E426: American Securities CEO on Warren Buffett, Private Equity & Playing the Long Game

Episode Summary

Executive Summary: Michael recounts how private equity evolved from a tiny 1980s niche into a massive global industry, and how American Securities grew by staying focused on U.S. industrials, prioritizing cash flow, culture fit, and strong relationships. He emphasizes disciplined deal selection, team-based investing, and the enduring importance of human judgment despite AI and market scale.

Main Topics: The evolution of private equity and M&A: Michael contrasts the early Wall Street era—when M&A barely existed—with today’s multi-trillion-dollar private equity ecosystem, explaining how the industry grew from a handful of players to thousands. Cash flow vs. earnings-based investing: He explains why private equity focused on cash flow rather than EPS accretion, using the plant/depreciation example to show how private equity thinking differed from public-market analysis. Founding and scaling American Securities: Michael describes launching the firm with a $71.4 million fund and scaling by steadily raising larger funds while keeping the same strategy and staying just below larger competitors. Relationships, friendship, and team culture: A major theme is that business relationships create lasting friendships and that success depends on working with people you like, trust, and want to battle-test together. Recruiting and triangulation in hiring: He argues that hiring should use multiple lenses—references, personality testing, interviews, and team input—to reduce bias and improve predictability of success. Focus on industrials and saying no to distractions: Michael emphasizes American Securities’ narrow sweet spot in U.S. industrial businesses and related services, arguing that focus creates advantage and helps avoid sexy but misaligned opportunities. Resources group and value creation post-acquisition: He outlines how the firm built a large resources group to help portfolio companies with functions like IT, HR, procurement, and recruiting, improving outcomes without replacing management.

Key Arguments: Private equity emerged from almost nothing in the 1980s and scaled because the cash-flow-based buying logic was powerful and repeatable. Public-market thinking centered on EPS accretion, while private equity cared about durable cash flow and debt service capacity. American Securities succeeded by staying in its core lane: U.S. industrials and related services, rather than chasing every new asset class. Strong business relationships often become strong personal friendships because they are forged through shared work, stress, and success. Hiring is probabilistic, so firms should triangulate through interviews, references, tests, and multiple perspectives rather than trust resumes alone. The best predictor of success is often someone who has already done the same job well elsewhere, not a risky step-up candidate. Scale in private equity is constrained because you cannot deploy capital as easily as in private credit or debt markets. AI may shrink analytical staffing needs, but it will not replace the rainmaker role or the importance of making the call and building relationships. A dedicated resources group can materially improve portfolio company performance in areas companies rarely do well alone, such as ERP implementations and recruiting. Retaining incumbent CEOs is a sign of strong culture fit and operational partnership, not just deal-making skill.

Data Points: First fund size: $71.4 million - American Securities’ initial fund closed in December 1994. Current AUM: $23 billion - Size of American Securities today as referenced in the conversation opener. Wall Street hiring year: 1983 - Michael says he came to Wall Street out of college in 1983 and joined Goldman Sachs M&A. Private equity market size in 1983: Less than $1 billion - He describes the industry as tiny at the start of his career. Number of private equity players in the late 1980s: Around 100 firms - He says the first “too much money chasing too few deals” period was in the late 1980s. Today’s private equity industry: Multiple trillions and thousands of firms - He contrasts current scale with the early years. American Securities fund growth: $71.4M to $350M to $650M to $1B to $2.3B to $3.6B to $5B+ - He walks through how the firm expanded its fund sizes over time. Typical equity per investment: $350M-$400M - He says the firm has averaged this range for about 15 years. Deals seen annually: 400-500 investments per year - He notes the size of the firm’s funnel. Deals completed annually: 1-4 - He implies only a very small subset of seen deals are actually pursued/completed. CEO retention / win rate: Over 80% - He says more than 80% of CEOs present when the firm invested were still there at exit or remain today. Portfolio company colleague base: About 120,000 - He references the size of the employee base across the portfolio when discussing recruiting support. Resources group size: About 50 people - Functional experts supporting portfolio companies across operations. ERP implementation frequency: Two per year - American Securities’ IT team does roughly two ERP implementations annually across the portfolio. Fund investor mix over time: First fund mostly U.S.; recent funds about 50% international - He notes the capital base has become much more global. Private equity allocation for institutions: 8%-15% - He gives a typical allocation range for institutional LPs. Retail investor private equity allocation: 0%-1% - He uses this to explain why retail capital could be a major source of new inflows. Meeting duration in China: 45 minutes - He says he once flew to China for a single 45-minute meeting.

Pivotal Quotes: "Money is the ultimate commodity. So all private equity firms, in a sense, are in a commodity business, but we're really in the people business." — Michael: He explains why relationships, trust, and teamwork matter more than capital alone. "Do you like the work and do you like the people?" — Michael: His core advice for young people choosing jobs and careers. "Make the call." — Michael: His recurring advice that direct outreach and personal follow-up are essential in business.

Implications: For investors and operators, the lesson is that durable advantage comes from focus, disciplined process, and human relationships—not scale for its own sake. AI may streamline analysis, but judgment, culture fit, and outreach remain decisive.