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

How I Invest with David Weisburd

In this episode of 'How I Invest,' host David Weisburd sits down with Michael Fisch, co-founder and CEO of American Securities, to explore how the firm grew

Key takeaways

• Private equity success comes from deep discipline in analyzing cash flow rather than relying on traditional public company metrics like EPS.
• American Securities maintained long-term focus by resisting the urge to diversify into every emerging asset class, instead mastering one strategy over decades.

Main topics

• The evolution of private equity since the 1980s
• Cash flow vs. earnings per share in investment analysis

Notable quotes

"If you're not lucky early, you're out of business." – A famous investor's advice that Fisch reflects on with skepticism.

Conclusion

Michael Fisch's journey with American Securities illustrates how enduring success

Transcript preview

Speaker 1 (0:00) Michael, you founded American Securities Capital Partners in 1994 with a $71 million first-time fund. Today, you have $23 billion AUM. How has the market evolved over several decades? A lot Speaker 2 (0:12) in every way. At the origins, going into the 1980s, there was really no M &A market at all. Companies didn't get bought and sold unless they went bankrupt. Investment banks had no M &A investment bankers. One guy at a desk drawer might have been the selling department for corporate finance. When I came to Wall Street out of college in 1983, I was lucky enough to get hired by an investment bank in their mergers and acquisitions department. It was Goldman Sachs. Very lucky to have been there. Terrific people I worked with, and many of them are still my friends. I saw then as the most junior person in the 33-person mergers and acquisitions group because Wall Street was so much smaller then. that there were these people then called bootstraps, bootstrappers who were sometimes looking at smaller M &A deals. Speaker 2 (1:06) and paying prices that were higher than anyone else. So they would buy the company. And for the rest of our Goldman Sachs M &A activity, most of the clients and the buyers were public companies. And the complete focus of the financial analysis was, is it accretive? Which is to say, if we do the acquisition, will our earnings per share go up accretive versus down dilutive? And if we had to pay such a high price that it went down, how long would it be dilutive? And Speaker 2 (1:36) These other people weren't looking at that. They were looking at cash flow. So, for example, if you had two chemical companies and they both had the same net income, but one chemical company had just built a brand new plant, brand spanking new, like you bought a new house, and they had used their cash to do that. And so they were going to have depreciation that would take down their net income. And another. Speaker 2 (2:08) competitor had the same size plant the same revenues the same net income but it was an old plant there was no depreciation From a public company perspective, buying them might be exactly the same price. But if you were thinking about it from a private equity lens, that first company with a brand new plant, I don't have to pay for a new plant for 5, 10, 20 years, and the depreciation is in cash. And I don't care about EPS, earnings per share, net income. I care about cash flow. And this... You call it a religious war if you want. Just looking at it from a different perspective was interesting to me. And when you're younger trying these things out, you're never really sure, is this going to work? How is this going to happen? And having seen this, you referred to our first fund in 1990, closed in December of 1994, $71.4 million. Last $0.4 million was hard to raise too. Speaker 2 (3:03) We had a belief that, yes, this cash flow thing really did matter and we could apply it. Private equity, the term we use today, didn't exist. It's leveraged Speaker 1 (3:10) buyouts. Speaker 2 (3:10) Then it was leveraged buyouts. And the people who did it were called leveraged buyout artistes. So there's a part of it which doesn't quite do AI because there's a little bit of like some of this thing. It's the same math in that company example I just gave you. But how you think about it was the artistry and raising the financing. The entire global. institutional private equity market in 1983 was less than a billion dollars. And you could name on less than two hands the number of players. And then it just grew. And there were probably, the first time I heard TFT, too much money chasing, see TFT, too much money chasing too few deals was in the late 80s. There might have been a hundred private equity firms. And of course now it's multiple trillions and there's thousands of private equity firms. So it's just kept growing and growing. So it was all different back then. And the world is different. The pace of change gets faster and faster and faster. When I came to Wall Street, there was no FedEx. There were no cell phones. There was teletype. I don't think they were fax machines and just the speed of information. Speaker 1 (4:27) What made you confident enough to go out on your own and start a fund? Speaker 2 (4:32) I was super lucky. As I said, I had the great good fortune to work for Goldman Sachs, be on Wall Street in 1983 in mergers and acquisitions as well. Another set of good luck. And then I went to business school. Then I came back to Wall Street and went into private equity. And I saw a bunch of private equity funds and I worked for two different private equity funds. And in general, the math that I was talking about before, just the fundamental cash flow math that purchase multiples worked and the deals that I'd been fortunate enough to be involved in worked. And so private equity as an asset class then was like a rising tide. And a rising tide floats all wood, but not all wood is a good boat. As I looked around and the skill sets needed to succeed, I thought to apply what we now call a private equity investment discipline were evident in very few firms. The people, like at the beginning of anything, the people that get into it often are not in what is the prior periods. best job, super successful. They kind of have something, they're kind of on a- Speaker 1 (5:43) They have a Speaker 2 (5:43) chip on their shoulder. Or they're just doing nothing. And I have friends from business school who became really, really successful internet entrepreneurs and business founders because they were sitting around with no job. They didn't have a great job at McKinsey or at a great investment bank. This one friend of mine, great guy, was sitting around in a coffee shop and thought, I can create an ISP because I can't get internet in my Starbucks. And he founded a massive multi-billion dollar ISP company. Speaker 2 (6:09) Similarly, some of the early practitioners of private equity weren't in that wonderful mainstream job that their generation or wherever they were in their career thought was great. And so they were available. And so that, I thought, created an opportunity. And I wasn't lucky enough to be working for one of those firms that I thought was really well managed. And so I thought, hey, I can probably do this if I can find the right people to partner with. Speaker 1 (6:33) And that was all driven by the capital that would underwrite it, kind of like a mortgage for a house. The metaphor to mortgage is a very easy way to understand Speaker 2 (6:42) private equity leverage buyouts. Because you've got to have a purchase price and a seller, like a house. You finance it with debt and equity, typically like a house. The only difference is... this house might be more like an apartment building. It's got rental income. And so whether your price has to make sense. Yeah, the cash coming in has to make sense to pay the interest and hopefully amortize the debt. And then at some point, sell Speaker 1 (7:08) it for a profit. Speaker 1 (7:10) I've been thinking about this quote you said when we last chatted, the John D. Rockefeller, which is a friendship founded on business is better than a business founded on friendship. What did he mean by that? I don't really know what Speaker 2 (7:20) he meant by that because he had passed away before I was born. But what it's meant to me is I am lucky to have some just terrific friendships, but they are founded on working together. I have been lucky to work with some terrific people and... They have become lifelong friends at everything I've ever done in work. And it includes CEOs of companies that American Securities has invested in. It includes colleagues back from the early 80s at Goldman Sachs. Speaker 2 (7:53) And so if you're working with someone, you have this ambition to be in private equity, to be in podcasting, to whatever it is, the people you meet doing, you want to do that. And other people around it want to do that thing. And if you do something with someone and that becomes a great friendship, that's really cool. And it's probably likely to happen because you have the same interests. And you'll click with some people, but not with others. But the ones you click with, you stay with. That has been my experience. and really enriched my life tremendously. And I'll distinguish that from, hey, I met this guy playing pickup basketball and he seems really fun. Let's invest in a company and give him some money if you're an investor. It might work out, but the odds are probably not as good as if you've worked together and had lots Speaker 1 (8:42) of fun together and kept working together. Also, the great thing about this friendship built on business is that it starts with a battle test. You don't have to wait 10 years before the friendship is battle tested. It's forged in battle. And then the friendship comes. That's exactly my point, David. It's created out of working together, Speaker 2 (8:59) enjoying it, probably having some shared success. And probably going through some trials and tribulations. Or being lucky enough to find that quick flip internet, whatever. But that makes a lifelong friendship. And it's the fun of the business. 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. It's the relationships because we're working through managers who actually run companies day to day, very different than a trader on Wall Street who's buying and selling in the casino. We're working through lawyers and bankers and accountants and just a whole range of people. So we're in the people business. Speaker 2 (9:39) You got to like people, you got to form good relationships with them, and they enrich your life if you can do that. Speaker 1 (9:44) I want to tie the knot on this concept of friendship through business and maybe thinking about it as your friendship portfolio. How did that evolve through your career? How much of your friendship became from business versus personal life? And reflecting back, what would be your advice for someone kind of building out their personal relationships? That's a tough one. Speaker 2 (10:07) arc and what I like to do is and seeing about the world is probably different than many people so firstly I'm kind of an introvert I like to read a lot I like numbers I like thinking about things and I like doing things so it was absolutely the case Early years, just in school and whatnot, most of my friendships were activity-based. The activity could be playing bridge before. The activity could be being in class with a bunch of nerds. The activity could be practice after school, which was the best part of my day. I was very aware of just being in activity-based friendships, being Boy Scouts, church stuff, sports, Speaker 1 (10:49) whatever it was. And in your adult life? Speaker 1 (10:55) What do you think brought you the most joy from a friendship standpoint? Building Speaker 2 (10:59) on the stuff in school, when I started working, I was all in. I mean, I'm not a victim of Wall Street. I loved the work when I got to Wall Street. I thought it was super interesting. I thought the people that were super cool. Speaker 2 (11:13) And I felt like I had just found something I just love doing. But I was super happy always and grateful. Back to your battle metaphor. When you're working on all these deals with these people, they do become your friends. You're getting on planes, going places with people to visit with companies. You're working late at night and grabbing, eating dinner in, but in a conference room. So you're spending a lot of time with people. So these are friendships formed based on business. Speaker 2 (11:41) and they've just been a natural part of who I am. I give this advice to young people coming out of college, coming out of grad school. The two most important things that I've always used in job selection, do you like the work and do you like the people? All the hype around anything means nothing. If you don't like the work every day, it doesn't matter how much they pay you. You're still miserable. you might be wealthy miserable but you're still miserable and the job in life is not to be miserable to be happy and secondary we talked about it before the people so if i think i'm really gonna like the job and i meet the people and just i Speaker 1 (12:20) kind of Speaker 2 (12:20) i can see myself in you Speaker 2 (12:24) That's a good way to start. And then as you say, once you're in the battle, you get even closer Speaker 1 (12:29) with people. And I think on the people aspect, it's so underrated. A lot of people obviously understand the concept of working with people that you like, but as a form of duration, in other words, if you like the people that you're working with, you're just going to work harder, longer. You're going to go through so much more crap and so many more trials and tribulations with the right people. Versus if you have the same exact business with somebody that you may just somewhat like or worst case, don't like at all, your tolerance for any kind of challenges is just going to be an order of magnitude lower. All of that and more. Speaker 2 (13:05) If you love the work and you love the people, you're really not working. You're having fun. Then it's like, can you Speaker 1 (13:12) survive? And once you're past that, then you're... Speaker 2 (13:15) Can you develop enough aptitude fast enough to be valuable to your peers so you survive and you don't get part of a riff? But like, I always loved to work. And I was lucky enough to, like most of the people I was working with, and work with the ones I really liked. So you're not really working. You're having fun every day. You're showing up every day to learn and something you like doing and doing it with people. And so then it's like, it's the coolest thing in the world. But I get paid to do this? I might pay for this experience because I think it's so valuable and I love the people I'm doing it with. And so that's kind of the holy grail. If I back up, when I grew up, my parents got divorced when I was three, single mother, two sisters, financial insecurity. So the first enemy was poverty. And then when I started to be able, and I always worked summer jobs and whatnot. And when I got to work at a certain level, I, okay, I'm not worried