00:17,440 --> 01:00:19,320
Speaker 1: would recommend to other people, who's given me by a

1060
01:00:19,360 --> 01:00:25,920
Speaker 1: colleague of mine. And I'm currently reading Outlive by Peter Attiyah,

1061
01:00:26,480 --> 01:00:30,040
Speaker 1: which is about you know, living longer and living healthfully.

1062
01:00:31,040 --> 01:00:31,520
Speaker 3: Interesting.

1063
01:00:32,120 --> 01:00:35,200
Speaker 2: Our final two questions, what sort of advice would you

1064
01:00:35,280 --> 01:00:39,400
Speaker 2: give a recent college graduate interested in a career in

1065
01:00:39,480 --> 01:00:41,040
Speaker 2: private equity or investing.

1066
01:00:41,400 --> 01:00:43,760
Speaker 1: I think the two most important things for a career

1067
01:00:43,760 --> 01:00:46,880
Speaker 1: in anything is do you like the work? And do

1068
01:00:46,920 --> 01:00:49,520
Speaker 1: you like the people? And I tell my kids that,

1069
01:00:49,600 --> 01:00:52,040
Speaker 1: and I tell everyone I meet. You know, don't whatever

1070
01:00:52,080 --> 01:00:56,919
Speaker 1: it is, tech, private equity, something else. Don't get caught

1071
01:00:56,960 --> 01:00:59,600
Speaker 1: up in the hype. Do you like the work, go

1072
01:00:59,680 --> 01:01:03,200
Speaker 1: try it. Understand what your friends or more people more senior,

1073
01:01:03,920 --> 01:01:07,080
Speaker 1: are doing. And do you like the work. It's you

1074
01:01:07,080 --> 01:01:09,960
Speaker 1: can't like private equity if you don't like modeling in numbers.

1075
01:01:10,880 --> 01:01:12,800
Speaker 1: So do you like the work, and make sure you

1076
01:01:12,800 --> 01:01:15,200
Speaker 1: work with people you like, because life is people and

1077
01:01:15,240 --> 01:01:17,520
Speaker 1: if you love the people you work with, you'll be

1078
01:01:17,600 --> 01:01:19,919
Speaker 1: learning and growing and happy every day. And if you don't,

1079
01:01:20,000 --> 01:01:22,160
Speaker 1: it doesn't matter what you're doing, you're not going to

1080
01:01:22,200 --> 01:01:22,600
Speaker 1: be happy.

1081
01:01:23,080 --> 01:01:25,760
Speaker 2: And our final question, what do you know about the

1082
01:01:25,800 --> 01:01:29,880
Speaker 2: world of private equity today? You wish you knew back

1083
01:01:29,920 --> 01:01:33,080
Speaker 2: in nineteen ninety four when you were first launching your firm.

1084
01:01:33,880 --> 01:01:38,880
Speaker 1: I think it would. It is amazing to me and

1085
01:01:39,000 --> 01:01:41,840
Speaker 1: probably to most of the other people who started in

1086
01:01:41,840 --> 01:01:44,880
Speaker 1: private equity in nineteen eighties, that this has become a

1087
01:01:45,080 --> 01:01:48,800
Speaker 1: massive industry. Honestly, I thought, and I think most of

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Speaker 1: the other people doing it thought, we were just we

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01:01:51,200 --> 01:01:52,680
Speaker 1: just saw the world a little bit different and there

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01:01:52,720 --> 01:01:55,280
Speaker 1: were a bunch of companies which had cash flow characteristics

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01:01:55,320 --> 01:01:59,200
Speaker 1: different than their EPs characteristics, and so we could buy

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01:01:59,240 --> 01:02:02,040
Speaker 1: some of these companies and have fun working with the

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01:02:02,080 --> 01:02:06,040
Speaker 1: management teams. And that this, you know, little side niche

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Speaker 1: has become so huge is really shocking to me.

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Speaker 2: Huh, really really fascinating. Michael, thank you for being so

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Speaker 2: generous with your time. We have been speaking with Michael Fish.

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Speaker 2: He is the CEO of American Securities, a twenty seven

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Speaker 2: billion dollar private equity firm. If you enjoy this conversation, well,

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Speaker 2: feel free to check out any of our previous five

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Speaker 2: hundred discussions we've had over the past nine years. You

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01:02:33,640 --> 01:02:38,560
Speaker 2: can find those at iTunes, Spotify, YouTube, wherever you get

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01:02:38,640 --> 01:02:42,479
Speaker 2: your favorite podcast. Sign up for our daily reading list

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01:02:42,560 --> 01:02:46,080
Speaker 2: at ridhlts dot com. Follow me on Twitter at Ritoltz.

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01:02:46,520 --> 01:02:49,920
Speaker 2: Follow all of the Bloomberg family of podcasts on Twitter

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01:02:50,440 --> 01:02:53,480
Speaker 2: at Podcasts. I would be remiss if I did not

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01:02:53,600 --> 01:02:56,880
Speaker 2: thank the crack team who helps me put these conversations

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Speaker 2: together each week. Meredith Brank is my audio engineer at

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01:03:00,960 --> 01:03:04,400
Speaker 2: tik of Albron is my project manager. Anna Luke is

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01:03:04,440 --> 01:03:08,040
Speaker 2: my producer. Sean Russo is my researcher.

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Speaker 3: I'm Barry Hilts.

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01:03:09,920 --> 01:03:13,720
Speaker 2: You've been listening to Masters in Business on Bloomberg Radio.