Michael Fisch on Private Equity Funds

Episode Summary

Executive Summary: This podcast features an interview with Michael Fish, CEO of American Securities, a private equity firm managing $27 billion. Fish discusses the firm's founding in 1994, its investment philosophy of partnering with existing management and focusing on market-leading companies, and the impact of rising interest rates on private equity. He also covers the growth of the industry, the importance of people and relationships, and the firm's commitment to ESG and philanthropy.

Main Topics: Founding and Philosophy of American Securities (Priority: 5/5): Michael Fish recounts the founding of American Securities in 1994 with Chuck Klein and the Rosenwald family. The firm's core philosophy is to invest in market-leading companies, support existing management, use modest leverage, and focus on long-term partnerships. Impact of Rising Interest Rates on Private Equity (Priority: 5/5): Fish explains how the 500 basis point increase in interest rates over 18 months has raised borrowing costs from ~6.25% to ~10.25%, affecting valuations, deal volume, and company liquidity. This has led to a 50% drop in deal volume and increased bankruptcies. Investment Strategy: Platforms and Add-ons (Priority: 4/5): The firm makes platform investments (first major investment) and then add-on acquisitions to build the business. They focus on U.S.-headquartered companies with sustainable competitive advantages and above-GDP growth. People and Management Partnership (Priority: 4/5): American Securities emphasizes partnering with existing management teams, with an 80% CEO retention rate versus industry averages of 25% at closing. They provide operational resources (180 professionals) to support growth. Industry Growth and Valuation Challenges (Priority: 3/5): Fish discusses the growth of private equity from a niche to a massive industry, valuation methods (quarterly marks with lag), and the 'extend and pretend' criticism. He notes that valuations are generally real but affected by timing and quality. Sector Focus: Industrials (Priority: 3/5): About 60% of investments are in industrials, which have grown faster than GDP for 20 years. Fish explains the appeal: stability, ability to do due diligence, and the sector's resilience. ESG, Philanthropy, and Corporate Citizenship (Priority: 2/5): The firm integrates ESG factors (safety, governance, diversity) into its operations, viewing them as both ethical and profitable. They give a fixed percentage of profits to charity and have independent boards with diverse members.

Key Arguments: Private equity's growth from a niche to a massive industry was unexpected by early practitioners. Rising interest rates (500 bps) have significantly increased borrowing costs, reduced deal volume by 50%, and constrained valuations. Partnering with existing management (80% retention) is more effective than replacing CEOs, contrary to industry norms. Valuations in private equity are generally accurate due to SEC oversight and audits, but suffer from timing lags. Industrials offer stability and growth, making them attractive for risk-adjusted returns. ESG and diversity are not just ethical but also profitable, as shown by studies.

Data Points: Assets under management: $27 billion - American Securities manages this amount as of the podcast. Number of professionals: 180 - Full-time professionals at American Securities. CEO retention rate: 80% - Percentage of CEOs retained at exit or still running the business, versus industry averages of 25% at closing and 50% by two years. Interest rate increase: 500 basis points - Increase in borrowing costs over 18 months, from ~6.25% to ~10.25%. Deal volume decline: 50% - Drop in new investments and exits compared to two years prior. First fund size: $71.4 million - Size of American Securities' first fund in 1994. Platform investments: 78 - Number of platform investments made over 30 years. Add-on acquisitions: 305 - Number of add-on acquisitions following platform investments. Industrials as percentage of investments: 60% - Proportion of American Securities' investments in industrials over 30 years.

Pivotal Quotes: "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." — Michael Fish: Explaining the key to success in private equity. "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?" — Michael Fish: Describing the value of partnership with management teams. "We try to be macro-aware. But really micro-focused." — Michael Fish: Explaining the firm's investment approach.

Implications: The podcast highlights that private equity is adapting to higher interest rates by focusing on quality companies and management partnerships. Investors should expect continued growth in the industry, but with more selective deal-making and a focus on operational improvements. The emphasis on ESG and diversity may become more standard.