Latest / Masters in Business / Michael Fisch on Private Equity Funds

Transcript

Michael Fisch on Private Equity Funds · Masters in Business

• 0:02
  Speaker 1: This is Master's in Business with Barry rid Holds on
• 0:06
  Speaker 1: Bloomberg Radio.
• 0:09
  Speaker 2: This week on the podcast, I have an extra special guest.
• 0:13
  Speaker 2: Michael Fish is co founder and CEO of American Securities.
• 0:18
  Speaker 2: They're one of the older private equity firms around, been
• 0:22
  Speaker 2: in business since nineteen ninety four. They run over twenty
• 0:26
  Speaker 2: seven billion dollars in assets. If you're at all interested
• 0:30
  Speaker 2: in what it's like to run a private equity firm
• 0:34
  Speaker 2: that doesn't just buy up companies and parcel them out,
• 0:37
  Speaker 2: but rather partners with management, keeps the teams in place
• 0:42
  Speaker 2: on the companies they buy, and just facilitates the improvement
• 0:48
  Speaker 2: of the company, how it operates, how they're able to
• 0:51
  Speaker 2: bring expertise both in along with capital and whatever necessary
• 0:56
  Speaker 2: debt is, as well as a network of experts. Then
• 1:00
  Speaker 2: I think you're going to find this to be a
• 1:01
  Speaker 2: fascinating conversation. There aren't a lot of companies and there
• 1:07
  Speaker 2: aren't a lot of people that have the historical perspective
• 1:11
  Speaker 2: on the rise of private equity like Michael Fish does.
• 1:15
  Speaker 2: I found this conversation to really be intriguing, and I
• 1:18
  Speaker 2: think you will also with no further ado. My discussion
• 1:22
  Speaker 2: with American Security CEO, Michael Fish.
• 1:26
  Speaker 1: Thank you Berry. It's a pleasure to be here.
• 1:28
  Speaker 3: It's a pleasure to have you.
• 1:29
  Speaker 2: So let's talk a little bit about your background BA
• 1:33
  Speaker 2: in economics from Dartmouth. You get a Stanford NBA. What
• 1:37
  Speaker 2: was the original career plan? Were you always thinking about
• 1:40
  Speaker 2: going into finance?
• 1:41
  Speaker 1: The original career plan was to be employed to provide
• 1:44
  Speaker 1: a safety net for my mother and my two sisters. Right.
• 1:47
  Speaker 1: But if I had a plan as to how to
• 1:49
  Speaker 1: do that when I went to college, it was learn
• 1:52
  Speaker 1: as much as I could, as fast as I could,
• 1:54
  Speaker 1: and get a BA and then become an accountant and
• 1:57
  Speaker 1: a lawyer, because then I figured I could always be
• 2:00
  Speaker 1: deployed either managing the numbers or doing law and get
• 2:03
  Speaker 1: those two degrees.
• 2:04
  Speaker 2: That that's not the direction you ended up going though.
• 2:07
  Speaker 2: What was it that made you say, Hey, this finance
• 2:10
  Speaker 2: thing looks like it's fun and interesting.
• 2:13
  Speaker 1: Well, it's, you know, like life, it's a serendipitous series
• 2:16
  Speaker 1: of things. I met a terrific man at Dartmouth named
• 2:19
  Speaker 1: John Hennessy Junior. He was the ex deean of the
• 2:23
  Speaker 1: Tuck School, the business school at Dartmouth College, and I
• 2:25
  Speaker 1: took a freshman seminar with him because I needed a course,
• 2:28
  Speaker 1: and he became a mentor. And he once asked me,
• 2:32
  Speaker 1: when you just asked me? And I explained him, get
• 2:34
  Speaker 1: the CPA, get the law degree, I'd always be employable.
• 2:37
  Speaker 1: And he kind of said, hmm, I'm higher. Have you
• 2:40
  Speaker 1: thought about an MBA?
• 2:41
  Speaker 2: Really? That's very interesting, though, says the person at Tuck
• 2:45
  Speaker 2: Business School.
• 2:46
  Speaker 1: Right exactly. And he ultimately encouraged me to apply to
• 2:51
  Speaker 1: the three to two program. They had a dormant program
• 2:54
  Speaker 1: left over from the Korean War. You know, business schools,
• 2:57
  Speaker 1: of course have favored people with experience.
• 3:00
  Speaker 2: So five years gives you undergraduate and graduate is that the.
• 3:04
  Speaker 1: Time you basically do three years as an undergrad. You
• 3:07
  Speaker 1: apply to the Tuck school. If you get in and
• 3:09
  Speaker 1: it hadn't taken anyone in over a decade, then you
• 3:11
  Speaker 1: do your senior year effectively as the first year MBA
• 3:14
  Speaker 1: do the second year, and you get both degrees in
• 3:16
  Speaker 1: five years.
• 3:17
  Speaker 3: Wow.
• 3:18
  Speaker 1: And he encouraged me to apply. He wrote a recommendation
• 3:22
  Speaker 1: for me, and I guess, surprising, not surprisingly after that.
• 3:25
  Speaker 3: I did get in, But you went to Stanford, not Tuck.
• 3:29
  Speaker 1: So I trotted down the street to call to his
• 3:32
  Speaker 1: assistant made an appointment, all sweaty and nervous, and went
• 3:35
  Speaker 1: to thank him for his gracious recommendation. And he said,
• 3:39
  Speaker 1: in the way of good mentors, well do you want
• 3:42
  Speaker 1: to go? And I'm thinking he's the x dan of
• 3:44
  Speaker 1: the business school, like, this is a trick question. And
• 3:47
  Speaker 1: I gave him the deer in the headlights look, and
• 3:49
  Speaker 1: he said, well, let me let's let me imagine we
• 3:52
  Speaker 1: got three letters here. We got a letter to get
• 3:55
  Speaker 1: into Tuck, a letter to get into Harvard, and a
• 3:58
  Speaker 1: letter to get into Stanford. And I said well, and
• 4:01
  Speaker 1: I thought to myself, well, I know he went to Harvard, right,
• 4:06
  Speaker 1: And he said, Dean Attuck is a trick question. And
• 4:08
  Speaker 1: I said something like, well, I guess Harvard or Stanford.
• 4:12
  Speaker 1: And he said, well, then we're done. And I said,
• 4:15
  Speaker 1: but I'm not into Harvard and Stanford. He said, well
• 4:17
  Speaker 1: you will be.
• 4:18
  Speaker 2: That's very funny. So in between Dartmouth and Stanford you
• 4:24
  Speaker 2: work for Goldman Sachs doing M and A early eighties.
• 4:28
  Speaker 3: How is that?
• 4:28
  Speaker 2: How did that help prepare your path to private equity?
• 4:33
  Speaker 1: Well, that same man the next year I trotted down
• 4:36
  Speaker 1: and he's said, well, okay, we're applying to Harvard and Stanford,
• 4:40
  Speaker 1: aren't you? And when do I write my letter of recommendation?
• 4:43
  Speaker 1: So he did, and I was fortunate to be accepted
• 4:46
  Speaker 1: to both and that was very important because when this
• 4:51
  Speaker 1: was the dawning of what is now a big analyst
• 4:54
  Speaker 1: program across the country in all banks and investment banks.
• 4:58
  Speaker 1: But back then, in nineteen eighty three, the entire analyst
• 5:03
  Speaker 1: program of Goldman Sachs was twenty five people, and that
• 5:06
  Speaker 1: was a big expansion from the prior year before, and
• 5:08
  Speaker 1: it had only been in existence for two years, so
• 5:10
  Speaker 1: Wall Street was so much smaller. Barry, you remember, back
• 5:13
  Speaker 1: in nineteen eighty three, Goldman Sacks had about thirty thousand
• 5:16
  Speaker 1: total employees, fifteen hundreds.
• 5:17
  Speaker 3: They were a private partnership. They weren't even public.
• 5:19
  Speaker 1: YEP.
• 5:20
  Speaker 3: Very different world.
• 5:21
  Speaker 1: And the entire merger department of Goldman Sachs in nineteen
• 5:24
  Speaker 1: eighty three was thirty two people. That's amazing, and I
• 5:30
  Speaker 1: like to say none were lowered to the ground than me,
• 5:33
  Speaker 1: a first year analyst, which meant I was below ground.
• 5:36
  Speaker 2: And how did you end up at Bain and Company
• 5:38
  Speaker 2: in Paris?
• 5:39
  Speaker 1: What was that like? Well, in the time that I
• 5:43
  Speaker 1: was working at Goldman Sachs. In mergers, there were a
• 5:48
  Speaker 1: bunch of big public companies who were on We were
• 5:50
  Speaker 1: on M and a retainer they call it. So the
• 5:52
  Speaker 1: public companies looking to buy lots of acquisitions, and they
• 5:55
  Speaker 1: would have us running the numbers with their people for them,
• 5:58
  Speaker 1: as they would have Bain and Company in two of
• 6:00
  Speaker 1: these situations doing the strategic work alongside their management team.
• 6:04
  Speaker 1: So I got to know the work and we would
• 6:07
  Speaker 1: jointly make presentations to the senior management team or their
• 6:10
  Speaker 1: board if a deal went far. And I got to
• 6:13
  Speaker 1: see firsthand what Bain was doing in strategic consulting and
• 6:17
  Speaker 1: understand their view of business separate from the numbers. And
• 6:21
  Speaker 1: so when I did go out to Stanford, I wanted
• 6:24
  Speaker 1: to spend my summer learning that better and in Paris,
• 6:27
  Speaker 1: and Bain was kind enough to offer me a job
• 6:30
  Speaker 1: to facilitate.
• 6:31
  Speaker 2: I have to imagine that Paris in the mid eighties
• 6:34
  Speaker 2: was just delightful.
• 6:38
  Speaker 1: It was not tough duty. I was very lucky to
• 6:40
  Speaker 1: be there and grateful all summer.
• 6:43
  Speaker 2: So you come out of Stanford, you enter the LBO world,
• 6:47
  Speaker 2: what we now call essentially private credit and private equity.
• 6:53
  Speaker 2: What was it like in the late nineteen eighties, how
• 6:56
  Speaker 2: to be the wild West. It really wasn't a mature
• 7:00
  Speaker 2: industry the way it is today.
• 7:03
  Speaker 1: Well buryer again like Wall Street. It was all so
• 7:05
  Speaker 1: much smaller. In nineteen eighty three, by my reckoning, the
• 7:09
  Speaker 1: entire global institutional private equity business was less than a
• 7:13
  Speaker 1: billion dollars of committed capital.
• 7:15
  Speaker 3: That's unbelievable, large nothing.
• 7:17
  Speaker 1: The largest fund then was KKR with one hundred and
• 7:20
  Speaker 1: seventy five million dollars. The second largest fund was forcement
• 7:24
  Speaker 1: Little with one hundred and fifty I.
• 7:26
  Speaker 2: Mean these are transaction levels. Today those entire funds are
• 7:31
  Speaker 2: like partial transaction.
• 7:34
  Speaker 1: They'd be less than I'm sure ten or twenty percent
• 7:36
  Speaker 1: of what KKR would put into many private equity deals.
• 7:39
  Speaker 2: So you're doing LBO, you're doing M and A. How
• 7:42
  Speaker 2: did those experiences lead to a career in private equity?
• 7:48
  Speaker 1: So there was almost no M and A activity. There
• 7:51
  Speaker 1: was no M and A departments in any investment bank
• 7:54
  Speaker 1: really until the very late seventies. Because the today where
• 7:58
  Speaker 1: we talk about return on equity, your margins with your
• 8:00
  Speaker 1: stock price. Back then, if you were in business in
• 8:04
  Speaker 1: you know, the real world, they said how many people
• 8:06
  Speaker 1: work for you? And if you started your career on
• 8:09
  Speaker 1: a line became a line manager or foreman, became a
• 8:13
  Speaker 1: plant manager maybe, or a division manager, so on up
• 8:16
  Speaker 1: the line. If people ask you how many people work
• 8:18
  Speaker 1: for you, and you said, well, I sold a business,
• 8:22
  Speaker 1: you know, I had a thousand, but now I'm at
• 8:24
  Speaker 1: you know, eight hundred. When you barry, you're not a
• 8:26
  Speaker 1: good manager. I thought you were a manager. So literally
• 8:29
  Speaker 1: nobody sold in and the only things that got sold
• 8:31
  Speaker 1: were bankruptcies. The odd company that went bankrupt would need
• 8:35
  Speaker 1: to get sold. But there wasn't an active M and
• 8:37
  Speaker 1: A business. There wasn't a leverage finance business, all the
• 8:39
  Speaker 1: things we know now. So when I was at Goldman
• 8:42
  Speaker 1: Sachs doing M and A from eighty three to eighty five,
• 8:46
  Speaker 1: there came to be some people looking at the M
• 8:50
  Speaker 1: and A business was started to boom, be a fraction
• 8:53
  Speaker 1: of what it is now. But there came to be
• 8:54
  Speaker 1: in certain situations buyers that were bootstrap buyers, that were
• 9:00
  Speaker 1: we would call them today. They then leveraged buyout financiers,
• 9:04
  Speaker 1: and now we call it the private equity industry. And
• 9:06
  Speaker 1: so I came to see some of these entities at
• 9:09
  Speaker 1: the very early stages KKR would be one, but there
• 9:12
  Speaker 1: were others and a lot of entrepreneurs trying to do
• 9:15
  Speaker 1: the same thing, because wealthy families were often these bootstrap buyers.
• 9:20
  Speaker 1: And honestly, it was almost like a religious war between
• 9:24
  Speaker 1: two views of the world. EPs earnings per share that
• 9:27
  Speaker 1: all public companies would look at to evaluate mergers and
• 9:32
  Speaker 1: cash flow ebit DA, which didn't exist as a term,
• 9:35
  Speaker 1: believe it or not back then, but ibadiya cash flow
• 9:38
  Speaker 1: was how these these bootstrap buyers would look at it.
• 9:42
  Speaker 1: And this seemed kind of interesting and new and different,
• 9:45
  Speaker 1: and I became interested in how they did what they
• 9:49
  Speaker 1: did and how they valued it and the differences between
• 9:52
  Speaker 1: that and ebit DA. So sorry then, EPs.
• 9:56
  Speaker 2: So in nineteen ninety four, you and your co found
• 10:00
  Speaker 2: Chuck Klein launch what is the present version of American Securities?
• 10:05
  Speaker 2: What was the catalyst for launching the firm?
• 10:09
  Speaker 3: Then?
• 10:10
  Speaker 2: What kind of business were you hoping to build?
• 10:12
  Speaker 1: Well, it was more than just Chuck and I. So
• 10:14
  Speaker 1: we had the great gift of the Rosenwaldt family. So
• 10:19
  Speaker 1: I had worked for two private equity firms when I
• 10:23
  Speaker 1: got out of Stanford, so I'd really gotten a little
• 10:25
  Speaker 1: bit of experience. I was still young, Hope. I still
• 10:28
  Speaker 1: am young today, but I'd gotten a little bit of experience,
• 10:31
  Speaker 1: and I met Chuck, and Chuck was then the senior
• 10:35
  Speaker 1: financial advisor to the William ROSENWALDT family and the William
• 10:38
  Speaker 1: Rosenwald family. Julius was the genius behind Sears Roebuck and
• 10:43
  Speaker 1: so they had largesse from the Rosenwald fortune.
• 10:46
  Speaker 2: So, in other words, this after building, helping to build
• 10:50
  Speaker 2: Seers and run Seers for a number of years, this
• 10:53
  Speaker 2: was we would call that today a family office of.
• 10:56
  Speaker 1: It absolutely was. It was called w R. S. William
• 11:01
  Speaker 1: Rosenwald family Associates. Julius Rosenwald, who was the eminence grease
• 11:06
  Speaker 1: behind the growth of Sears the way Ray crock was
• 11:09
  Speaker 1: with McDonald genius for the Catalog and Downtown department stores.
• 11:16
  Speaker 1: Sears Alton got taken public. He passed away in the
• 11:19
  Speaker 1: nineteen thirties. Bill was his youngest son. Bill separated his
• 11:23
  Speaker 1: money from that of his siblings and came to New
• 11:24
  Speaker 1: York and right after World War Two set up his
• 11:27
  Speaker 1: family office modeled along the lines of the Rockefeller family,
• 11:32
  Speaker 1: and he's founded the name. He registered the name American
• 11:35
  Speaker 1: Securities Corporation, the first corporate owned broker dealer. All the
• 11:39
  Speaker 1: other ones had been private partnerships, but he had capital
• 11:42
  Speaker 1: and didn't want to have it at risk, and that
• 11:46
  Speaker 1: family office had done were then called bootstraps, all sorts
• 11:49
  Speaker 1: of investments, not just the stocks and bonds common of
• 11:52
  Speaker 1: wealthy families of the day, but actually buying businesses, some
• 11:55
  Speaker 1: very very successful businesses that were still private, that were
• 11:59
  Speaker 1: private when I bought them. Now one of them is
• 12:01
  Speaker 1: public and as a equity market cap of thirty five
• 12:03
  Speaker 1: billion dollars. But Chuck was their senior financial advisor, so
• 12:08
  Speaker 1: he's buying selling stocks. And Chuck and I hit it
• 12:12
  Speaker 1: off on our first breakfast on the Upper East Side
• 12:14
  Speaker 1: here in New York, and he kindly asked me if
• 12:19
  Speaker 1: I would come join him, saying that he would if
• 12:23
  Speaker 1: he wanted me to come join him. He was fifty five,
• 12:27
  Speaker 1: he wanted to retire when he's sixty. Families take a
• 12:30
  Speaker 1: while to get used to somebody, so he wanted me
• 12:32
  Speaker 1: to work with him and then he'd retire. And I
• 12:36
  Speaker 1: said to Chuck, I really like you, but that's not
• 12:39
  Speaker 1: really what I want to do. But I got a
• 12:41
  Speaker 1: different idea. You be my partner. We'll set up a
• 12:44
  Speaker 1: private equity firm, and the Rosewold family will be our
• 12:47
  Speaker 1: lead investor, and that's what I want to do.
• 12:52
  Speaker 2: And everybody signed on and said, let's go. That's the
• 12:55
  Speaker 2: launch of the modern version of American securities.
• 12:57
  Speaker 1: It's more complicatan that because Chuck was a very cautious investors.
• 13:01
  Speaker 1: So what Chuck actually said was, Okay, well, come work
• 13:05
  Speaker 1: with me for a year and assuming that works out, well,
• 13:07
  Speaker 1: then we'll go raise this private equity firm.
• 13:09
  Speaker 3: Right.
• 13:10
  Speaker 1: So I joined the Rosenwald family in the spring of
• 13:13
  Speaker 1: nineteen ninety three, and we we did some investing together
• 13:17
  Speaker 1: for the first year, and we raised our private equity
• 13:19
  Speaker 1: fund the next year.
• 13:21
  Speaker 2: I almost feel compelled to point out to younger listeners
• 13:25
  Speaker 2: who may not be familiar with what Sears was back
• 13:29
  Speaker 2: in the day. But I'm not exaggerating when I say
• 13:33
  Speaker 2: Sears was the Amazon of its time. It was America's
• 13:36
  Speaker 2: largest retailer. Every major city, every major town had a Sears.
• 13:42
  Speaker 2: They were dominant, weren't they.
• 13:45
  Speaker 1: Oh? Absolutely. I like to say I hadn't thought about
• 13:47
  Speaker 1: think about Amazon. I like to say they created the
• 13:49
  Speaker 1: walton esque fortune, ok the first half of the nineteen
• 13:52
  Speaker 1: hundreds because they were Walmart at least and maybe Amazon two.
• 13:57
  Speaker 1: They had a one third market share of certain product
• 14:00
  Speaker 1: sales in the entire country. And they were also an
• 14:03
  Speaker 1: amazing they picked. Julius successfully leveraged two really great trends.
• 14:10
  Speaker 1: One was the urbanization of America and the downtown department store,
• 14:14
  Speaker 1: which was so prevalent then and then almost on a
• 14:18
  Speaker 1: different axis to the catalog which was mailed. The Sears
• 14:22
  Speaker 1: Catalog was mail to homes across the country and it
• 14:25
  Speaker 1: allowed anyone in any community of any background to buy
• 14:30
  Speaker 1: exactly what the city slickers were buying, or vice versa.
• 14:34
  Speaker 1: And that was and they were. Interestingly, I think it's
• 14:38
  Speaker 1: true to say the first non utility, non railroad that
• 14:42
  Speaker 1: was thought stable enough to be allowed to be a
• 14:44
  Speaker 1: public company. Huh. Only utilities and railroads at the beginning
• 14:49
  Speaker 1: of the stock market were thought stable enough.
• 14:52
  Speaker 2: So last question about that. That's really fascinating, and there's
• 14:56
  Speaker 2: a whole long history of things that Sears spun out.
• 15:03
  Speaker 2: I think the Discover card came from Sears and All
• 15:07
  Speaker 2: State Insurance and a couple of banks. I mean, it
• 15:09
  Speaker 2: was just one different entity after another.
• 15:13
  Speaker 1: That's absolutely true. And the family separately is responsible. The
• 15:18
  Speaker 1: Rosenwald family for Blue Cross and Blue Shield. Oh really,
• 15:23
  Speaker 1: for the Museum of Science and Industry in Chicago. Uh huh.
• 15:26
  Speaker 1: Julius Rosenwald was an important trustee of Tuskegee University and
• 15:31
  Speaker 1: friend of I think it's Booker t. Washington. I mean,
• 15:34
  Speaker 1: the family's philanthropic legacy is staggering.
• 15:38
  Speaker 2: That's really fascinating. You know, it's funny. I'm very aware
• 15:41
  Speaker 2: of the audience age, and it's arranged from people listening
• 15:47
  Speaker 2: who might be in college or grad school and people
• 15:49
  Speaker 2: who have are retired, and I sort of feel like,
• 15:53
  Speaker 2: all right, some of you youngsters may not know. This
• 15:58
  Speaker 2: was literally the biggest retailer of its day, whether you
• 16:01
  Speaker 2: want to compare it to Walmart for the stores or
• 16:04
  Speaker 2: Amazon the catalog not all that different from online shopping.
• 16:08
  Speaker 2: They were just massive and failed to pivot when the
• 16:12
  Speaker 2: time came. So hey, everything is temporary, right, last question
• 16:18
  Speaker 2: about the launch of the firm, So ninety four, it's
• 16:22
  Speaker 2: still early days for private equity. Not a lot of transactions,
• 16:26
  Speaker 2: not a lot of money under management. When you're out
• 16:31
  Speaker 2: pitching this to institutional investors in the middle of a
• 16:35
  Speaker 2: giant bull market, let me add inequities. What was what
• 16:40
  Speaker 2: was the response, did people understand that this was a
• 16:43
  Speaker 2: different type of investing and potentially a diversifier, or did
• 16:47
  Speaker 2: they look at you kind of funny?
• 16:50
  Speaker 1: Well berry to paint where we were in the arc
• 16:53
  Speaker 1: of private equity. So as we were talking before it did,
• 16:57
  Speaker 1: it didn't exist until the very late seventies at best,
• 17:02
  Speaker 1: and then was you know, from five firms to ten firms,
• 17:05
  Speaker 1: two hundred firms in the nineteen eighties, and so it
• 17:09
  Speaker 1: was growing. And when we went to raise our first
• 17:12
  Speaker 1: fund again we had the great benefit of the support
• 17:16
  Speaker 1: of the William Rosenwald family. They were a committed lead investor.
• 17:20
  Speaker 1: But I had been involved in some transactions and had
• 17:24
  Speaker 1: and those transactions had happily gone well. Chuck Klin and
• 17:27
  Speaker 1: the family had been involved in a bunch of transactions.
• 17:29
  Speaker 1: So we had some form of a track record that
• 17:32
  Speaker 1: we could talk to people about and a very specific
• 17:37
  Speaker 1: investment objective about what we were planning to do. And
• 17:40
  Speaker 1: so there were certainly there weren't that many, and we
• 17:44
  Speaker 1: did talk to a lot of people, but we were
• 17:46
  Speaker 1: grateful to have a college endowment, a publicly traded insurance company,
• 17:52
  Speaker 1: a publicly traded company, corporation's pension fund, and some wealthy
• 17:56
  Speaker 1: individuals join our first fund, which was a mighty seven
• 18:00
  Speaker 1: one point four million dollars at the final closing.
• 18:02
  Speaker 2: Well, so you mentioned you had some specific objectives back
• 18:06
  Speaker 2: in nineteen ninety four.
• 18:08
  Speaker 3: What were those objectives?
• 18:10
  Speaker 1: Well, building on the the investment legacy of the Rosenwald
• 18:17
  Speaker 1: family and some of the things that I had been
• 18:20
  Speaker 1: doing and thinking about, we agreed that we were only
• 18:24
  Speaker 1: going to buy the market leading company, the number one
• 18:26
  Speaker 1: market share company in its niche. I mean, obviously these
• 18:29
  Speaker 1: would be modest sized companies given the size of our fund,
• 18:31
  Speaker 1: but the number one market share company, we would look
• 18:34
  Speaker 1: to only buy that company an industry which was GDP
• 18:37
  Speaker 1: growth or better, we would look to only support the
• 18:41
  Speaker 1: existing CEO. We wanted to support them, Meaning you're.
• 18:44
  Speaker 2: Not coming in cleaning house and installing your own guys.
• 18:47
  Speaker 3: You're looking for a management team you want to work with.
• 18:49
  Speaker 1: We had then and we have still today, a relationship focus.
• 18:54
  Speaker 1: And you know, changing and it's practical, changing executives is risky.
• 18:59
  Speaker 1: We believe that if we're coming in and feel aligned
• 19:04
  Speaker 1: and simpatico with the management team and particularly the CEO
• 19:07
  Speaker 1: running the business that delivered the earnings that we're valuing
• 19:10
  Speaker 1: the business on if we could just help them be
• 19:13
  Speaker 1: the same or better, we'd have only good outcomes for investors.
• 19:18
  Speaker 1: And why take the risk of changing management. We'd rather
• 19:20
  Speaker 1: just look for a new situation. And we wanted to
• 19:24
  Speaker 1: have relatively modest leverage. We tended at the beginning to
• 19:27
  Speaker 1: capitalize our companies with less debt than other investors.
• 19:31
  Speaker 3: Huh, really really intriguing.
• 19:33
  Speaker 2: So let's talk a little bit about twenty seven billion dollars,
• 19:36
  Speaker 2: one hundred and eighty full time professionals. What is the
• 19:40
  Speaker 2: secret to successfully growing a private equity firm? For you?
• 19:45
  Speaker 3: Coming up on your thirtieth year?
• 19:49
  Speaker 1: Great people, you know, I like to say money is
• 19:51
  Speaker 1: the ultimate commodity. So our product, if you will, is money.
• 19:54
  Speaker 1: That's what we invest and so if we're going to
• 19:56
  Speaker 1: outperform for our investors, it's going to be the people
• 20:00
  Speaker 1: that we've attracted, our investment philosophy, and maybe some processes
• 20:04
  Speaker 1: that we've employed.
• 20:06
  Speaker 2: So you've done plenty of deals over that thirty year period.
• 20:10
  Speaker 2: What stands out anything really memorable? Any transactions that stick
• 20:15
  Speaker 2: with you?
• 20:18
  Speaker 1: You know when I think about that, we've certainly had
• 20:20
  Speaker 1: the great pleasure to be involved with some great businesses,
• 20:24
  Speaker 1: but it's really the people that stick out the most. It's,
• 20:27
  Speaker 1: you know, life is people, and we are in the
• 20:29
  Speaker 1: people business managers, investors, lenders, bankers, the whole ecosystem. And
• 20:35
  Speaker 1: it's the special relationships which we're proud to have created.
• 20:40
  Speaker 1: And some of the CEOs from our very first fund,
• 20:43
  Speaker 1: our very first deals, you know, twenty eight years ago,
• 20:45
  Speaker 1: are still close friends of mine. I'll be going to
• 20:47
  Speaker 1: Florida to spend a weekend with one of our first
• 20:50
  Speaker 1: CEOs and his wife staying with them next month. Huh.
• 20:54
  Speaker 2: That's really interesting. So let's stay focused on that concept
• 20:59
  Speaker 2: of people and partnering with management rather than just taking
• 21:05
  Speaker 2: over a company and cleaning house. Is this relatively uncommon
• 21:10
  Speaker 2: in the industry. I have to imagine other companies see
• 21:15
  Speaker 2: the value of this, Or when you first started doing this,
• 21:18
  Speaker 2: was it kind of a one off?
• 21:22
  Speaker 1: We weren't really sure when anyone else was doing At
• 21:24
  Speaker 1: the beginning, You're just kind of doing it and hoping
• 21:25
  Speaker 1: it works out. As it turns out, You're absolutely right.
• 21:29
  Speaker 1: There is a consulting firm which did a study a
• 21:31
  Speaker 1: few years ago that twenty five percent of the CEOs
• 21:35
  Speaker 1: are gone at closing in most partly the average private
• 21:38
  Speaker 1: equity transaction, fifty percent are gone by two years and
• 21:43
  Speaker 1: only twenty five percent are there after four years. In
• 21:48
  Speaker 1: contrast to that, now, for our thirty year existence, are
• 21:52
  Speaker 1: what I call CEO win rate is over eighty percent,
• 21:56
  Speaker 1: meaning eighty percent of the men and women who were
• 21:58
  Speaker 1: running the business before we showed up, we're running it
• 22:01
  Speaker 1: at exit or are running it today if we still
• 22:03
  Speaker 1: own it.
• 22:04
  Speaker 2: So this is really very different if if the typical firm,
• 22:08
  Speaker 2: they're in half the situations, they're gone either closing or
• 22:13
  Speaker 2: two years later.
• 22:15
  Speaker 1: We are walking the talk in terms of management partnership,
• 22:18
  Speaker 1: and we really believe in it.
• 22:19
  Speaker 2: So when you're evaluating a company, this is more than
• 22:23
  Speaker 2: EBADA or earnings per share or something like that. You're
• 22:26
  Speaker 2: really doing your due diligence on the management team and
• 22:30
  Speaker 2: how effective they are, and hey, are these people we
• 22:33
  Speaker 2: want to get into bed with and do business with?
• 22:35
  Speaker 1: All those things we have, we add a very important
• 22:38
  Speaker 1: management dimension to the basic you know, product services, customers,
• 22:43
  Speaker 1: raw material suppliers and so on.
• 22:45
  Speaker 3: How do you evaluate that?
• 22:46
  Speaker 2: Because that's Listen, when you look at EBAD, it's numbers
• 22:49
  Speaker 2: on an Excel spreadsheet or Google sheets or whatever you're
• 22:53
  Speaker 2: using when you're evaluating people, it's much squishier and qualitative.
• 23:00
  Speaker 2: How do you make that how do you institutionalize that process?
• 23:06
  Speaker 1: Well, you know, it's very it's very bespoke. Every person
• 23:11
  Speaker 1: is different. Different of our colleagues are different, even though
• 23:15
  Speaker 1: we all share this same belief in CEO partnership and
• 23:18
  Speaker 1: management team partnership. And it's really just deciding you want
• 23:21
  Speaker 1: to work together. We're not perfect, our management teams aren't perfect.
• 23:26
  Speaker 1: But can we make I like to say my favorite
• 23:28
  Speaker 1: equation is one plus one equals three. Can we work
• 23:31
  Speaker 1: with a management team and together be great partners and
• 23:35
  Speaker 1: do something different together? And we bring certain resources that
• 23:38
  Speaker 1: some other firms don't have. The largest group of our
• 23:41
  Speaker 1: one hundred and eighty people that you cited are so
• 23:44
  Speaker 1: called resources group. These are full time operating professionals. They're
• 23:48
  Speaker 1: not virtual, they're not consultants, they're not ten ninety nine,
• 23:51
  Speaker 1: and they are W two colleagues. And so we have
• 23:55
  Speaker 1: a lot of resources we can bring to our companies
• 23:57
  Speaker 1: in purchasing, procurement, strategy, it hr you name it. And
• 24:02
  Speaker 1: some executives are excited by that. They want the help,
• 24:06
  Speaker 1: they want fresh set of eyes on certain problems, or
• 24:10
  Speaker 1: extra extra arms and legs on problems. And some people say,
• 24:13
  Speaker 1: you know, we got that, we know what we do,
• 24:15
  Speaker 1: and you just put up the money, and we're better
• 24:18
  Speaker 1: partners for the former than the latter.
• 24:20
  Speaker 2: So you describe a lot of your investments as platform investments,
• 24:26
  Speaker 2: and you've made seventy eight of these platform investments over the.
• 24:30
  Speaker 3: Last thirty years.
• 24:32
  Speaker 2: Tell us a little bit bit about that phrase, and
• 24:36
  Speaker 2: then we'll get into the subsequent three hundred and five
• 24:39
  Speaker 2: add on investments that followed.
• 24:42
  Speaker 1: Well, a platform investment for us is really the first
• 24:45
  Speaker 1: big investment. It's we're investing in a company with the
• 24:49
  Speaker 1: management team. We're typically the control investor, so we'll own
• 24:52
  Speaker 1: more than fifty one percent, sometimes almost one hundred percent
• 24:55
  Speaker 1: of the company, but the management will always be an
• 24:57
  Speaker 1: investor with us. And that is and that first unique
• 25:00
  Speaker 1: investment is a so called platform. Some investments will never
• 25:04
  Speaker 1: have add on acquisitions. They can grow organically or other ways.
• 25:08
  Speaker 1: But many acquisitions do find smaller competitors or sometimes mergers
• 25:12
  Speaker 1: of equals, and we then build them with add on
• 25:14
  Speaker 1: what are called add on acquisitions, into the existing platform.
• 25:18
  Speaker 1: And so that three hundred would be a lot of
• 25:20
  Speaker 1: add ons, and sometimes they're very small, sometimes they're material.
• 25:23
  Speaker 1: It just depends on the company.
• 25:24
  Speaker 2: So when you're putting money into a company, is this
• 25:29
  Speaker 2: you're obviously buying shares from somebody. Are you also providing
• 25:33
  Speaker 2: a level of operating capital? How much in a typical structure,
• 25:37
  Speaker 2: what is previous owners selling and what is money that
• 25:41
  Speaker 2: goes for future deployment.
• 25:45
  Speaker 1: It greatly depends. The interesting thing about us is we
• 25:50
  Speaker 1: are very attractive to founder CEOs. Almost half of the
• 25:55
  Speaker 1: investments in our most recent fund, half of the companies
• 25:58
  Speaker 1: we've purchased, we purchased from founder CEOs who continue to
• 26:03
  Speaker 1: be the CEO and in many cases rolled over an
• 26:06
  Speaker 1: enormous amount of money into this company that we now control,
• 26:09
  Speaker 1: where they're still being the CEO. So I like to
• 26:12
  Speaker 1: think of those as very choosy investors. They really care
• 26:16
  Speaker 1: about their company because they founded it, They really care
• 26:18
  Speaker 1: about their company because they're running it, And they really
• 26:21
  Speaker 1: care about their company because they're going to maintain a
• 26:23
  Speaker 1: very big personal investment. And in a lot of those situations,
• 26:27
  Speaker 1: they are happy and excited to partner with us as
• 26:30
  Speaker 1: we are them, And I think they're attracted by the
• 26:32
  Speaker 1: resources we bring other than money to the second part
• 26:36
  Speaker 1: of your question on what is the capital structure and
• 26:38
  Speaker 1: what's the money? Typically the capital structure the money that
• 26:44
  Speaker 1: we put up and oftentimes lenders's if it's a debt
• 26:47
  Speaker 1: free business goes to selling shareholders. But as part of that,
• 26:51
  Speaker 1: of course, you want to capitalize a company with undrawn
• 26:53
  Speaker 1: lines of credit so called revolvers or delay draw term loans,
• 26:58
  Speaker 1: other terms like that. There's liquidity to run the business
• 27:01
  Speaker 1: on a day to day basis, survive a rainy day,
• 27:06
  Speaker 1: and also grow the business as makes sense, if it
• 27:08
  Speaker 1: is by out on acquisition or new customer acquisitions or
• 27:11
  Speaker 1: new plants we're building, whatever.
• 27:13
  Speaker 2: So I want to separate the platform initial investments with
• 27:17
  Speaker 2: the add ons. What are you looking for when you're
• 27:20
  Speaker 2: making a platform investment. What is it that gets you
• 27:24
  Speaker 2: excited about a particular company or not so excited and saying, hey,
• 27:28
  Speaker 2: this isn't exactly for us.
• 27:31
  Speaker 1: So going back to what we started thirty years ago,
• 27:33
  Speaker 1: we're looking for the number one market share player or.
• 27:37
  Speaker 2: So that's persistent. In other words, the original ideas are
• 27:39
  Speaker 2: still driving your investment strategies.
• 27:42
  Speaker 1: We work really hard to get better tactically and execution
• 27:46
  Speaker 1: wise and with our scale advantages now, but the fundamental
• 27:49
  Speaker 1: investment philosophy hasn't changed. We're looking for that market share
• 27:53
  Speaker 1: leader which has a sustainable competitive advantage. We hope that
• 27:57
  Speaker 1: we can invest behind and see stability so that there
• 28:00
  Speaker 1: won't be a loss of capital.
• 28:02
  Speaker 3: And above average GDP growth.
• 28:04
  Speaker 1: And we're looking for that company to exist, as you said,
• 28:07
  Speaker 1: in an industry that is growing at GDP or better.
• 28:11
  Speaker 1: Now we use terms like is there a tailwind?
• 28:15
  Speaker 2: Huh, So we'll talk a little bit about sectors in
• 28:19
  Speaker 2: a few moments.
• 28:21
  Speaker 1: I'm sorry, Berry, and I have to add. And we're
• 28:23
  Speaker 1: looking to back the existing management team.
• 28:25
  Speaker 3: They're going to stick around.
• 28:26
  Speaker 1: We want the CEO to want to be our partner.
• 28:29
  Speaker 1: I mean, we obviously know a lot of managers, but
• 28:32
  Speaker 1: we really get excited if the CEO is going to
• 28:35
  Speaker 1: be our partner going forward.
• 28:36
  Speaker 2: So competitive edge, better than average growth, a management team,
• 28:40
  Speaker 2: you like, that doesn't sound like the worst sort of
• 28:44
  Speaker 2: investment that those sound like pretty attractive things. How many
• 28:49
  Speaker 2: companies are out there that check all your boxes? You?
• 28:53
  Speaker 1: I mean quite? I mean it's a lot are a
• 28:55
  Speaker 1: little depending on how big your screen is, but we
• 28:58
  Speaker 1: it depends on the year but we will typically see
• 29:01
  Speaker 1: three hundred and fifty to four hundred and fifty companies
• 29:05
  Speaker 1: that look like they might be suitable. This number is
• 29:09
  Speaker 1: a rough guess, but we probably do very detailed work,
• 29:13
  Speaker 1: sometimes without side consulting firms and other advisors on maybe
• 29:19
  Speaker 1: forty of those, and we will make you know, final
• 29:23
  Speaker 1: contract offers on probably around ten. That's rough guess, and
• 29:29
  Speaker 1: it changes every year. And we're only buying i should say,
• 29:33
  Speaker 1: US headquartered businesses. That's all we've ever aspired to do,
• 29:37
  Speaker 1: and it's something overseas all here. Many of our companies
• 29:40
  Speaker 1: have international operations. Some are truly global companies, some are not.
• 29:44
  Speaker 1: But the key thing for us is that they're US
• 29:46
  Speaker 1: headquartered because this is where we know people, we know
• 29:50
  Speaker 1: the laws, we know the language. We should have a
• 29:51
  Speaker 1: competitive advantage and we can be close and still try
• 29:55
  Speaker 1: to have a family life. If we're travel all over
• 29:57
  Speaker 1: the world, there should be someone who has our advantages
• 29:59
  Speaker 1: and say Beijing, Berlin, Buenos Aires and Bombay, that should
• 30:05
  Speaker 1: be not us, Whereas we have those advantages here as
• 30:08
  Speaker 1: American securities.
• 30:09
  Speaker 2: And so when you look hence the name, and so
• 30:11
  Speaker 2: when you look at doing any of those three hundred
• 30:14
  Speaker 2: and five add ons. At that point, you're familiar with
• 30:19
  Speaker 2: much more familiar with the company. You've already put prior
• 30:22
  Speaker 2: capital into it. What are you looking to accomplish with
• 30:26
  Speaker 2: those add ons? Is it just a matter of getting
• 30:28
  Speaker 2: liquidity the insiders who want some and you and larger position,
• 30:32
  Speaker 2: or is it hey, they could use a little more
• 30:35
  Speaker 2: capital and we're happy to participate.
• 30:37
  Speaker 1: So the add ons are all about building the existing
• 30:40
  Speaker 1: business or the platform initial investment to use the phrase
• 30:44
  Speaker 1: you were using, and so there, it's not about a
• 30:47
  Speaker 1: capital it's not about getting liquidity for anyone who's an
• 30:50
  Speaker 1: existing investor. Sometimes there will be a smaller competitor that
• 30:53
  Speaker 1: the company wants to sell to us. Sometimes there will
• 30:57
  Speaker 1: be size business in an adjacent industry where there's synergies
• 31:04
  Speaker 1: that we can save money on purchasing, let's say, by
• 31:06
  Speaker 1: having a bigger scale platform. It really depends on the company.
• 31:11
  Speaker 2: So you guys have been doing this sort of platform
• 31:14
  Speaker 2: investment and add on investment pretty much from the beginning.
• 31:18
  Speaker 2: Have you seen other companies other private equity firms seemingly
• 31:23
  Speaker 2: imitate or at least has this said differently? Has this
• 31:27
  Speaker 2: strategy become more popular over the years.
• 31:30
  Speaker 1: Oh, I think absolutely, Barry. I think almost everybody in
• 31:34
  Speaker 1: private equity generally, when they make their first investment, they
• 31:37
  Speaker 1: are looking at what might be able to acquire. In addition,
• 31:43
  Speaker 1: investment bankers always market this now in their materials. When
• 31:47
  Speaker 1: you're looking at company, this company can grow by buying
• 31:50
  Speaker 1: all these companies. This is real or imagined, but it
• 31:52
  Speaker 1: gets marketed, and really it's something I think everyone in
• 31:55
  Speaker 1: the private equity industry is pretty much thinking about every
• 31:58
  Speaker 1: time they make initial investment. Is their growth through acquisition
• 32:01
  Speaker 1: as well as organic really intriguing.
• 32:04
  Speaker 2: So let's talk about the modern world and what you're
• 32:08
  Speaker 2: dealing with. I have a quote of yours that I
• 32:11
  Speaker 2: really liked. Five hundred basis points of rate increases changes
• 32:15
  Speaker 2: a lot. Can you explain to us, yes, five hundred
• 32:19
  Speaker 2: BIPs it does change a lot. What does it mean
• 32:21
  Speaker 2: for your work?
• 32:23
  Speaker 1: Well, eighteen months ago, just to put this in perspective,
• 32:27
  Speaker 1: eighteen months ago, private equity firms generally could borrow senior
• 32:32
  Speaker 1: debt for their companies at around six six and a
• 32:35
  Speaker 1: quarter percent all in. So if you borrowed one hundred
• 32:40
  Speaker 1: dollars of debt, you paid six dollars and twenty five
• 32:46
  Speaker 1: cents let's say of interest every year on that debt that.
• 32:50
  Speaker 2: Was whatever, I forget the name of what replaced Libor
• 32:53
  Speaker 2: plus three percent or so something like that two and
• 32:55
  Speaker 2: a half percent.
• 32:56
  Speaker 1: Software has replaced Libor and then basically it was libor
• 33:02
  Speaker 1: softra at about four fifty. Depends on the perceived credit
• 33:08
  Speaker 1: quality of the company and syndication markets at that time,
• 33:11
  Speaker 1: so it was basically the initial base rate was almost
• 33:14
  Speaker 1: zero's you're at a fifty basis points with software plus
• 33:17
  Speaker 1: that four fifty, let's say, and fees amortized in and
• 33:22
  Speaker 1: you get to let's say six six and a quarter,
• 33:24
  Speaker 1: and today and eighteen months later that your people like
• 33:29
  Speaker 1: us are paying more like ten and a quarter.
• 33:32
  Speaker 3: That's a big number.
• 33:33
  Speaker 1: And that's the five percent more or five hundred basis
• 33:35
  Speaker 1: points you were talking about. So instead of paying six
• 33:38
  Speaker 1: dollars and twenty five cents, you're now paying ten dollars
• 33:41
  Speaker 1: and twenty five cents in interest. And you know, it's
• 33:45
  Speaker 1: either a lot or a little, depending on whether you
• 33:46
  Speaker 1: have the money or not. If one didn't capitalize the
• 33:50
  Speaker 1: capital structure planning to have a cushion that was that big,
• 33:56
  Speaker 1: that higher interest rate can be a barrier to continuing
• 34:00
  Speaker 1: to pay interest or amortize, you know, pay back that
• 34:03
  Speaker 1: debt over time. And there are other problems like inflation
• 34:10
  Speaker 1: where and supply chain issues, both of which caused many companies,
• 34:14
  Speaker 1: even healthy, growing companies, to need more cash for working capital.
• 34:18
  Speaker 1: You know, if you were selling something where the raw
• 34:20
  Speaker 1: material cost used to be a dollar, and because of inflation,
• 34:22
  Speaker 1: after a couple of years, it's now a dollar twenty five,
• 34:25
  Speaker 1: that's twenty five percent more money in working capital for
• 34:29
  Speaker 1: the same number of units. And if you were your
• 34:32
  Speaker 1: supply chains might have come from Asia and it takes
• 34:35
  Speaker 1: longer because they're not quite sufficient, harder to get containers,
• 34:39
  Speaker 1: so you actually need more units. This can add up
• 34:42
  Speaker 1: as well. So between interest and working capital, even companies
• 34:46
  Speaker 1: that are flat or growing can have cash flow problems
• 34:49
  Speaker 1: if they didn't plan to have enough liquidity.
• 34:51
  Speaker 2: So when we look at the public markets, most of
• 34:54
  Speaker 2: the major public corporations that were carrying any sort of
• 34:58
  Speaker 2: debt all refine financed before this we're up and rates,
• 35:02
  Speaker 2: so what they're carrying is fairly low interest rates. What
• 35:07
  Speaker 2: did you see in the private sector where people taking
• 35:10
  Speaker 2: advantage of low rates to to you know, recapitalize whatever
• 35:14
  Speaker 2: their obligations were at the lowest possible carrying costs.
• 35:18
  Speaker 1: Well public or private Barry the companies are always refinancing.
• 35:24
  Speaker 1: You have a first issue is are you refinancing with
• 35:26
  Speaker 1: floating rate debt or fixed rate debt? So if I
• 35:30
  Speaker 1: had a five year senior debt credit facility of let's
• 35:34
  Speaker 1: say liboard then software now plus four fifty, that whether
• 35:39
  Speaker 1: I refinanced it now or then that that's five and
• 35:42
  Speaker 1: a half six sorry, six and a quarter percent debt
• 35:44
  Speaker 1: that's now ten and a quarter. But if I issued
• 35:46
  Speaker 1: bonds or fixed rate debt, then I would be insulated
• 35:50
  Speaker 1: from their rate increase. So it's it's firstly, did you
• 35:53
  Speaker 1: issue fixed rate debt or floating And if it was floating,
• 35:56
  Speaker 1: some people still bought hedges. The hedge market's pretty efficient
• 36:00
  Speaker 1: for two three years. Hard to hedge farther than that, right,
• 36:03
  Speaker 1: And so when those hedges run out, even if you
• 36:05
  Speaker 1: were conservative, and so you really have been boring at
• 36:08
  Speaker 1: six and a quarter for the last eighteen months as
• 36:10
  Speaker 1: rates have come up. When your hedge runs out, it's
• 36:13
  Speaker 1: gonna be ten and a quarter if rates stay the
• 36:15
  Speaker 1: same as they are today.
• 36:16
  Speaker 2: I mean most companies are not Apple. I remember Apple
• 36:19
  Speaker 2: floated a bond deal at like two to and a
• 36:22
  Speaker 2: quarter some crazy number for thirty years. Yep, right, sold
• 36:25
  Speaker 2: a ton of it. I'm gonna imagine private companies don't
• 36:29
  Speaker 2: have that sort of ability to float debt, but they
• 36:32
  Speaker 2: certainly can issue some sort of fixed rate. Did you see,
• 36:38
  Speaker 2: Like what was the fixed rate world like on the
• 36:40
  Speaker 2: private side when things were dirt cheap.
• 36:44
  Speaker 1: Typically on the private side eighteen months ago, you wouldn't
• 36:51
  Speaker 1: have borrowed, but few people borrowed first lean. In the
• 36:56
  Speaker 1: private markets, they would sometimes issue bonds. And so in
• 37:01
  Speaker 1: one company we know, well, that company managed to issue
• 37:05
  Speaker 1: six percent bonds. So that was fixed rate.
• 37:08
  Speaker 2: Six percent sounds attractive eighteen months ago. Now it looks
• 37:11
  Speaker 2: like a bargain for them.
• 37:13
  Speaker 1: Yes, it was attractive eighteen months ago because it was
• 37:15
  Speaker 1: fixed rate. If you were a conservative, you had no risk.
• 37:17
  Speaker 1: And now now that same company, if it came to market,
• 37:21
  Speaker 1: would be issuing those bonds for at least twelve percent.
• 37:26
  Speaker 2: So we've seen a lot of again in the public markets,
• 37:30
  Speaker 2: multiple compression stocks were pretty pricey in the low rate era.
• 37:35
  Speaker 3: Rates have gone up.
• 37:36
  Speaker 2: We're stone, it's see multiple compression. How are the higher
• 37:40
  Speaker 2: rates affecting valuations amongst private companies.
• 37:45
  Speaker 1: So there's two issues that are affecting valuations. One is
• 37:49
  Speaker 1: the amount, just what's called the quantum, the amount of
• 37:52
  Speaker 1: debt you can borrow, expressed as a multiple of your
• 37:54
  Speaker 1: free cash flow or your ebit DA. Until eighteen months ago,
• 38:01
  Speaker 1: a reasonably solid, stable business could borrow between six and
• 38:04
  Speaker 1: six and a half times it's trailing EBITDA, and sometimes
• 38:10
  Speaker 1: pro form projected this year it would be a little higher.
• 38:13
  Speaker 1: You could borrow that same number off what you hope
• 38:16
  Speaker 1: to achieve in the year you're in. Now that six
• 38:20
  Speaker 1: and a half is more like five for a good company,
• 38:23
  Speaker 1: and it could be four and a half if the
• 38:25
  Speaker 1: company is perceived to have a little bit of a blemish,
• 38:28
  Speaker 1: and the adjustments that might move it higher are harder
• 38:33
  Speaker 1: for lenders to support. So one thing that constrains value
• 38:36
  Speaker 1: is you fundamentally, all things being equal, if you bought
• 38:41
  Speaker 1: a company with six times leverage three or four years ago,
• 38:46
  Speaker 1: and now a private equity firm is trying to sell it,
• 38:48
  Speaker 1: it probably cannot sell it with that much leverage. The
• 38:51
  Speaker 1: buyer is going to be having five times, and that
• 38:54
  Speaker 1: means more equity. And if you have the same equity.
• 38:56
  Speaker 1: If you have a bigger equity check that will be
• 38:58
  Speaker 1: in a lower rate turn in the X. That can
• 39:00
  Speaker 1: impact price. And as we've talked a lot about, the
• 39:03
  Speaker 1: higher interest rate is also a big impact because instead
• 39:05
  Speaker 1: of paying in the one hundred dollars of debt at
• 39:09
  Speaker 1: six fifty, let's say six fifty of interest a year,
• 39:12
  Speaker 1: now it's ten to fifty because rates are higher. So
• 39:14
  Speaker 1: those two things constrain value where earnings hasn't even if
• 39:18
  Speaker 1: earning's grown, and it may make it hard to get
• 39:21
  Speaker 1: all of the money out where in a sale today
• 39:24
  Speaker 1: if earnings are flat or only up a little bit.
• 39:26
  Speaker 2: So let's look at valuation in a historical perspective, and
• 39:30
  Speaker 2: again most of my frame of reference are the public markets.
• 39:34
  Speaker 2: Pre financial crisis, stocks were at least reasonably priced, and
• 39:40
  Speaker 2: certainly before the mid nineties reasonably priced. And then since
• 39:45
  Speaker 2: the financial crisis, everything seems to have gotten everything priced
• 39:49
  Speaker 2: in dollars and credit seems to have gotten more expensive,
• 39:52
  Speaker 2: including stocks. Did you see anything take place similarly in
• 39:57
  Speaker 2: private markets when we're looking at the nineties, the two
• 40:01
  Speaker 2: thousands to twenty tens.
• 40:03
  Speaker 1: Oh, there's so many forces going on very I mean,
• 40:07
  Speaker 1: now and just think about the big impact of the
• 40:10
  Speaker 1: five or six largest tech companies as a percent of
• 40:13
  Speaker 1: the growth in stock markets, and the average company, particularly
• 40:18
  Speaker 1: smaller public companies, are down, not up, even though the
• 40:20
  Speaker 1: stock market's up. So at any one time, I like
• 40:24
  Speaker 1: to say, no one should ever invest in us because
• 40:28
  Speaker 1: they think we're good macroeconomists, because macroeconomists are often wrong,
• 40:34
  Speaker 1: especially at inflection points when we need them to be right.
• 40:37
  Speaker 1: That particular company at a moment in time, with its
• 40:41
  Speaker 1: forces and its management team, and that's what we spend
• 40:44
  Speaker 1: all of our time trying to analyze. We try to
• 40:46
  Speaker 1: be macro aware, but really micro focus.
• 40:49
  Speaker 2: That makes a lot of sense. And look at the
• 40:51
  Speaker 2: financial crisis middle of two thousand and eight. Most economists
• 40:57
  Speaker 2: didn't see a recession coming, even though we were right
• 40:59
  Speaker 2: in the middle of the worst one in a long time.
• 41:03
  Speaker 2: So macro aware, micro focused I like that description. So
• 41:09
  Speaker 2: let let's talk about some of the challenges of the
• 41:11
  Speaker 2: current environment. Bankruptcies just hit a thirteen year high. What
• 41:17
  Speaker 2: sort of risks does this create for your portfolio companies?
• 41:22
  Speaker 2: Or is this really companies that aren't doing as well
• 41:26
  Speaker 2: that eventually succumb to the more challenging environment.
• 41:34
  Speaker 1: It's it's all facts and circumstances. Certainly, you're absolutely right
• 41:38
  Speaker 1: that bankruptcies are up, and most people think they're going
• 41:42
  Speaker 1: to keep rising, and I think they're right. And that's
• 41:45
  Speaker 1: nothing more than we've just talked about the cash needs
• 41:48
  Speaker 1: of the average business for more money and inventory, for
• 41:51
  Speaker 1: higher interest rates, and in some many businesses constrain growth
• 41:56
  Speaker 1: and at some point that can that can reach a
• 41:59
  Speaker 1: breaking point, and so those forces will have bankruptcies rise,
• 42:04
  Speaker 1: just as lower interest rates will have that debate in
• 42:07
  Speaker 1: the natural cycle of business.
• 42:10
  Speaker 2: And my assumption is, since you're looking at companies and
• 42:13
  Speaker 2: management teams, you're probably not all that interested in these
• 42:18
  Speaker 2: bankrupt companies or distressed assets. Doesn't seem to really fit
• 42:22
  Speaker 2: the way I think of your model.
• 42:24
  Speaker 1: There are many private equi firms that focus on so
• 42:29
  Speaker 1: called bankruptcy, distressed and whatnot, and private credit providers. We
• 42:34
  Speaker 1: are trying to avoid those and trying to buy good business.
• 42:38
  Speaker 1: On the journey from good to great or great to greater,
• 42:41
  Speaker 1: once in a while we will look at what i'll
• 42:43
  Speaker 1: call good company, bad balance sheet. The fundamental company is
• 42:46
  Speaker 1: a good company and has been. It has all the
• 42:49
  Speaker 1: characters who like market leadership, margins, stability, some tailwinds, and
• 42:54
  Speaker 1: great management team, but it just had too much debt.
• 42:57
  Speaker 1: So we may try to provide an investment to a
• 43:01
  Speaker 1: company like that where when it comes out of bankruptcy
• 43:04
  Speaker 1: or its debt problem, it's a great company with the
• 43:06
  Speaker 1: right capital structure. But most of our most of our
• 43:08
  Speaker 1: things are not that.
• 43:09
  Speaker 3: That's really interesting.
• 43:11
  Speaker 2: So let's talk a little bit about the private equity industry.
• 43:15
  Speaker 2: We saw a lot of investors kind of rush in
• 43:19
  Speaker 2: in twenty twenty two when public markets stocks, am bonds
• 43:24
  Speaker 2: we're doing poorly. And since then there's been lots of
• 43:28
  Speaker 2: talk about how we price private holdings. What do you
• 43:35
  Speaker 2: think about this chatter about extending pretend or quarterly marks
• 43:40
  Speaker 2: not being very accurate or precise. And I'm not referring
• 43:44
  Speaker 2: to any of your companies, I'm talking generally.
• 43:47
  Speaker 3: This has been.
• 43:50
  Speaker 2: Chatter that's been in a lot of news.
• 43:54
  Speaker 1: So private equity, as you were talking about before, has
• 43:58
  Speaker 1: been growing now now for thirty five years. So as
• 44:03
  Speaker 1: the ecosystem keeps growing, there are more companies owned by
• 44:06
  Speaker 1: private equity, There are more good things, and there are
• 44:09
  Speaker 1: sometimes more bad things. So it's just it's just growing
• 44:12
  Speaker 1: so I think the trend to more people investing in
• 44:16
  Speaker 1: private equity has grown dramatically and it's it's continuing to grow.
• 44:22
  Speaker 1: And the institutional investors often are thinking, if you're a
• 44:26
  Speaker 1: big state pension fund, I want ten percent, twenty percent,
• 44:30
  Speaker 1: If you're some college endowments, forty percent in private equity.
• 44:33
  Speaker 1: But whatever is that percentage, they're targeting that and they've
• 44:36
  Speaker 1: allocated their assets to have that percentage invested in private equity.
• 44:41
  Speaker 1: So two big forces that affect all of these institutions
• 44:46
  Speaker 1: is one, what's the value of those private equity investments.
• 44:51
  Speaker 1: So if you targeted if you had a dollar to
• 44:53
  Speaker 1: invest and you targeted ten percent in private equity, and
• 44:56
  Speaker 1: those investment doubled, now you have twenty cents in private
• 45:01
  Speaker 1: equity instead of ten on your dollar, so your quote
• 45:04
  Speaker 1: over allocated. That's really good in a sense because your
• 45:09
  Speaker 1: private equity portfolios are up, but it's still a problem
• 45:13
  Speaker 1: because you're overallocated, so you stop making new commitments. The
• 45:18
  Speaker 1: same thing happens in a different way with your dollar
• 45:21
  Speaker 1: if that dollar is based on the value of all
• 45:23
  Speaker 1: of your holdings and the stock market say drops by
• 45:26
  Speaker 1: ten percent, now you only got ninety cents. If your
• 45:29
  Speaker 1: private equity is at ten cents, you're over allocated, and
• 45:31
  Speaker 1: if it's at twenty, you've got a real problem. And
• 45:34
  Speaker 1: it's really both those factors. They're called the numerator and
• 45:37
  Speaker 1: the denominator effect. That has caused some institutions to slow
• 45:44
  Speaker 1: down their commitments to private equity to get those back
• 45:47
  Speaker 1: in balance, because, as you know, the stock market was
• 45:50
  Speaker 1: down not this year, but last year, and private equity
• 45:52
  Speaker 1: values continue to be up. So that's one set of forces.
• 45:56
  Speaker 1: The second thing you raised is you know, how is
• 45:59
  Speaker 1: private equity valued. The stock market gets valued every day,
• 46:02
  Speaker 1: every stock you can see when it trades, every tick
• 46:06
  Speaker 1: the way private equity gets valued. And all private equity
• 46:09
  Speaker 1: firms in the United States with more than one hundred
• 46:11
  Speaker 1: and fifty million dollars of capital under management are registered
• 46:15
  Speaker 1: with the SEC. And one of the requirements is that
• 46:19
  Speaker 1: all private equity firms value their holdings every quarter and
• 46:24
  Speaker 1: that at least annually. Those valuations are typically subjected to audit.
• 46:29
  Speaker 1: As part of the audit process, the audits look at
• 46:31
  Speaker 1: those valuations. Now they're private companies, so you got what
• 46:36
  Speaker 1: a timing lag, if you will, So every quarter, so
• 46:39
  Speaker 1: let's say on March thirty first, the quarter ends. Private
• 46:42
  Speaker 1: equity firms takes time to get numbers from your companies,
• 46:44
  Speaker 1: and so there's typically forty five days where you try
• 46:47
  Speaker 1: to figure out what the value was on March thirty first,
• 46:50
  Speaker 1: and then you send those values to your investors. So
• 46:53
  Speaker 1: if you're invested in private equity March thirty one, by
• 46:57
  Speaker 1: May fifteenth, you will get to know what the private
• 47:01
  Speaker 1: equity firm valued those investments on. So that's a lag.
• 47:05
  Speaker 1: So people talk about the lag, and that's one inherent issue.
• 47:09
  Speaker 1: And the second is since it's not if we know
• 47:12
  Speaker 1: what's trading in the public market, so you know that
• 47:14
  Speaker 1: that was the trade yesterday. Whether someone paid too much
• 47:16
  Speaker 1: or too little, you know that was the trade. And
• 47:19
  Speaker 1: as we say, for every buyer who thinks they're getting
• 47:22
  Speaker 1: a deal, there's a seller who is happy with the price.
• 47:24
  Speaker 1: So there's a market the valuations being done by each
• 47:28
  Speaker 1: private equity firm. You don't really have that market test
• 47:31
  Speaker 1: except when it's sold. And so some people talk about
• 47:37
  Speaker 1: is the value real my personal belief In general, it's
• 47:41
  Speaker 1: very real. The sec comes in, looks at it, the
• 47:44
  Speaker 1: auditors bless it, and investors are sophisticated in general, so
• 47:49
  Speaker 1: they're pretty real, although people can cast dispersions, but often
• 47:52
  Speaker 1: that's the lag happening. You know, if you're if at
• 47:56
  Speaker 1: April thirtieth, after this notional March thirty one, the market
• 48:00
  Speaker 1: ten percent, you say, my private equity stuff's down ten percent. Well,
• 48:03
  Speaker 1: the valuation you get May fifteenth is as of March
• 48:06
  Speaker 1: thirty one, it's not going to be shown down because
• 48:08
  Speaker 1: it's not supposed to be.
• 48:09
  Speaker 3: You won't get that till the next quarter.
• 48:11
  Speaker 1: So the third thing, just I mean, just say last thing.
• 48:13
  Speaker 1: While the institutions have backed up new commitments in private equity,
• 48:17
  Speaker 1: which actually seems to be thawing as we're speaking, individuals,
• 48:22
  Speaker 1: individual investors are dramatically underinvested in private equity versus institutions,
• 48:28
  Speaker 1: and that is an even bigger pool of capital, if
• 48:31
  Speaker 1: you will, on the sidelines or now trying to invest
• 48:33
  Speaker 1: in private equity. And so that's another wave of flow.
• 48:37
  Speaker 1: So most people expect private equity to keep growing.
• 48:40
  Speaker 2: So you mentioned transactions are obviously the easiest way to
• 48:44
  Speaker 2: measure valuation. What are you seeing in terms of deal making?
• 48:49
  Speaker 2: Are private equity firms still making as many investments as
• 48:54
  Speaker 2: they were in recent years, and what are you seeing
• 48:57
  Speaker 2: on the other side, what about exits.
• 49:00
  Speaker 1: You know, we had a detailed conversation a few moments
• 49:03
  Speaker 1: ago about interest rates and their impact, and you were
• 49:05
  Speaker 1: talking about some companies declaring bankruptcy more often, and I
• 49:11
  Speaker 1: think that trend continues. And in terms of volume, deal
• 49:15
  Speaker 1: volume is about half of what it was two years ago.
• 49:19
  Speaker 2: Meaning new investments into existing companies.
• 49:21
  Speaker 1: And sales both because they're two sides at the same coin. Often,
• 49:25
  Speaker 1: I mean there are you can take companies public to exit,
• 49:28
  Speaker 1: and you can sell to public companies, but the private
• 49:31
  Speaker 1: buyer to private buyer is an active, active market, and
• 49:36
  Speaker 1: it's roughly down fifty percent. So new investments are down
• 49:42
  Speaker 1: and realizations are down, but the ones that are happening
• 49:46
  Speaker 1: are actually happening at prices close to, if not entirely,
• 49:51
  Speaker 1: as much as they were eighteen twenty four months ago.
• 49:53
  Speaker 2: So prices are holding up, just total volumes.
• 49:56
  Speaker 1: So far, prices are holding up now.
• 49:59
  Speaker 2: Obviously there's an implication there that the best companies are
• 50:05
  Speaker 2: getting a price. And if you have a little a
• 50:07
  Speaker 2: little hair on the deal or a blemish not so much.
• 50:11
  Speaker 1: Barry, you show yourself to be an astute observer or
• 50:15
  Speaker 1: keen understanding of how the world works. That's exactly what happens.
• 50:19
  Speaker 1: The average we see, which let's say is down maybe
• 50:23
  Speaker 1: half a multiple point, maybe three quarters of multipoint is
• 50:28
  Speaker 1: this year compared to two years ago, is only the
• 50:30
  Speaker 1: ones that's sold which are going to be the better companies.
• 50:34
  Speaker 1: So the multiple drop is a little more than shown
• 50:36
  Speaker 1: in the numbers quality adjusted.
• 50:38
  Speaker 3: You're exactly right.
• 50:39
  Speaker 2: I look at the world through the lens that everything
• 50:42
  Speaker 2: is survivorship biased, so that you're seeing the winners, you're
• 50:45
  Speaker 2: not seeing the ones that didn't close. And that is
• 50:48
  Speaker 2: that's something that's that's never far from my thoughts. So
• 50:52
  Speaker 2: let's focus on some of the sectors that American Securities
• 50:57
  Speaker 2: really likes. You're big in services, You're you're being in
• 51:00
  Speaker 2: consumer and healthcare, but you're especially formidable in industrials. Tell
• 51:07
  Speaker 2: us about those sectors and what's been the appeal.
• 51:11
  Speaker 1: Well, you're absolutely right. For the thirty year history of
• 51:13
  Speaker 1: the firm, roughly sixty percent of our investments have been
• 51:16
  Speaker 1: in so called industrials and the rest have been consumer
• 51:20
  Speaker 1: services and healthcare. With respect to industrials, I'm not sure
• 51:29
  Speaker 1: why it is the case, but lots of people don't
• 51:32
  Speaker 1: find it sexy.
• 51:33
  Speaker 2: I mean, you think about what a big industrial manufacturer does.
• 51:38
  Speaker 2: It's hard, it's dirty, it's complicated. As opposed to some
• 51:44
  Speaker 2: new software app that all the kids love. There's a
• 51:48
  Speaker 2: very different set of audiences for those businesses there is.
• 51:53
  Speaker 1: But you know, we need our industrial base, and interestingly
• 51:57
  Speaker 1: in this country it actually grows faster than the overall
• 52:01
  Speaker 1: GDP by a point or two for the last twenty years.
• 52:05
  Speaker 3: It's amazing.
• 52:06
  Speaker 1: It's a vibrant source of transactions and it's been very
• 52:10
  Speaker 1: successful for us. And we have to some extent built
• 52:13
  Speaker 1: our resources group and some of our internal functions to
• 52:16
  Speaker 1: help those management teams and those companies be better. That
• 52:19
  Speaker 1: are industrial companies. And the thing that we like about
• 52:22
  Speaker 1: it is because we're very focused on creating the best
• 52:26
  Speaker 1: risk adjusted returns we can. So we like stable businesses
• 52:32
  Speaker 1: and we when we do our due diligence with an
• 52:35
  Speaker 1: established business industrial business, if you will, you can understand
• 52:38
  Speaker 1: its manufacturing process and how that compares to its competitors.
• 52:42
  Speaker 1: You can understand its suppliers and how it purchases raw
• 52:45
  Speaker 1: materials and how that compares favorably or not to competitors.
• 52:49
  Speaker 1: And you can understand the customers, and particularly if you're
• 52:51
  Speaker 1: buying the number one market share player, you can really
• 52:54
  Speaker 1: see the industry and know what customers are thinking. So
• 52:57
  Speaker 1: we see stability in that and in a relatively large
• 53:03
  Speaker 1: number of situations, we're able to see the indicitia of
• 53:06
  Speaker 1: a successful investment equity investment, we hope because of that
• 53:10
  Speaker 1: stability and the ability to do due diligence, where other
• 53:13
  Speaker 1: people in the venture world, for example, are just looking
• 53:15
  Speaker 1: at how big is the runway and if we build it,
• 53:18
  Speaker 1: they will come, and God bless them they many of
• 53:19
  Speaker 1: those folks have done terrific investing for their investors. But
• 53:23
  Speaker 1: that's not what we do. We're looking at what is
• 53:25
  Speaker 1: and what can continue to be the case, and how
• 53:28
  Speaker 1: might we be able to help management make it better.
• 53:30
  Speaker 2: So you mentioned industrials have been growing faster than GDP
• 53:35
  Speaker 2: over the past twenty years, an era, as we previously discussed,
• 53:40
  Speaker 2: a very low interest rates. What does that mean for
• 53:43
  Speaker 2: the next ten or twenty years for industrials. How do
• 53:46
  Speaker 2: you think about the sector today in a higher inflation,
• 53:50
  Speaker 2: higher interest rate environment.
• 53:52
  Speaker 1: Well, you know, all businesses are dealing in an active market, right,
• 53:56
  Speaker 1: they have active competitors their customers are thinking how to
• 53:59
  Speaker 1: do the best for themselves. Suppliers likewise, and so the
• 54:03
  Speaker 1: forces that will have made a company survive and perhaps
• 54:07
  Speaker 1: thrive over the last twenty years are likely to be
• 54:10
  Speaker 1: pretty consistent and the product of market based forces, and
• 54:13
  Speaker 1: so the really good companies will should keep doing well
• 54:18
  Speaker 1: irrespective of the environment. Sometimes it's easier, sometimes it's harder,
• 54:22
  Speaker 1: but again it's more the microeconomic forces that are going
• 54:25
  Speaker 1: to matter for that company than a general macroeconomic something.
• 54:29
  Speaker 2: So let me let me tack in a slightly different direction.
• 54:34
  Speaker 2: A lot of your site talks about citizenship being a
• 54:37
  Speaker 2: good corporate steward, and you have discussions of deverstitating, inclusion, philanthropy, esg.
• 54:44
  Speaker 2: How do you work that sort of focus into.
• 54:47
  Speaker 3: What you do on the private equity side.
• 54:51
  Speaker 1: Well, some of it's some of it's related, and some
• 54:54
  Speaker 1: of it enables the other stuff. So we grew out
• 54:58
  Speaker 1: of the Rosenwaldt family. Rosemol family had a terrific philanthropic legacy,
• 55:03
  Speaker 1: and we're terrific citizens and cared about communities and we
• 55:06
  Speaker 1: try to do the same. So we we have lots
• 55:11
  Speaker 1: of programs that are philanthropic that are enabled by the
• 55:14
  Speaker 1: success of our businesses. We give us a fixed percent
• 55:17
  Speaker 1: of our annual profits to charities every year as an example.
• 55:22
  Speaker 1: But there are other things that we're trying to do
• 55:24
  Speaker 1: every day with our businesses. You know, so called ESG. Environmental,
• 55:28
  Speaker 1: social and governance factors we think are not only good
• 55:32
  Speaker 1: for the planet, but they enable ebitt the a growth.
• 55:35
  Speaker 1: And so being a good steward is about being efficient.
• 55:38
  Speaker 1: You don't want to waste energy, and you want to
• 55:40
  Speaker 1: reduce it if you can. You want to. You don't
• 55:42
  Speaker 1: certainly don't want your employees to get hurt on the job.
• 55:45
  Speaker 1: So every monthly book from every one of our companies
• 55:48
  Speaker 1: for years and years and years, starts with safety. It's
• 55:51
  Speaker 1: the most important thing. We want employees that are showing
• 55:53
  Speaker 1: up to know that they and their loved ones now
• 55:55
  Speaker 1: we're in a safe environment. I mean, and this seems
• 55:57
  Speaker 1: like how everyone should be acting. But and I hope
• 55:59
  Speaker 1: they We certainly are too.
• 56:01
  Speaker 2: There's been a lot of studies on governance and it
• 56:04
  Speaker 2: turns out that companies and there's a little bit of
• 56:07
  Speaker 2: a chicken and egg question here issue here, but companies
• 56:11
  Speaker 2: that have broad governance with a variety of people in
• 56:17
  Speaker 2: board positions and senior management positions tend to outperform, at
• 56:22
  Speaker 2: least in the public markets, companies that, for example, have
• 56:25
  Speaker 2: no women on their boards of directors. Do you ever
• 56:29
  Speaker 2: think about this when you're considering an investment or Is
• 56:32
  Speaker 2: that the sort of thing that gets facilitated post investment?
• 56:38
  Speaker 1: Well, we think about we think about being a good
• 56:41
  Speaker 1: steward and a good corporate citizen and investing in businesses
• 56:44
  Speaker 1: that enable us to do that. Going in period full
• 56:48
  Speaker 1: stop the boards. Every one of our companies has an
• 56:50
  Speaker 1: independent board, so the CEOs on the board. Typically we're
• 56:54
  Speaker 1: the controlling shaffers who are on the board, but we
• 56:56
  Speaker 1: actually create a unique board for every company and try
• 57:00
  Speaker 1: to model the best of diversity in all its forms
• 57:03
  Speaker 1: and diverse members on those boards.
• 57:05
  Speaker 2: So this isn't just the sort of thing that is
• 57:09
  Speaker 2: you know, green dressing or whatever. Greenwashing is the phrase
• 57:13
  Speaker 2: of the day. There's an actual corporate advantage to having
• 57:18
  Speaker 2: a diverse board. Is that a fair way to look
• 57:21
  Speaker 2: at it?
• 57:21
  Speaker 1: I think. I think the studies use sites show that
• 57:25
  Speaker 1: diversity is profitable. Okay, diversity is profitable for investors. And
• 57:31
  Speaker 1: the great thing about being a private company is there's
• 57:33
  Speaker 1: a whole reduced liability structure for outside directors. So we
• 57:38
  Speaker 1: often find, and I think this is broadly true for
• 57:40
  Speaker 1: the private equity industry. There is a lot of people
• 57:43
  Speaker 1: who are great people and very experienced and can add
• 57:46
  Speaker 1: value to boards, that are actively interested in joining the
• 57:49
  Speaker 1: boards of private companies, maybe even more so than public companies.
• 57:53
  Speaker 2: All right, so let me shift gears again. You were
• 57:56
  Speaker 2: a lecturer. You began at Stanford in two thousand and six,
• 58:00
  Speaker 2: still doing that.
• 58:01
  Speaker 1: Well, it's really one day a year.
• 58:03
  Speaker 3: There was a test lecture a terrific.
• 58:06
  Speaker 1: Man professor when I was there. I became his research
• 58:09
  Speaker 1: assistant and he asked me to come one day and
• 58:12
  Speaker 1: talk about private equity. So I go to Stanford one
• 58:15
  Speaker 1: day a year since two thousand and six.
• 58:17
  Speaker 2: And you're involved in a number of other philanthropies, the
• 58:22
  Speaker 2: eleven sixty two Foundation, the Atlantic Council, just a run
• 58:29
  Speaker 2: of this, Northwell Health, Board of Trustees of Princeton Theological Seminary.
• 58:34
  Speaker 2: Tell us a little bit about what you do on
• 58:36
  Speaker 2: the philanthropic side.
• 58:39
  Speaker 1: Well, you know, being a good corporate citizen isn't just
• 58:42
  Speaker 1: talking about it. You got to walk to talk. And
• 58:44
  Speaker 1: so I think it's important to give of one's time
• 58:48
  Speaker 1: and one's treasure to these institutions, and I'm proud to
• 58:53
  Speaker 1: be able to do it.
• 58:54
  Speaker 3: So I only have you for a few more minutes.
• 58:57
  Speaker 2: Let's jump to our speed round and just ask you
• 59:01
  Speaker 2: some of the same questions we ask all of our guests,
• 59:03
  Speaker 2: starting with what what have you been streaming these days?
• 59:06
  Speaker 2: Tell us what's kept you entertained?
• 59:11
  Speaker 1: Well, very I watch so little personal media of any form.
• 59:15
  Speaker 1: What I what I do watch is typically with my kids,
• 59:19
  Speaker 1: and the Witcher is a big fan favorite for them,
• 59:24
  Speaker 1: as are whatever Star Wars spin off at the moment.
• 59:27
  Speaker 2: Let's talk about mentors. You mentioned one of your early
• 59:30
  Speaker 2: mentors who helped shape your career.
• 59:34
  Speaker 1: Oh, I've been blessed with so many. I'd feel bad
• 59:37
  Speaker 1: naming some, but I mentioned a couple of PhD professors.
• 59:41
  Speaker 1: There's people I've worked with. Uh, there's you know, Chuck Klin,
• 59:44
  Speaker 1: with whom I founded American Securities, who's a dear, dear
• 59:48
  Speaker 1: mentor and important figure in my life. But there's I'm
• 59:50
  Speaker 1: really blessed with a lot of people who've tried to
• 59:52
  Speaker 1: help me.
• 59:52
  Speaker 3: Let's talk about books.
• 59:53
  Speaker 2: What are some of your favorites and what are you
• 59:55
  Speaker 2: reading right now?
• 59:57
  Speaker 1: You know pleasure. Reading is a sad asualty of my
• 1:00:00
  Speaker 1: day job, but occasionally I do get to steal sometime.
• 1:00:05
  Speaker 1: There's a terrific book that's so elegant and peaceful called
• 1:00:09
  Speaker 1: A Gentleman in Moscow, about a man held in a
• 1:00:12
  Speaker 1: hotel for decades. That is a really a read I
• 1:00:17
  Speaker 1: would recommend to other people, who's given me by a
• 1:00:19
  Speaker 1: colleague of mine. And I'm currently reading Outlive by Peter Attiyah,
• 1:00:26
  Speaker 1: which is about you know, living longer and living healthfully.
• 1:00:31
  Speaker 3: Interesting.
• 1:00:32
  Speaker 2: Our final two questions, what sort of advice would you
• 1:00:35
  Speaker 2: give a recent college graduate interested in a career in
• 1:00:39
  Speaker 2: private equity or investing.
• 1:00:41
  Speaker 1: I think the two most important things for a career
• 1:00:43
  Speaker 1: in anything is do you like the work? And do
• 1:00:46
  Speaker 1: you like the people? And I tell my kids that,
• 1:00:49
  Speaker 1: and I tell everyone I meet. You know, don't whatever
• 1:00:52
  Speaker 1: it is, tech, private equity, something else. Don't get caught
• 1:00:56
  Speaker 1: up in the hype. Do you like the work, go
• 1:00:59
  Speaker 1: try it. Understand what your friends or more people more senior,
• 1:01:03
  Speaker 1: are doing. And do you like the work. It's you
• 1:01:07
  Speaker 1: can't like private equity if you don't like modeling in numbers.
• 1:01:10
  Speaker 1: So do you like the work, and make sure you
• 1:01:12
  Speaker 1: work with people you like, because life is people and
• 1:01:15
  Speaker 1: if you love the people you work with, you'll be
• 1:01:17
  Speaker 1: learning and growing and happy every day. And if you don't,
• 1:01:20
  Speaker 1: it doesn't matter what you're doing, you're not going to
• 1:01:22
  Speaker 1: be happy.
• 1:01:23
  Speaker 2: And our final question, what do you know about the
• 1:01:25
  Speaker 2: world of private equity today? You wish you knew back
• 1:01:29
  Speaker 2: in nineteen ninety four when you were first launching your firm.
• 1:01:33
  Speaker 1: I think it would. It is amazing to me and
• 1:01:39
  Speaker 1: probably to most of the other people who started in
• 1:01:41
  Speaker 1: private equity in nineteen eighties, that this has become a
• 1:01:45
  Speaker 1: massive industry. Honestly, I thought, and I think most of
• 1:01:48
  Speaker 1: the other people doing it thought, we were just we
• 1:01:51
  Speaker 1: just saw the world a little bit different and there
• 1:01:52
  Speaker 1: were a bunch of companies which had cash flow characteristics
• 1:01:55
  Speaker 1: different than their EPs characteristics, and so we could buy
• 1:01:59
  Speaker 1: some of these companies and have fun working with the
• 1:02:02
  Speaker 1: management teams. And that this, you know, little side niche
• 1:02:06
  Speaker 1: has become so huge is really shocking to me.
• 1:02:11
  Speaker 2: Huh, really really fascinating. Michael, thank you for being so
• 1:02:14
  Speaker 2: generous with your time. We have been speaking with Michael Fish.
• 1:02:18
  Speaker 2: He is the CEO of American Securities, a twenty seven
• 1:02:22
  Speaker 2: billion dollar private equity firm. If you enjoy this conversation, well,
• 1:02:27
  Speaker 2: feel free to check out any of our previous five
• 1:02:29
  Speaker 2: hundred discussions we've had over the past nine years. You
• 1:02:33
  Speaker 2: can find those at iTunes, Spotify, YouTube, wherever you get
• 1:02:38
  Speaker 2: your favorite podcast. Sign up for our daily reading list
• 1:02:42
  Speaker 2: at ridhlts dot com. Follow me on Twitter at Ritoltz.
• 1:02:46
  Speaker 2: Follow all of the Bloomberg family of podcasts on Twitter
• 1:02:50
  Speaker 2: at Podcasts. I would be remiss if I did not
• 1:02:53
  Speaker 2: thank the crack team who helps me put these conversations
• 1:02:56
  Speaker 2: together each week. Meredith Brank is my audio engineer at
• 1:03:00
  Speaker 2: tik of Albron is my project manager. Anna Luke is
• 1:03:04
  Speaker 2: my producer. Sean Russo is my researcher.
• 1:03:08
  Speaker 3: I'm Barry Hilts.
• 1:03:09
  Speaker 2: You've been listening to Masters in Business on Bloomberg Radio.