The below excerpt was provided by RJ Lumba, Managing Partner of GrowthCap and host of the Growth Investor podcast. He interviewed Michael Fisch, the Founder and CEO of American Securities, a leading U.S. private equity firm with approximately $26 billion under management.
RJ: What’s really unique about American Securities is that you’ve been very long-term oriented. How have you been able to sustain your long-term partnerships — both internally and externally — over such an extensive period of time? Presumably, this plays into how you’ve been able to consistently grow the firm over the years.
Michael: These are really important and material points, RJ. Firstly, our product is the ultimate commodity money. And so if we’re going to perform for our investors, it’s only going to be our people and our investment philosophy and the processes that we implement.
So, on the people side, we care about long-term relationships. We care about acting properly and being a good partner to all constituents, investors, management colleagues and portfolio companies, lending partners — all of the many service providers, accounting, legal consulting, just everyone we come into contact with.
And with respect to companies, we have always believed that we should always be thinking about building companies. So we tend to buy the market leading companies. We feel that we have the resources to help that management team go from good to great; from great to greater. And the guiding philosophy is always to build a better company. If we’re building a better company, then we are thinking long-term.
Meanwhile, the liquidity event or the exit, whenever that happens, will take care of itself.
But we’ve never turned down a CapEx request at a board of any company because we were thinking of selling the business.
We’re cutting back on working capital or temporarily having a RIF in salesforce because it may look good for short term earnings, but be bad for the long-term.
We’re always thinking of being a good long-term partner building better businesses. And if it makes sense to hold the business longer, we’re happy to do that. And if management is looking for liquidity to achieve their personal objectives, we’re, of course, wanting to support that in some way, shape or form. That’s consistent with great outcomes for our investors. And one of the great joys, really, is the people side of the business.
There are CEOs – from our first deals going back 25-30 years ago – who’ve invested in every single one of our subsequent funds. In fact, they are still great friends of the firm and are known to come to firm events. Building those long-term relationships is one of the great joys of the business.
RJ: You invest across a number of sectors. Over time, has the diversification of your portfolio evolved? If so, how has it changed?
Michael: Not really. We’ve always believed in buying the No. 1 market share player in its particular niche. For the last 15 years, those companies have had a node, which is 100 to 150 million of existing EBITDA. Some are a little bigger at purchase, 200 or more. And some now are over 600, 700 million of EBITDA. But the node is buying companies that are 100 to 150 million of EBITDA, all U.S.-headquartered.
So the mix has really been the same. We’ve roughly invested 60 percent of every fund in industrial companies, packaging, chemicals, whatnot, widget manufacturers. And the rest is service, consumer, and some health care services.
It’s pretty consistent across every fund. This is not necessarily by design or by fiat. But that’s just the number of investments that we end up populating in the dollars per second.
RJ: When examining large asset managers and how their portfolios may shift into other sectors (e.g. technology), does that have implications for what’s happening in the macroeconomic environment? Furthermore, does that play into how you focus on industrials?
Michael: It certainly plays a role, but it’s very different for every company. In addition to an investment team of roughly 50 people now, we have more than 55 full-time professionals in what we call our resources group. These are functional operating resources in purchasing, procurement, IT, CHRO functions, CFO functions, strategy — including our office in Shanghai, China. These men and women, I like to think, are a full quiver of arrows.
Additionally, our investment team looks at each business and considers: What can we help them be better at? Or, where do we have resources where they haven’t yet developed resources — and pull those arrows to help? So it’s really a little bit of everything.
Specifically to your question on technology: Like many other investors, we have found very productive ways to deploy digital marketing, to deploy AI in certain functions, and deploy certain online industrial businesses. Fundamentally, however, we’re buying the industrial business and applying technology where it makes sense, which has pretty much been universally associated with margin-enhancing revenue increases.
It’s been good. But we don’t have an enterprise software investment team per se.
Rather, we have data science in our resources group, which helps in digital technology. This is how we’re approaching it. As such, we’re certainly very appreciated today with so much money that’s gone into tech and software. It’s really gone from nothing to maybe 30-35% of total fundraising in private equity — to be true to our knitting in industrial businesses, where we think we have advantages in sourcing and execution and relationships; as well as consumer and services to stay focused.
RJ: A couple of decades ago, I had the pleasure of getting to know David Musicant, a member of your firm; and someone who I think very highly of. He’s a wonderful person. It strikes me that you probably have a firm filled with wonderful people. As I’m very interested in this topic, can you talk about the culture at American Securities?
Michael: David’s a fabulous person and has been a colleague for more than a decade. He runs our investment development and capital markets activity — and does a fabulous, fabulous job. He’s also joined by Matt Fishman, who just came on board at American Securities to co-lead
capital markets activities because we keep getting bigger and bigger.
In fact, we have almost no turnover — and virtually no voluntary turnover. So culturally, we’re doing something right. Part of it, as you say, is just hiring good people. Within that rubric of hiring good people who enjoy what they do, I like to say happiness is operating at the intersection of this Venn diagram: what someone’s really good at and what the firm needs them to do to succeed. At American Securities, we have many people who’ve ideally found that white space in the middle of that Venn diagram.
We take a very patient approach in helping people find their ideal spot. For example, when it’s an existing position, the process is relatively easy. Looking at our investment team, it’s not difficult because there is a logical progression and mentorship that goes on. Conversely, when looking at our resources group, these are often new functions. Amazingly, they’ve almost always worked out at our firm. We find that white space with each woman and man who joins us there. And it works out really well. We care about culture. We think about it a lot.
Our CHRO and chief operating officer, David Maue, has again been with us a very long time. He spends a lot of time putting in the scaffolding, the infrastructure, to make sure we’re continuing our tradition of a great culture. This is important because, as I’ve observed over my career: scale conspires against intimacy.
By definition, success leads to growth and scaling, which means that company meetings are bigger. It means that the number of people you’re interacting with is larger. (You might have seen this at Merrill, RJ.) But people really crave intimacy. Intimacy means you’re consistently working with them, or in meetings with them.
The benefits of intimacy are undeniable. For instance, if one deal is going well or badly, or if a colleague has an issue at home, or if another colleague is dealing with an aging parent, you can kind of care about them — and they can feel cared about. And when that meeting is no longer three to five people, but now 25 people, that level of intimacy is difficult. So we’re always trying, I would say, to get back to where we’ve been. We’re trying to intentionally build intimacy into our work groups and our work life so that people feel like they’re understood, they’re individually cared about. This is not just some big, amorphous organization. Although with 175 people, we’re really the largest team in private equity devoted to these size companies in the US.
You have to work at it. And David Maue, David Musicant, and many others are our culture carriers. They really help us get back to where we’ve been – or stay where we want to be.