Speaker 1: This is Master's in Business with Barry rid Holds on
Speaker 1: Bloomberg Radio.
Speaker 2: This week on the podcast, I have an extra special guest.
Speaker 2: Michael Fish is co founder and CEO of American Securities.
Speaker 2: They're one of the older private equity firms around, been
Speaker 2: in business since nineteen ninety four. They run over twenty
Speaker 2: seven billion dollars in assets. If you're at all interested
Speaker 2: in what it's like to run a private equity firm
Speaker 2: that doesn't just buy up companies and parcel them out,
Speaker 2: but rather partners with management, keeps the teams in place
Speaker 2: on the companies they buy, and just facilitates the improvement
Speaker 2: of the company, how it operates, how they're able to
Speaker 2: bring expertise both in along with capital and whatever necessary
Speaker 2: debt is, as well as a network of experts. Then
Speaker 2: I think you're going to find this to be a
Speaker 2: fascinating conversation. There aren't a lot of companies and there
Speaker 2: aren't a lot of people that have the historical perspective
Speaker 2: on the rise of private equity like Michael Fish does.
Speaker 2: I found this conversation to really be intriguing, and I
Speaker 2: think you will also with no further ado. My discussion
Speaker 2: with American Security CEO, Michael Fish.
Speaker 1: Thank you Berry. It's a pleasure to be here.
Speaker 3: It's a pleasure to have you.
Speaker 2: So let's talk a little bit about your background BA
Speaker 2: in economics from Dartmouth. You get a Stanford NBA. What
Speaker 2: was the original career plan? Were you always thinking about
Speaker 2: going into finance?
Speaker 1: The original career plan was to be employed to provide
Speaker 1: a safety net for my mother and my two sisters. Right.
Speaker 1: But if I had a plan as to how to
Speaker 1: do that when I went to college, it was learn
Speaker 1: as much as I could, as fast as I could,
Speaker 1: and get a BA and then become an accountant and
Speaker 1: a lawyer, because then I figured I could always be
Speaker 1: deployed either managing the numbers or doing law and get
Speaker 1: those two degrees.
Speaker 2: That that's not the direction you ended up going though.
Speaker 2: What was it that made you say, Hey, this finance
Speaker 2: thing looks like it's fun and interesting.
Speaker 1: Well, it's, you know, like life, it's a serendipitous series
Speaker 1: of things. I met a terrific man at Dartmouth named
Speaker 1: John Hennessy Junior. He was the ex deean of the
Speaker 1: Tuck School, the business school at Dartmouth College, and I
Speaker 1: took a freshman seminar with him because I needed a course,
Speaker 1: and he became a mentor. And he once asked me,
Speaker 1: when you just asked me? And I explained him, get
Speaker 1: the CPA, get the law degree, I'd always be employable.
Speaker 1: And he kind of said, hmm, I'm higher. Have you
Speaker 1: thought about an MBA?
Speaker 2: Really? That's very interesting, though, says the person at Tuck
Speaker 2: Business School.
Speaker 1: Right exactly. And he ultimately encouraged me to apply to
Speaker 1: the three to two program. They had a dormant program
Speaker 1: left over from the Korean War. You know, business schools,
Speaker 1: of course have favored people with experience.
Speaker 2: So five years gives you undergraduate and graduate is that the.
Speaker 1: Time you basically do three years as an undergrad. You
Speaker 1: apply to the Tuck school. If you get in and
Speaker 1: it hadn't taken anyone in over a decade, then you
Speaker 1: do your senior year effectively as the first year MBA
Speaker 1: do the second year, and you get both degrees in
Speaker 1: five years.
Speaker 3: Wow.
Speaker 1: And he encouraged me to apply. He wrote a recommendation
Speaker 1: for me, and I guess, surprising, not surprisingly after that.
Speaker 3: I did get in, But you went to Stanford, not Tuck.
Speaker 1: So I trotted down the street to call to his
Speaker 1: assistant made an appointment, all sweaty and nervous, and went
Speaker 1: to thank him for his gracious recommendation. And he said,
Speaker 1: in the way of good mentors, well do you want
Speaker 1: to go? And I'm thinking he's the x dan of
Speaker 1: the business school, like, this is a trick question. And
Speaker 1: I gave him the deer in the headlights look, and
Speaker 1: he said, well, let me let's let me imagine we
Speaker 1: got three letters here. We got a letter to get
Speaker 1: into Tuck, a letter to get into Harvard, and a
Speaker 1: letter to get into Stanford. And I said well, and
Speaker 1: I thought to myself, well, I know he went to Harvard, right,
Speaker 1: And he said, Dean Attuck is a trick question. And
Speaker 1: I said something like, well, I guess Harvard or Stanford.
Speaker 1: And he said, well, then we're done. And I said,
Speaker 1: but I'm not into Harvard and Stanford. He said, well
Speaker 1: you will be.
Speaker 2: That's very funny. So in between Dartmouth and Stanford you
Speaker 2: work for Goldman Sachs doing M and A early eighties.
Speaker 3: How is that?
Speaker 2: How did that help prepare your path to private equity?
Speaker 1: Well, that same man the next year I trotted down
Speaker 1: and he's said, well, okay, we're applying to Harvard and Stanford,
Speaker 1: aren't you? And when do I write my letter of recommendation?
Speaker 1: So he did, and I was fortunate to be accepted
Speaker 1: to both and that was very important because when this
Speaker 1: was the dawning of what is now a big analyst
Speaker 1: program across the country in all banks and investment banks.
Speaker 1: But back then, in nineteen eighty three, the entire analyst
Speaker 1: program of Goldman Sachs was twenty five people, and that
Speaker 1: was a big expansion from the prior year before, and
Speaker 1: it had only been in existence for two years, so
Speaker 1: Wall Street was so much smaller. Barry, you remember, back
Speaker 1: in nineteen eighty three, Goldman Sacks had about thirty thousand
Speaker 1: total employees, fifteen hundreds.
Speaker 3: They were a private partnership. They weren't even public.
Speaker 1: YEP.
Speaker 3: Very different world.
Speaker 1: And the entire merger department of Goldman Sachs in nineteen
Speaker 1: eighty three was thirty two people. That's amazing, and I
Speaker 1: like to say none were lowered to the ground than me,
Speaker 1: a first year analyst, which meant I was below ground.
Speaker 2: And how did you end up at Bain and Company
Speaker 2: in Paris?
Speaker 1: What was that like? Well, in the time that I
Speaker 1: was working at Goldman Sachs. In mergers, there were a
Speaker 1: bunch of big public companies who were on We were
Speaker 1: on M and a retainer they call it. So the
Speaker 1: public companies looking to buy lots of acquisitions, and they
Speaker 1: would have us running the numbers with their people for them,
Speaker 1: as they would have Bain and Company in two of
Speaker 1: these situations doing the strategic work alongside their management team.
Speaker 1: So I got to know the work and we would
Speaker 1: jointly make presentations to the senior management team or their
Speaker 1: board if a deal went far. And I got to
Speaker 1: see firsthand what Bain was doing in strategic consulting and
Speaker 1: understand their view of business separate from the numbers. And
Speaker 1: so when I did go out to Stanford, I wanted
Speaker 1: to spend my summer learning that better and in Paris,
Speaker 1: and Bain was kind enough to offer me a job
Speaker 1: to facilitate.
Speaker 2: I have to imagine that Paris in the mid eighties
Speaker 2: was just delightful.
Speaker 1: It was not tough duty. I was very lucky to
Speaker 1: be there and grateful all summer.
Speaker 2: So you come out of Stanford, you enter the LBO world,
Speaker 2: what we now call essentially private credit and private equity.
Speaker 2: What was it like in the late nineteen eighties, how
Speaker 2: to be the wild West. It really wasn't a mature
Speaker 2: industry the way it is today.
Speaker 1: Well buryer again like Wall Street. It was all so
Speaker 1: much smaller. In nineteen eighty three, by my reckoning, the
Speaker 1: entire global institutional private equity business was less than a
Speaker 1: billion dollars of committed capital.
Speaker 3: That's unbelievable, large nothing.
Speaker 1: The largest fund then was KKR with one hundred and
Speaker 1: seventy five million dollars. The second largest fund was forcement
Speaker 1: Little with one hundred and fifty I.
Speaker 2: Mean these are transaction levels. Today those entire funds are
Speaker 2: like partial transaction.
Speaker 1: They'd be less than I'm sure ten or twenty percent
Speaker 1: of what KKR would put into many private equity deals.
Speaker 2: So you're doing LBO, you're doing M and A. How
Speaker 2: did those experiences lead to a career in private equity?
Speaker 1: So there was almost no M and A activity. There
Speaker 1: was no M and A departments in any investment bank
Speaker 1: really until the very late seventies. Because the today where
Speaker 1: we talk about return on equity, your margins with your
Speaker 1: stock price. Back then, if you were in business in
Speaker 1: you know, the real world, they said how many people
Speaker 1: work for you? And if you started your career on
Speaker 1: a line became a line manager or foreman, became a
Speaker 1: plant manager maybe, or a division manager, so on up
Speaker 1: the line. If people ask you how many people work
Speaker 1: for you, and you said, well, I sold a business,
Speaker 1: you know, I had a thousand, but now I'm at
Speaker 1: you know, eight hundred. When you barry, you're not a
Speaker 1: good manager. I thought you were a manager. So literally
Speaker 1: nobody sold in and the only things that got sold
Speaker 1: were bankruptcies. The odd company that went bankrupt would need
Speaker 1: to get sold. But there wasn't an active M and
Speaker 1: A business. There wasn't a leverage finance business, all the
Speaker 1: things we know now. So when I was at Goldman
Speaker 1: Sachs doing M and A from eighty three to eighty five,
Speaker 1: there came to be some people looking at the M
Speaker 1: and A business was started to boom, be a fraction
Speaker 1: of what it is now. But there came to be
Speaker 1: in certain situations buyers that were bootstrap buyers, that were
Speaker 1: we would call them today. They then leveraged buyout financiers,
Speaker 1: and now we call it the private equity industry. And
Speaker 1: so I came to see some of these entities at
Speaker 1: the very early stages KKR would be one, but there
Speaker 1: were others and a lot of entrepreneurs trying to do
Speaker 1: the same thing, because wealthy families were often these bootstrap buyers.
Speaker 1: And honestly, it was almost like a religious war between
Speaker 1: two views of the world. EPs earnings per share that
Speaker 1: all public companies would look at to evaluate mergers and
Speaker 1: cash flow ebit DA, which didn't exist as a term,
Speaker 1: believe it or not back then, but ibadiya cash flow
Speaker 1: was how these these bootstrap buyers would look at it.
Speaker 1: And this seemed kind of interesting and new and different,
Speaker 1: and I became interested in how they did what they
Speaker 1: did and how they valued it and the differences between
Speaker 1: that and ebit DA. So sorry then, EPs.
Speaker 2: So in nineteen ninety four, you and your co found
Speaker 2: Chuck Klein launch what is the present version of American Securities?
Speaker 2: What was the catalyst for launching the firm?
Speaker 3: Then?
Speaker 2: What kind of business were you hoping to build?
Speaker 1: Well, it was more than just Chuck and I. So
Speaker 1: we had the great gift of the Rosenwaldt family. So
Speaker 1: I had worked for two private equity firms when I
Speaker 1: got out of Stanford, so I'd really gotten a little
Speaker 1: bit of experience. I was still young, Hope. I still
Speaker 1: am young today, but I'd gotten a little bit of experience,
Speaker 1: and I met Chuck, and Chuck was then the senior
Speaker 1: financial advisor to the William ROSENWALDT family and the William
Speaker 1: Rosenwald family. Julius was the genius behind Sears Roebuck and
Speaker 1: so they had largesse from the Rosenwald fortune.
Speaker 2: So, in other words, this after building, helping to build
Speaker 2: Seers and run Seers for a number of years, this
Speaker 2: was we would call that today a family office of.
Speaker 1: It absolutely was. It was called w R. S. William
Speaker 1: Rosenwald family Associates. Julius Rosenwald, who was the eminence grease
Speaker 1: behind the growth of Sears the way Ray crock was
Speaker 1: with McDonald genius for the Catalog and Downtown department stores.
Speaker 1: Sears Alton got taken public. He passed away in the
Speaker 1: nineteen thirties. Bill was his youngest son. Bill separated his
Speaker 1: money from that of his siblings and came to New
Speaker 1: York and right after World War Two set up his
Speaker 1: family office modeled along the lines of the Rockefeller family,
Speaker 1: and he's founded the name. He registered the name American
Speaker 1: Securities Corporation, the first corporate owned broker dealer. All the
Speaker 1: other ones had been private partnerships, but he had capital
Speaker 1: and didn't want to have it at risk, and that
Speaker 1: family office had done were then called bootstraps, all sorts
Speaker 1: of investments, not just the stocks and bonds common of
Speaker 1: wealthy families of the day, but actually buying businesses, some
Speaker 1: very very successful businesses that were still private, that were
Speaker 1: private when I bought them. Now one of them is
Speaker 1: public and as a equity market cap of thirty five
Speaker 1: billion dollars. But Chuck was their senior financial advisor, so
Speaker 1: he's buying selling stocks. And Chuck and I hit it
Speaker 1: off on our first breakfast on the Upper East Side
Speaker 1: here in New York, and he kindly asked me if
Speaker 1: I would come join him, saying that he would if
Speaker 1: he wanted me to come join him. He was fifty five,
Speaker 1: he wanted to retire when he's sixty. Families take a
Speaker 1: while to get used to somebody, so he wanted me
Speaker 1: to work with him and then he'd retire. And I
Speaker 1: said to Chuck, I really like you, but that's not
Speaker 1: really what I want to do. But I got a
Speaker 1: different idea. You be my partner. We'll set up a
Speaker 1: private equity firm, and the Rosewold family will be our
Speaker 1: lead investor, and that's what I want to do.
Speaker 2: And everybody signed on and said, let's go. That's the
Speaker 2: launch of the modern version of American securities.
Speaker 1: It's more complicatan that because Chuck was a very cautious investors.
Speaker 1: So what Chuck actually said was, Okay, well, come work
Speaker 1: with me for a year and assuming that works out, well,
Speaker 1: then we'll go raise this private equity firm.
Speaker 3: Right.
Speaker 1: So I joined the Rosenwald family in the spring of
Speaker 1: nineteen ninety three, and we we did some investing together
Speaker 1: for the first year, and we raised our private equity
Speaker 1: fund the next year.
Speaker 2: I almost feel compelled to point out to younger listeners
Speaker 2: who may not be familiar with what Sears was back
Speaker 2: in the day. But I'm not exaggerating when I say
Speaker 2: Sears was the Amazon of its time. It was America's
Speaker 2: largest retailer. Every major city, every major town had a Sears.
Speaker 2: They were dominant, weren't they.
Speaker 1: Oh? Absolutely. I like to say I hadn't thought about
Speaker 1: think about Amazon. I like to say they created the
Speaker 1: walton esque fortune, ok the first half of the nineteen
Speaker 1: hundreds because they were Walmart at least and maybe Amazon two.
Speaker 1: They had a one third market share of certain product
Speaker 1: sales in the entire country. And they were also an
Speaker 1: amazing they picked. Julius successfully leveraged two really great trends.
Speaker 1: One was the urbanization of America and the downtown department store,
Speaker 1: which was so prevalent then and then almost on a
Speaker 1: different axis to the catalog which was mailed. The Sears
Speaker 1: Catalog was mail to homes across the country and it
Speaker 1: allowed anyone in any community of any background to buy
Speaker 1: exactly what the city slickers were buying, or vice versa.
Speaker 1: And that was and they were. Interestingly, I think it's
Speaker 1: true to say the first non utility, non railroad that
Speaker 1: was thought stable enough to be allowed to be a
Speaker 1: public company. Huh. Only utilities and railroads at the beginning
Speaker 1: of the stock market were thought stable enough.
Speaker 2: So last question about that. That's really fascinating, and there's
Speaker 2: a whole long history of things that Sears spun out.
Speaker 2: I think the Discover card came from Sears and All
Speaker 2: State Insurance and a couple of banks. I mean, it
Speaker 2: was just one different entity after another.
Speaker 1: That's absolutely true. And the family separately is responsible. The
Speaker 1: Rosenwald family for Blue Cross and Blue Shield. Oh really,
Speaker 1: for the Museum of Science and Industry in Chicago. Uh huh.
Speaker 1: Julius Rosenwald was an important trustee of Tuskegee University and
Speaker 1: friend of I think it's Booker t. Washington. I mean,
Speaker 1: the family's philanthropic legacy is staggering.
Speaker 2: That's really fascinating. You know, it's funny. I'm very aware
Speaker 2: of the audience age, and it's arranged from people listening
Speaker 2: who might be in college or grad school and people
Speaker 2: who have are retired, and I sort of feel like,
Speaker 2: all right, some of you youngsters may not know. This
Speaker 2: was literally the biggest retailer of its day, whether you
Speaker 2: want to compare it to Walmart for the stores or
Speaker 2: Amazon the catalog not all that different from online shopping.
Speaker 2: They were just massive and failed to pivot when the
Speaker 2: time came. So hey, everything is temporary, right, last question
Speaker 2: about the launch of the firm, So ninety four, it's
Speaker 2: still early days for private equity. Not a lot of transactions,
Speaker 2: not a lot of money under management. When you're out
Speaker 2: pitching this to institutional investors in the middle of a
Speaker 2: giant bull market, let me add inequities. What was what
Speaker 2: was the response, did people understand that this was a
Speaker 2: different type of investing and potentially a diversifier, or did
Speaker 2: they look at you kind of funny?
Speaker 1: Well berry to paint where we were in the arc
Speaker 1: of private equity. So as we were talking before it did,
Speaker 1: it didn't exist until the very late seventies at best,
Speaker 1: and then was you know, from five firms to ten firms,
Speaker 1: two hundred firms in the nineteen eighties, and so it
Speaker 1: was growing. And when we went to raise our first
Speaker 1: fund again we had the great benefit of the support
Speaker 1: of the William Rosenwald family. They were a committed lead investor.
Speaker 1: But I had been involved in some transactions and had
Speaker 1: and those transactions had happily gone well. Chuck Klin and
Speaker 1: the family had been involved in a bunch of transactions.
Speaker 1: So we had some form of a track record that
Speaker 1: we could talk to people about and a very specific
Speaker 1: investment objective about what we were planning to do. And
Speaker 1: so there were certainly there weren't that many, and we
Speaker 1: did talk to a lot of people, but we were
Speaker 1: grateful to have a college endowment, a publicly traded insurance company,
Speaker 1: a publicly traded company, corporation's pension fund, and some wealthy
Speaker 1: individuals join our first fund, which was a mighty seven
Speaker 1: one point four million dollars at the final closing.
Speaker 2: Well, so you mentioned you had some specific objectives back
Speaker 2: in nineteen ninety four.
Speaker 3: What were those objectives?
Speaker 1: Well, building on the the investment legacy of the Rosenwald
Speaker 1: family and some of the things that I had been
Speaker 1: doing and thinking about, we agreed that we were only
Speaker 1: going to buy the market leading company, the number one
Speaker 1: market share company in its niche. I mean, obviously these
Speaker 1: would be modest sized companies given the size of our fund,
Speaker 1: but the number one market share company, we would look
Speaker 1: to only buy that company an industry which was GDP
Speaker 1: growth or better, we would look to only support the
Speaker 1: existing CEO. We wanted to support them, Meaning you're.
Speaker 2: Not coming in cleaning house and installing your own guys.
Speaker 3: You're looking for a management team you want to work with.
Speaker 1: We had then and we have still today, a relationship focus.
Speaker 1: And you know, changing and it's practical, changing executives is risky.
Speaker 1: We believe that if we're coming in and feel aligned
Speaker 1: and simpatico with the management team and particularly the CEO
Speaker 1: running the business that delivered the earnings that we're valuing
Speaker 1: the business on if we could just help them be
Speaker 1: the same or better, we'd have only good outcomes for investors.
Speaker 1: And why take the risk of changing management. We'd rather
Speaker 1: just look for a new situation. And we wanted to
Speaker 1: have relatively modest leverage. We tended at the beginning to
Speaker 1: capitalize our companies with less debt than other investors.
Speaker 3: Huh, really really intriguing.
Speaker 2: So let's talk a little bit about twenty seven billion dollars,
Speaker 2: one hundred and eighty full time professionals. What is the
Speaker 2: secret to successfully growing a private equity firm? For you?
Speaker 3: Coming up on your thirtieth year?
Speaker 1: Great people, you know, I like to say money is
Speaker 1: the ultimate commodity. So our product, if you will, is money.
Speaker 1: That's what we invest and so if we're going to
Speaker 1: outperform for our investors, it's going to be the people
Speaker 1: that we've attracted, our investment philosophy, and maybe some processes
Speaker 1: that we've employed.
Speaker 2: So you've done plenty of deals over that thirty year period.
Speaker 2: What stands out anything really memorable? Any transactions that stick
Speaker 2: with you?
Speaker 1: You know when I think about that, we've certainly had
Speaker 1: the great pleasure to be involved with some great businesses,
Speaker 1: but it's really the people that stick out the most. It's,
Speaker 1: you know, life is people, and we are in the
Speaker 1: people business managers, investors, lenders, bankers, the whole ecosystem. And
Speaker 1: it's the special relationships which we're proud to have created.
Speaker 1: And some of the CEOs from our very first fund,
Speaker 1: our very first deals, you know, twenty eight years ago,
Speaker 1: are still close friends of mine. I'll be going to
Speaker 1: Florida to spend a weekend with one of our first
Speaker 1: CEOs and his wife staying with them next month. Huh.
Speaker 2: That's really interesting. So let's stay focused on that concept
Speaker 2: of people and partnering with management rather than just taking
Speaker 2: over a company and cleaning house. Is this relatively uncommon
Speaker 2: in the industry. I have to imagine other companies see
Speaker 2: the value of this, Or when you first started doing this,
Speaker 2: was it kind of a one off?
Speaker 1: We weren't really sure when anyone else was doing At
Speaker 1: the beginning, You're just kind of doing it and hoping
Speaker 1: it works out. As it turns out, You're absolutely right.
Speaker 1: There is a consulting firm which did a study a
Speaker 1: few years ago that twenty five percent of the CEOs
Speaker 1: are gone at closing in most partly the average private
Speaker 1: equity transaction, fifty percent are gone by two years and
Speaker 1: only twenty five percent are there after four years. In
Speaker 1: contrast to that, now, for our thirty year existence, are
Speaker 1: what I call CEO win rate is over eighty percent,
Speaker 1: meaning eighty percent of the men and women who were
Speaker 1: running the business before we showed up, we're running it
Speaker 1: at exit or are running it today if we still
Speaker 1: own it.
Speaker 2: So this is really very different if if the typical firm,
Speaker 2: they're in half the situations, they're gone either closing or
Speaker 2: two years later.
Speaker 1: We are walking the talk in terms of management partnership,
Speaker 1: and we really believe in it.
Speaker 2: So when you're evaluating a company, this is more than
Speaker 2: EBADA or earnings per share or something like that. You're
Speaker 2: really doing your due diligence on the management team and
Speaker 2: how effective they are, and hey, are these people we
Speaker 2: want to get into bed with and do business with?
Speaker 1: All those things we have, we add a very important
Speaker 1: management dimension to the basic you know, product services, customers,
Speaker 1: raw material suppliers and so on.
Speaker 3: How do you evaluate that?
Speaker 2: Because that's Listen, when you look at EBAD, it's numbers
Speaker 2: on an Excel spreadsheet or Google sheets or whatever you're
Speaker 2: using when you're evaluating people, it's much squishier and qualitative.
Speaker 2: How do you make that how do you institutionalize that process?
Speaker 1: Well, you know, it's very it's very bespoke. Every person
Speaker 1: is different. Different of our colleagues are different, even though
Speaker 1: we all share this same belief in CEO partnership and
Speaker 1: management team partnership. And it's really just deciding you want
Speaker 1: to work together. We're not perfect, our management teams aren't perfect.
Speaker 1: But can we make I like to say my favorite
Speaker 1: equation is one plus one equals three. Can we work
Speaker 1: with a management team and together be great partners and
Speaker 1: do something different together? And we bring certain resources that
Speaker 1: some other firms don't have. The largest group of our
Speaker 1: one hundred and eighty people that you cited are so
Speaker 1: called resources group. These are full time operating professionals. They're
Speaker 1: not virtual, they're not consultants, they're not ten ninety nine,
Speaker 1: and they are W two colleagues. And so we have
Speaker 1: a lot of resources we can bring to our companies
Speaker 1: in purchasing, procurement, strategy, it hr you name it. And
Speaker 1: some executives are excited by that. They want the help,
Speaker 1: they want fresh set of eyes on certain problems, or
Speaker 1: extra extra arms and legs on problems. And some people say,
Speaker 1: you know, we got that, we know what we do,
Speaker 1: and you just put up the money, and we're better
Speaker 1: partners for the former than the latter.
Speaker 2: So you describe a lot of your investments as platform investments,
Speaker 2: and you've made seventy eight of these platform investments over the.
Speaker 3: Last thirty years.
Speaker 2: Tell us a little bit bit about that phrase, and
Speaker 2: then we'll get into the subsequent three hundred and five
Speaker 2: add on investments that followed.
Speaker 1: Well, a platform investment for us is really the first
Speaker 1: big investment. It's we're investing in a company with the
Speaker 1: management team. We're typically the control investor, so we'll own
Speaker 1: more than fifty one percent, sometimes almost one hundred percent
Speaker 1: of the company, but the management will always be an
Speaker 1: investor with us. And that is and that first unique
Speaker 1: investment is a so called platform. Some investments will never
Speaker 1: have add on acquisitions. They can grow organically or other ways.
Speaker 1: But many acquisitions do find smaller competitors or sometimes mergers
Speaker 1: of equals, and we then build them with add on
Speaker 1: what are called add on acquisitions, into the existing platform.
Speaker 1: And so that three hundred would be a lot of
Speaker 1: add ons, and sometimes they're very small, sometimes they're material.
Speaker 1: It just depends on the company.
Speaker 2: So when you're putting money into a company, is this
Speaker 2: you're obviously buying shares from somebody. Are you also providing
Speaker 2: a level of operating capital? How much in a typical structure,
Speaker 2: what is previous owners selling and what is money that
Speaker 2: goes for future deployment.
Speaker 1: It greatly depends. The interesting thing about us is we
Speaker 1: are very attractive to founder CEOs. Almost half of the
Speaker 1: investments in our most recent fund, half of the companies
Speaker 1: we've purchased, we purchased from founder CEOs who continue to
Speaker 1: be the CEO and in many cases rolled over an
Speaker 1: enormous amount of money into this company that we now control,
Speaker 1: where they're still being the CEO. So I like to
Speaker 1: think of those as very choosy investors. They really care
Speaker 1: about their company because they founded it, They really care
Speaker 1: about their company because they're running it, And they really
Speaker 1: care about their company because they're going to maintain a
Speaker 1: very big personal investment. And in a lot of those situations,
Speaker 1: they are happy and excited to partner with us as
Speaker 1: we are them, And I think they're attracted by the
Speaker 1: resources we bring other than money to the second part
Speaker 1: of your question on what is the capital structure and
Speaker 1: what's the money? Typically the capital structure the money that
Speaker 1: we put up and oftentimes lenders's if it's a debt
Speaker 1: free business goes to selling shareholders. But as part of that,
Speaker 1: of course, you want to capitalize a company with undrawn
Speaker 1: lines of credit so called revolvers or delay draw term loans,
Speaker 1: other terms like that. There's liquidity to run the business
Speaker 1: on a day to day basis, survive a rainy day,
Speaker 1: and also grow the business as makes sense, if it
Speaker 1: is by out on acquisition or new customer acquisitions or
Speaker 1: new plants we're building, whatever.
Speaker 2: So I want to separate the platform initial investments with
Speaker 2: the add ons. What are you looking for when you're
Speaker 2: making a platform investment. What is it that gets you
Speaker 2: excited about a particular company or not so excited and saying, hey,
Speaker 2: this isn't exactly for us.
Speaker 1: So going back to what we started thirty years ago,
Speaker 1: we're looking for the number one market share player or.
Speaker 2: So that's persistent. In other words, the original ideas are
Speaker 2: still driving your investment strategies.
Speaker 1: We work really hard to get better tactically and execution
Speaker 1: wise and with our scale advantages now, but the fundamental
Speaker 1: investment philosophy hasn't changed. We're looking for that market share
Speaker 1: leader which has a sustainable competitive advantage. We hope that
Speaker 1: we can invest behind and see stability so that there
Speaker 1: won't be a loss of capital.
Speaker 3: And above average GDP growth.
Speaker 1: And we're looking for that company to exist, as you said,
Speaker 1: in an industry that is growing at GDP or better.
Speaker 1: Now we use terms like is there a tailwind?
Speaker 2: Huh, So we'll talk a little bit about sectors in
Speaker 2: a few moments.
Speaker 1: I'm sorry, Berry, and I have to add. And we're
Speaker 1: looking to back the existing management team.
Speaker 3: They're going to stick around.
Speaker 1: We want the CEO to want to be our partner.
Speaker 1: I mean, we obviously know a lot of managers, but
Speaker 1: we really get excited if the CEO is going to
Speaker 1: be our partner going forward.
Speaker 2: So competitive edge, better than average growth, a management team,
Speaker 2: you like, that doesn't sound like the worst sort of
Speaker 2: investment that those sound like pretty attractive things. How many
Speaker 2: companies are out there that check all your boxes? You?
Speaker 1: I mean quite? I mean it's a lot are a
Speaker 1: little depending on how big your screen is, but we
Speaker 1: it depends on the year but we will typically see
Speaker 1: three hundred and fifty to four hundred and fifty companies
Speaker 1: that look like they might be suitable. This number is
Speaker 1: a rough guess, but we probably do very detailed work,
Speaker 1: sometimes without side consulting firms and other advisors on maybe
Speaker 1: forty of those, and we will make you know, final
Speaker 1: contract offers on probably around ten. That's rough guess, and
Speaker 1: it changes every year. And we're only buying i should say,
Speaker 1: US headquartered businesses. That's all we've ever aspired to do,
Speaker 1: and it's something overseas all here. Many of our companies
Speaker 1: have international operations. Some are truly global companies, some are not.
Speaker 1: But the key thing for us is that they're US
Speaker 1: headquartered because this is where we know people, we know
Speaker 1: the laws, we know the language. We should have a
Speaker 1: competitive advantage and we can be close and still try
Speaker 1: to have a family life. If we're travel all over
Speaker 1: the world, there should be someone who has our advantages
Speaker 1: and say Beijing, Berlin, Buenos Aires and Bombay, that should
Speaker 1: be not us, Whereas we have those advantages here as
Speaker 1: American securities.
Speaker 2: And so when you look hence the name, and so
Speaker 2: when you look at doing any of those three hundred
Speaker 2: and five add ons. At that point, you're familiar with
Speaker 2: much more familiar with the company. You've already put prior
Speaker 2: capital into it. What are you looking to accomplish with
Speaker 2: those add ons? Is it just a matter of getting
Speaker 2: liquidity the insiders who want some and you and larger position,
Speaker 2: or is it hey, they could use a little more
Speaker 2: capital and we're happy to participate.
Speaker 1: So the add ons are all about building the existing
Speaker 1: business or the platform initial investment to use the phrase
Speaker 1: you were using, and so there, it's not about a
Speaker 1: capital it's not about getting liquidity for anyone who's an
Speaker 1: existing investor. Sometimes there will be a smaller competitor that
Speaker 1: the company wants to sell to us. Sometimes there will
Speaker 1: be size business in an adjacent industry where there's synergies
Speaker 1: that we can save money on purchasing, let's say, by
Speaker 1: having a bigger scale platform. It really depends on the company.
Speaker 2: So you guys have been doing this sort of platform
Speaker 2: investment and add on investment pretty much from the beginning.
Speaker 2: Have you seen other companies other private equity firms seemingly
Speaker 2: imitate or at least has this said differently? Has this
Speaker 2: strategy become more popular over the years.
Speaker 1: Oh, I think absolutely, Barry. I think almost everybody in
Speaker 1: private equity generally, when they make their first investment, they
Speaker 1: are looking at what might be able to acquire. In addition,
Speaker 1: investment bankers always market this now in their materials. When
Speaker 1: you're looking at company, this company can grow by buying
Speaker 1: all these companies. This is real or imagined, but it
Speaker 1: gets marketed, and really it's something I think everyone in
Speaker 1: the private equity industry is pretty much thinking about every
Speaker 1: time they make initial investment. Is their growth through acquisition
Speaker 1: as well as organic really intriguing.
Speaker 2: So let's talk about the modern world and what you're
Speaker 2: dealing with. I have a quote of yours that I
Speaker 2: really liked. Five hundred basis points of rate increases changes
Speaker 2: a lot. Can you explain to us, yes, five hundred
Speaker 2: BIPs it does change a lot. What does it mean
Speaker 2: for your work?
Speaker 1: Well, eighteen months ago, just to put this in perspective,
Speaker 1: eighteen months ago, private equity firms generally could borrow senior
Speaker 1: debt for their companies at around six six and a
Speaker 1: quarter percent all in. So if you borrowed one hundred
Speaker 1: dollars of debt, you paid six dollars and twenty five
Speaker 1: cents let's say of interest every year on that debt that.
Speaker 2: Was whatever, I forget the name of what replaced Libor
Speaker 2: plus three percent or so something like that two and
Speaker 2: a half percent.
Speaker 1: Software has replaced Libor and then basically it was libor
Speaker 1: softra at about four fifty. Depends on the perceived credit
Speaker 1: quality of the company and syndication markets at that time,
Speaker 1: so it was basically the initial base rate was almost
Speaker 1: zero's you're at a fifty basis points with software plus
Speaker 1: that four fifty, let's say, and fees amortized in and
Speaker 1: you get to let's say six six and a quarter,
Speaker 1: and today and eighteen months later that your people like
Speaker 1: us are paying more like ten and a quarter.
Speaker 3: That's a big number.
Speaker 1: And that's the five percent more or five hundred basis
Speaker 1: points you were talking about. So instead of paying six
Speaker 1: dollars and twenty five cents, you're now paying ten dollars
Speaker 1: and twenty five cents in interest. And you know, it's
Speaker 1: either a lot or a little, depending on whether you
Speaker 1: have the money or not. If one didn't capitalize the
Speaker 1: capital structure planning to have a cushion that was that big,
Speaker 1: that higher interest rate can be a barrier to continuing
Speaker 1: to pay interest or amortize, you know, pay back that
Speaker 1: debt over time. And there are other problems like inflation
Speaker 1: where and supply chain issues, both of which caused many companies,
Speaker 1: even healthy, growing companies, to need more cash for working capital.
Speaker 1: You know, if you were selling something where the raw
Speaker 1: material cost used to be a dollar, and because of inflation,
Speaker 1: after a couple of years, it's now a dollar twenty five,
Speaker 1: that's twenty five percent more money in working capital for
Speaker 1: the same number of units. And if you were your
Speaker 1: supply chains might have come from Asia and it takes
Speaker 1: longer because they're not quite sufficient, harder to get containers,
Speaker 1: so you actually need more units. This can add up
Speaker 1: as well. So between interest and working capital, even companies
Speaker 1: that are flat or growing can have cash flow problems
Speaker 1: if they didn't plan to have enough liquidity.
Speaker 2: So when we look at the public markets, most of
Speaker 2: the major public corporations that were carrying any sort of
Speaker 2: debt all refine financed before this we're up and rates,
Speaker 2: so what they're carrying is fairly low interest rates. What
Speaker 2: did you see in the private sector where people taking
Speaker 2: advantage of low rates to to you know, recapitalize whatever
Speaker 2: their obligations were at the lowest possible carrying costs.
Speaker 1: Well public or private Barry the companies are always refinancing.
Speaker 1: You have a first issue is are you refinancing with
Speaker 1: floating rate debt or fixed rate debt? So if I
Speaker 1: had a five year senior debt credit facility of let's
Speaker 1: say liboard then software now plus four fifty, that whether
Speaker 1: I refinanced it now or then that that's five and
Speaker 1: a half six sorry, six and a quarter percent debt
Speaker 1: that's now ten and a quarter. But if I issued
Speaker 1: bonds or fixed rate debt, then I would be insulated
Speaker 1: from their rate increase. So it's it's firstly, did you
Speaker 1: issue fixed rate debt or floating And if it was floating,
Speaker 1: some people still bought hedges. The hedge market's pretty efficient
Speaker 1: for two three years. Hard to hedge farther than that, right,
Speaker 1: And so when those hedges run out, even if you
Speaker 1: were conservative, and so you really have been boring at
Speaker 1: six and a quarter for the last eighteen months as
Speaker 1: rates have come up. When your hedge runs out, it's
Speaker 1: gonna be ten and a quarter if rates stay the
Speaker 1: same as they are today.
Speaker 2: I mean most companies are not Apple. I remember Apple
Speaker 2: floated a bond deal at like two to and a
Speaker 2: quarter some crazy number for thirty years. Yep, right, sold
Speaker 2: a ton of it. I'm gonna imagine private companies don't
Speaker 2: have that sort of ability to float debt, but they
Speaker 2: certainly can issue some sort of fixed rate. Did you see,
Speaker 2: Like what was the fixed rate world like on the
Speaker 2: private side when things were dirt cheap.
Speaker 1: Typically on the private side eighteen months ago, you wouldn't
Speaker 1: have borrowed, but few people borrowed first lean. In the
Speaker 1: private markets, they would sometimes issue bonds. And so in
Speaker 1: one company we know, well, that company managed to issue
Speaker 1: six percent bonds. So that was fixed rate.
Speaker 2: Six percent sounds attractive eighteen months ago. Now it looks
Speaker 2: like a bargain for them.
Speaker 1: Yes, it was attractive eighteen months ago because it was
Speaker 1: fixed rate. If you were a conservative, you had no risk.
Speaker 1: And now now that same company, if it came to market,
Speaker 1: would be issuing those bonds for at least twelve percent.
Speaker 2: So we've seen a lot of again in the public markets,
Speaker 2: multiple compression stocks were pretty pricey in the low rate era.
Speaker 3: Rates have gone up.
Speaker 2: We're stone, it's see multiple compression. How are the higher
Speaker 2: rates affecting valuations amongst private companies.
Speaker 1: So there's two issues that are affecting valuations. One is
Speaker 1: the amount, just what's called the quantum, the amount of
Speaker 1: debt you can borrow, expressed as a multiple of your
Speaker 1: free cash flow or your ebit DA. Until eighteen months ago,
Speaker 1: a reasonably solid, stable business could borrow between six and
Speaker 1: six and a half times it's trailing EBITDA, and sometimes
Speaker 1: pro form projected this year it would be a little higher.
Speaker 1: You could borrow that same number off what you hope
Speaker 1: to achieve in the year you're in. Now that six
Speaker 1: and a half is more like five for a good company,
Speaker 1: and it could be four and a half if the
Speaker 1: company is perceived to have a little bit of a blemish,
Speaker 1: and the adjustments that might move it higher are harder
Speaker 1: for lenders to support. So one thing that constrains value
Speaker 1: is you fundamentally, all things being equal, if you bought
Speaker 1: a company with six times leverage three or four years ago,
Speaker 1: and now a private equity firm is trying to sell it,
Speaker 1: it probably cannot sell it with that much leverage. The
Speaker 1: buyer is going to be having five times, and that
Speaker 1: means more equity. And if you have the same equity.
Speaker 1: If you have a bigger equity check that will be
Speaker 1: in a lower rate turn in the X. That can
Speaker 1: impact price. And as we've talked a lot about, the
Speaker 1: higher interest rate is also a big impact because instead
Speaker 1: of paying in the one hundred dollars of debt at
Speaker 1: six fifty, let's say six fifty of interest a year,
Speaker 1: now it's ten to fifty because rates are higher. So
Speaker 1: those two things constrain value where earnings hasn't even if
Speaker 1: earning's grown, and it may make it hard to get
Speaker 1: all of the money out where in a sale today
Speaker 1: if earnings are flat or only up a little bit.
Speaker 2: So let's look at valuation in a historical perspective, and
Speaker 2: again most of my frame of reference are the public markets.
Speaker 2: Pre financial crisis, stocks were at least reasonably priced, and
Speaker 2: certainly before the mid nineties reasonably priced. And then since
Speaker 2: the financial crisis, everything seems to have gotten everything priced
Speaker 2: in dollars and credit seems to have gotten more expensive,
Speaker 2: including stocks. Did you see anything take place similarly in
Speaker 2: private markets when we're looking at the nineties, the two
Speaker 2: thousands to twenty tens.
Speaker 1: Oh, there's so many forces going on very I mean,
Speaker 1: now and just think about the big impact of the
Speaker 1: five or six largest tech companies as a percent of
Speaker 1: the growth in stock markets, and the average company, particularly
Speaker 1: smaller public companies, are down, not up, even though the
Speaker 1: stock market's up. So at any one time, I like
Speaker 1: to say, no one should ever invest in us because
Speaker 1: they think we're good macroeconomists, because macroeconomists are often wrong,
Speaker 1: especially at inflection points when we need them to be right.
Speaker 1: That particular company at a moment in time, with its
Speaker 1: forces and its management team, and that's what we spend
Speaker 1: all of our time trying to analyze. We try to
Speaker 1: be macro aware, but really micro focus.
Speaker 2: That makes a lot of sense. And look at the
Speaker 2: financial crisis middle of two thousand and eight. Most economists
Speaker 2: didn't see a recession coming, even though we were right
Speaker 2: in the middle of the worst one in a long time.
Speaker 2: So macro aware, micro focused I like that description. So
Speaker 2: let let's talk about some of the challenges of the
Speaker 2: current environment. Bankruptcies just hit a thirteen year high. What
Speaker 2: sort of risks does this create for your portfolio companies?
Speaker 2: Or is this really companies that aren't doing as well
Speaker 2: that eventually succumb to the more challenging environment.
Speaker 1: It's it's all facts and circumstances. Certainly, you're absolutely right
Speaker 1: that bankruptcies are up, and most people think they're going
Speaker 1: to keep rising, and I think they're right. And that's
Speaker 1: nothing more than we've just talked about the cash needs
Speaker 1: of the average business for more money and inventory, for
Speaker 1: higher interest rates, and in some many businesses constrain growth
Speaker 1: and at some point that can that can reach a
Speaker 1: breaking point, and so those forces will have bankruptcies rise,
Speaker 1: just as lower interest rates will have that debate in
Speaker 1: the natural cycle of business.
Speaker 2: And my assumption is, since you're looking at companies and
Speaker 2: management teams, you're probably not all that interested in these
Speaker 2: bankrupt companies or distressed assets. Doesn't seem to really fit
Speaker 2: the way I think of your model.
Speaker 1: There are many private equi firms that focus on so
Speaker 1: called bankruptcy, distressed and whatnot, and private credit providers. We
Speaker 1: are trying to avoid those and trying to buy good business.
Speaker 1: On the journey from good to great or great to greater,
Speaker 1: once in a while we will look at what i'll
Speaker 1: call good company, bad balance sheet. The fundamental company is
Speaker 1: a good company and has been. It has all the
Speaker 1: characters who like market leadership, margins, stability, some tailwinds, and
Speaker 1: great management team, but it just had too much debt.
Speaker 1: So we may try to provide an investment to a
Speaker 1: company like that where when it comes out of bankruptcy
Speaker 1: or its debt problem, it's a great company with the
Speaker 1: right capital structure. But most of our most of our
Speaker 1: things are not that.
Speaker 3: That's really interesting.
Speaker 2: So let's talk a little bit about the private equity industry.
Speaker 2: We saw a lot of investors kind of rush in
Speaker 2: in twenty twenty two when public markets stocks, am bonds
Speaker 2: we're doing poorly. And since then there's been lots of
Speaker 2: talk about how we price private holdings. What do you
Speaker 2: think about this chatter about extending pretend or quarterly marks
Speaker 2: not being very accurate or precise. And I'm not referring
Speaker 2: to any of your companies, I'm talking generally.
Speaker 3: This has been.
Speaker 2: Chatter that's been in a lot of news.
Speaker 1: So private equity, as you were talking about before, has
Speaker 1: been growing now now for thirty five years. So as
Speaker 1: the ecosystem keeps growing, there are more companies owned by
Speaker 1: private equity, There are more good things, and there are
Speaker 1: sometimes more bad things. So it's just it's just growing
Speaker 1: so I think the trend to more people investing in
Speaker 1: private equity has grown dramatically and it's it's continuing to grow.
Speaker 1: And the institutional investors often are thinking, if you're a
Speaker 1: big state pension fund, I want ten percent, twenty percent,
Speaker 1: If you're some college endowments, forty percent in private equity.
Speaker 1: But whatever is that percentage, they're targeting that and they've
Speaker 1: allocated their assets to have that percentage invested in private equity.
Speaker 1: So two big forces that affect all of these institutions
Speaker 1: is one, what's the value of those private equity investments.
Speaker 1: So if you targeted if you had a dollar to
Speaker 1: invest and you targeted ten percent in private equity, and
Speaker 1: those investment doubled, now you have twenty cents in private
Speaker 1: equity instead of ten on your dollar, so your quote
Speaker 1: over allocated. That's really good in a sense because your
Speaker 1: private equity portfolios are up, but it's still a problem
Speaker 1: because you're overallocated, so you stop making new commitments. The
Speaker 1: same thing happens in a different way with your dollar
Speaker 1: if that dollar is based on the value of all
Speaker 1: of your holdings and the stock market say drops by
Speaker 1: ten percent, now you only got ninety cents. If your
Speaker 1: private equity is at ten cents, you're over allocated, and
Speaker 1: if it's at twenty, you've got a real problem. And
Speaker 1: it's really both those factors. They're called the numerator and
Speaker 1: the denominator effect. That has caused some institutions to slow
Speaker 1: down their commitments to private equity to get those back
Speaker 1: in balance, because, as you know, the stock market was
Speaker 1: down not this year, but last year, and private equity
Speaker 1: values continue to be up. So that's one set of forces.
Speaker 1: The second thing you raised is you know, how is
Speaker 1: private equity valued. The stock market gets valued every day,
Speaker 1: every stock you can see when it trades, every tick
Speaker 1: the way private equity gets valued. And all private equity
Speaker 1: firms in the United States with more than one hundred
Speaker 1: and fifty million dollars of capital under management are registered
Speaker 1: with the SEC. And one of the requirements is that
Speaker 1: all private equity firms value their holdings every quarter and
Speaker 1: that at least annually. Those valuations are typically subjected to audit.
Speaker 1: As part of the audit process, the audits look at
Speaker 1: those valuations. Now they're private companies, so you got what
Speaker 1: a timing lag, if you will, So every quarter, so
Speaker 1: let's say on March thirty first, the quarter ends. Private
Speaker 1: equity firms takes time to get numbers from your companies,
Speaker 1: and so there's typically forty five days where you try
Speaker 1: to figure out what the value was on March thirty first,
Speaker 1: and then you send those values to your investors. So
Speaker 1: if you're invested in private equity March thirty one, by
Speaker 1: May fifteenth, you will get to know what the private
Speaker 1: equity firm valued those investments on. So that's a lag.
Speaker 1: So people talk about the lag, and that's one inherent issue.
Speaker 1: And the second is since it's not if we know
Speaker 1: what's trading in the public market, so you know that
Speaker 1: that was the trade yesterday. Whether someone paid too much
Speaker 1: or too little, you know that was the trade. And
Speaker 1: as we say, for every buyer who thinks they're getting
Speaker 1: a deal, there's a seller who is happy with the price.
Speaker 1: So there's a market the valuations being done by each
Speaker 1: private equity firm. You don't really have that market test
Speaker 1: except when it's sold. And so some people talk about
Speaker 1: is the value real my personal belief In general, it's
Speaker 1: very real. The sec comes in, looks at it, the
Speaker 1: auditors bless it, and investors are sophisticated in general, so
Speaker 1: they're pretty real, although people can cast dispersions, but often
Speaker 1: that's the lag happening. You know, if you're if at
Speaker 1: April thirtieth, after this notional March thirty one, the market
Speaker 1: ten percent, you say, my private equity stuff's down ten percent. Well,
Speaker 1: the valuation you get May fifteenth is as of March
Speaker 1: thirty one, it's not going to be shown down because
Speaker 1: it's not supposed to be.
Speaker 3: You won't get that till the next quarter.
Speaker 1: So the third thing, just I mean, just say last thing.
Speaker 1: While the institutions have backed up new commitments in private equity,
Speaker 1: which actually seems to be thawing as we're speaking, individuals,
Speaker 1: individual investors are dramatically underinvested in private equity versus institutions,
Speaker 1: and that is an even bigger pool of capital, if
Speaker 1: you will, on the sidelines or now trying to invest
Speaker 1: in private equity. And so that's another wave of flow.
Speaker 1: So most people expect private equity to keep growing.
Speaker 2: So you mentioned transactions are obviously the easiest way to
Speaker 2: measure valuation. What are you seeing in terms of deal making?
Speaker 2: Are private equity firms still making as many investments as
Speaker 2: they were in recent years, and what are you seeing
Speaker 2: on the other side, what about exits.
Speaker 1: You know, we had a detailed conversation a few moments
Speaker 1: ago about interest rates and their impact, and you were
Speaker 1: talking about some companies declaring bankruptcy more often, and I
Speaker 1: think that trend continues. And in terms of volume, deal
Speaker 1: volume is about half of what it was two years ago.
Speaker 2: Meaning new investments into existing companies.
Speaker 1: And sales both because they're two sides at the same coin. Often,
Speaker 1: I mean there are you can take companies public to exit,
Speaker 1: and you can sell to public companies, but the private
Speaker 1: buyer to private buyer is an active, active market, and
Speaker 1: it's roughly down fifty percent. So new investments are down
Speaker 1: and realizations are down, but the ones that are happening
Speaker 1: are actually happening at prices close to, if not entirely,
Speaker 1: as much as they were eighteen twenty four months ago.
Speaker 2: So prices are holding up, just total volumes.
Speaker 1: So far, prices are holding up now.
Speaker 2: Obviously there's an implication there that the best companies are
Speaker 2: getting a price. And if you have a little a
Speaker 2: little hair on the deal or a blemish not so much.
Speaker 1: Barry, you show yourself to be an astute observer or
Speaker 1: keen understanding of how the world works. That's exactly what happens.
Speaker 1: The average we see, which let's say is down maybe
Speaker 1: half a multiple point, maybe three quarters of multipoint is
Speaker 1: this year compared to two years ago, is only the
Speaker 1: ones that's sold which are going to be the better companies.
Speaker 1: So the multiple drop is a little more than shown
Speaker 1: in the numbers quality adjusted.
Speaker 3: You're exactly right.
Speaker 2: I look at the world through the lens that everything
Speaker 2: is survivorship biased, so that you're seeing the winners, you're
Speaker 2: not seeing the ones that didn't close. And that is
Speaker 2: that's something that's that's never far from my thoughts. So
Speaker 2: let's focus on some of the sectors that American Securities
Speaker 2: really likes. You're big in services, You're you're being in
Speaker 2: consumer and healthcare, but you're especially formidable in industrials. Tell
Speaker 2: us about those sectors and what's been the appeal.
Speaker 1: Well, you're absolutely right. For the thirty year history of
Speaker 1: the firm, roughly sixty percent of our investments have been
Speaker 1: in so called industrials and the rest have been consumer
Speaker 1: services and healthcare. With respect to industrials, I'm not sure
Speaker 1: why it is the case, but lots of people don't
Speaker 1: find it sexy.
Speaker 2: I mean, you think about what a big industrial manufacturer does.
Speaker 2: It's hard, it's dirty, it's complicated. As opposed to some
Speaker 2: new software app that all the kids love. There's a
Speaker 2: very different set of audiences for those businesses there is.
Speaker 1: But you know, we need our industrial base, and interestingly
Speaker 1: in this country it actually grows faster than the overall
Speaker 1: GDP by a point or two for the last twenty years.
Speaker 3: It's amazing.
Speaker 1: It's a vibrant source of transactions and it's been very
Speaker 1: successful for us. And we have to some extent built
Speaker 1: our resources group and some of our internal functions to
Speaker 1: help those management teams and those companies be better. That
Speaker 1: are industrial companies. And the thing that we like about
Speaker 1: it is because we're very focused on creating the best
Speaker 1: risk adjusted returns we can. So we like stable businesses
Speaker 1: and we when we do our due diligence with an
Speaker 1: established business industrial business, if you will, you can understand
Speaker 1: its manufacturing process and how that compares to its competitors.
Speaker 1: You can understand its suppliers and how it purchases raw
Speaker 1: materials and how that compares favorably or not to competitors.
Speaker 1: And you can understand the customers, and particularly if you're
Speaker 1: buying the number one market share player, you can really
Speaker 1: see the industry and know what customers are thinking. So
Speaker 1: we see stability in that and in a relatively large
Speaker 1: number of situations, we're able to see the indicitia of
Speaker 1: a successful investment equity investment, we hope because of that
Speaker 1: stability and the ability to do due diligence, where other
Speaker 1: people in the venture world, for example, are just looking
Speaker 1: at how big is the runway and if we build it,
Speaker 1: they will come, and God bless them they many of
Speaker 1: those folks have done terrific investing for their investors. But
Speaker 1: that's not what we do. We're looking at what is
Speaker 1: and what can continue to be the case, and how
Speaker 1: might we be able to help management make it better.
Speaker 2: So you mentioned industrials have been growing faster than GDP
Speaker 2: over the past twenty years, an era, as we previously discussed,
Speaker 2: a very low interest rates. What does that mean for
Speaker 2: the next ten or twenty years for industrials. How do
Speaker 2: you think about the sector today in a higher inflation,
Speaker 2: higher interest rate environment.
Speaker 1: Well, you know, all businesses are dealing in an active market, right,
Speaker 1: they have active competitors their customers are thinking how to
Speaker 1: do the best for themselves. Suppliers likewise, and so the
Speaker 1: forces that will have made a company survive and perhaps
Speaker 1: thrive over the last twenty years are likely to be
Speaker 1: pretty consistent and the product of market based forces, and
Speaker 1: so the really good companies will should keep doing well
Speaker 1: irrespective of the environment. Sometimes it's easier, sometimes it's harder,
Speaker 1: but again it's more the microeconomic forces that are going
Speaker 1: to matter for that company than a general macroeconomic something.
Speaker 2: So let me let me tack in a slightly different direction.
Speaker 2: A lot of your site talks about citizenship being a
Speaker 2: good corporate steward, and you have discussions of deverstitating, inclusion, philanthropy, esg.
Speaker 2: How do you work that sort of focus into.
Speaker 3: What you do on the private equity side.
Speaker 1: Well, some of it's some of it's related, and some
Speaker 1: of it enables the other stuff. So we grew out
Speaker 1: of the Rosenwaldt family. Rosemol family had a terrific philanthropic legacy,
Speaker 1: and we're terrific citizens and cared about communities and we
Speaker 1: try to do the same. So we we have lots
Speaker 1: of programs that are philanthropic that are enabled by the
Speaker 1: success of our businesses. We give us a fixed percent
Speaker 1: of our annual profits to charities every year as an example.
Speaker 1: But there are other things that we're trying to do
Speaker 1: every day with our businesses. You know, so called ESG. Environmental,
Speaker 1: social and governance factors we think are not only good
Speaker 1: for the planet, but they enable ebitt the a growth.
Speaker 1: And so being a good steward is about being efficient.
Speaker 1: You don't want to waste energy, and you want to
Speaker 1: reduce it if you can. You want to. You don't
Speaker 1: certainly don't want your employees to get hurt on the job.
Speaker 1: So every monthly book from every one of our companies
Speaker 1: for years and years and years, starts with safety. It's
Speaker 1: the most important thing. We want employees that are showing
Speaker 1: up to know that they and their loved ones now
Speaker 1: we're in a safe environment. I mean, and this seems
Speaker 1: like how everyone should be acting. But and I hope
Speaker 1: they We certainly are too.
Speaker 2: There's been a lot of studies on governance and it
Speaker 2: turns out that companies and there's a little bit of
Speaker 2: a chicken and egg question here issue here, but companies
Speaker 2: that have broad governance with a variety of people in
Speaker 2: board positions and senior management positions tend to outperform, at
Speaker 2: least in the public markets, companies that, for example, have
Speaker 2: no women on their boards of directors. Do you ever
Speaker 2: think about this when you're considering an investment or Is
Speaker 2: that the sort of thing that gets facilitated post investment?
Speaker 1: Well, we think about we think about being a good
Speaker 1: steward and a good corporate citizen and investing in businesses
Speaker 1: that enable us to do that. Going in period full
Speaker 1: stop the boards. Every one of our companies has an
Speaker 1: independent board, so the CEOs on the board. Typically we're
Speaker 1: the controlling shaffers who are on the board, but we
Speaker 1: actually create a unique board for every company and try
Speaker 1: to model the best of diversity in all its forms
Speaker 1: and diverse members on those boards.
Speaker 2: So this isn't just the sort of thing that is
Speaker 2: you know, green dressing or whatever. Greenwashing is the phrase
Speaker 2: of the day. There's an actual corporate advantage to having
Speaker 2: a diverse board. Is that a fair way to look
Speaker 2: at it?
Speaker 1: I think. I think the studies use sites show that
Speaker 1: diversity is profitable. Okay, diversity is profitable for investors. And
Speaker 1: the great thing about being a private company is there's
Speaker 1: a whole reduced liability structure for outside directors. So we
Speaker 1: often find, and I think this is broadly true for
Speaker 1: the private equity industry. There is a lot of people
Speaker 1: who are great people and very experienced and can add
Speaker 1: value to boards, that are actively interested in joining the
Speaker 1: boards of private companies, maybe even more so than public companies.
Speaker 2: All right, so let me shift gears again. You were
Speaker 2: a lecturer. You began at Stanford in two thousand and six,
Speaker 2: still doing that.
Speaker 1: Well, it's really one day a year.
Speaker 3: There was a test lecture a terrific.
Speaker 1: Man professor when I was there. I became his research
Speaker 1: assistant and he asked me to come one day and
Speaker 1: talk about private equity. So I go to Stanford one
Speaker 1: day a year since two thousand and six.
Speaker 2: And you're involved in a number of other philanthropies, the
Speaker 2: eleven sixty two Foundation, the Atlantic Council, just a run
Speaker 2: of this, Northwell Health, Board of Trustees of Princeton Theological Seminary.
Speaker 2: Tell us a little bit about what you do on
Speaker 2: the philanthropic side.
Speaker 1: Well, you know, being a good corporate citizen isn't just
Speaker 1: talking about it. You got to walk to talk. And
Speaker 1: so I think it's important to give of one's time
Speaker 1: and one's treasure to these institutions, and I'm proud to
Speaker 1: be able to do it.
Speaker 3: So I only have you for a few more minutes.
Speaker 2: Let's jump to our speed round and just ask you
Speaker 2: some of the same questions we ask all of our guests,
Speaker 2: starting with what what have you been streaming these days?
Speaker 2: Tell us what's kept you entertained?
Speaker 1: Well, very I watch so little personal media of any form.
Speaker 1: What I what I do watch is typically with my kids,
Speaker 1: and the Witcher is a big fan favorite for them,
Speaker 1: as are whatever Star Wars spin off at the moment.
Speaker 2: Let's talk about mentors. You mentioned one of your early
Speaker 2: mentors who helped shape your career.
Speaker 1: Oh, I've been blessed with so many. I'd feel bad
Speaker 1: naming some, but I mentioned a couple of PhD professors.
Speaker 1: There's people I've worked with. Uh, there's you know, Chuck Klin,
Speaker 1: with whom I founded American Securities, who's a dear, dear
Speaker 1: mentor and important figure in my life. But there's I'm
Speaker 1: really blessed with a lot of people who've tried to
Speaker 1: help me.
Speaker 3: Let's talk about books.
Speaker 2: What are some of your favorites and what are you
Speaker 2: reading right now?
Speaker 1: You know pleasure. Reading is a sad asualty of my
Speaker 1: day job, but occasionally I do get to steal sometime.
Speaker 1: There's a terrific book that's so elegant and peaceful called
Speaker 1: A Gentleman in Moscow, about a man held in a
Speaker 1: hotel for decades. That is a really a read I
Speaker 1: would recommend to other people, who's given me by a
Speaker 1: colleague of mine. And I'm currently reading Outlive by Peter Attiyah,
Speaker 1: which is about you know, living longer and living healthfully.
Speaker 3: Interesting.
Speaker 2: Our final two questions, what sort of advice would you
Speaker 2: give a recent college graduate interested in a career in
Speaker 2: private equity or investing.
Speaker 1: I think the two most important things for a career
Speaker 1: in anything is do you like the work? And do
Speaker 1: you like the people? And I tell my kids that,
Speaker 1: and I tell everyone I meet. You know, don't whatever
Speaker 1: it is, tech, private equity, something else. Don't get caught
Speaker 1: up in the hype. Do you like the work, go
Speaker 1: try it. Understand what your friends or more people more senior,
Speaker 1: are doing. And do you like the work. It's you
Speaker 1: can't like private equity if you don't like modeling in numbers.
Speaker 1: So do you like the work, and make sure you
Speaker 1: work with people you like, because life is people and
Speaker 1: if you love the people you work with, you'll be
Speaker 1: learning and growing and happy every day. And if you don't,
Speaker 1: it doesn't matter what you're doing, you're not going to
Speaker 1: be happy.
Speaker 2: And our final question, what do you know about the
Speaker 2: world of private equity today? You wish you knew back
Speaker 2: in nineteen ninety four when you were first launching your firm.
Speaker 1: I think it would. It is amazing to me and
Speaker 1: probably to most of the other people who started in
Speaker 1: private equity in nineteen eighties, that this has become a
Speaker 1: massive industry. Honestly, I thought, and I think most of
Speaker 1: the other people doing it thought, we were just we
Speaker 1: just saw the world a little bit different and there
Speaker 1: were a bunch of companies which had cash flow characteristics
Speaker 1: different than their EPs characteristics, and so we could buy
Speaker 1: some of these companies and have fun working with the
Speaker 1: management teams. And that this, you know, little side niche
Speaker 1: has become so huge is really shocking to me.
Speaker 2: Huh, really really fascinating. Michael, thank you for being so
Speaker 2: generous with your time. We have been speaking with Michael Fish.
Speaker 2: He is the CEO of American Securities, a twenty seven
Speaker 2: billion dollar private equity firm. If you enjoy this conversation, well,
Speaker 2: feel free to check out any of our previous five
Speaker 2: hundred discussions we've had over the past nine years. You
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Speaker 2: your favorite podcast. Sign up for our daily reading list
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Speaker 3: I'm Barry Hilts.
Speaker 2: You've been listening to Masters in Business on Bloomberg Radio.