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