Your firm goes all the way back to the 1940s. Does a long legacy actually matter to investors and potential investors?
We trace our roots back to the Rosenwald family, one of the founding shareholders of Sears and Roebuck. A lot of the tenets that govern us regarding conservative investing and who we partner with are consistent with the culture of a family office: how consistent we’ve been, how we partner with management, how we capitalize investments, and the duration of our funds, which are 25-year funds. All these things reflect the confidence our investors have in us, and we really think these things are a differentiating factor.
Why does American Securities retain most of the CEOs from the companies it buys?
What we do is back existing CEOs. Over 80 percent of the CEOs we start with are still with the companies when we sell them. That is an order of magnitude greater than the average private equity firm. So, if we’re buying a leading company, and we have a management team we want to back, and if we can offer them additional resources, we think we can make great managers even better.
How would you describe the availability of financing right now?
The availability of financing is actually so strong that we have to be judicious about where we spend our time, because favorable lending terms are resulting in higher price expectatoins. Banks and institutional lenders are being very aggressive as far as the terms with which they will finance deals. And there’s also been a pick-up in the number of banks that are coming to us and saying, ‘we’d like to partner with you; what activity do you have.’
But the availability of financing has been a desert for a long time, despite low interest rates. Why do you think you’re seeing a sudden pick-up now?
When the Fed comes out and says that for the next two-plus years we’re going to have flat interest rates, everyone puts their risk trade back on. As far as the banks are concerned, they are saying, ‘we’ve got a lot of liquidity on our balance sheets, and we need to deploy it, we think default rates are going to be low, and we’re going to try and earn our way out of all our problems.’ I guess I would summarize it by saying that the financing that’s available to companies being acquired is now very aggressive.
Not only do your funds last 25 years, but your firm holds onto its portfolio companies longer than most private equity firms. What is the advantage of acting so slowly and deliberately?
The key is that we never want the fund dynamics or the capital structure to dictate how we think about an exit. We want to exit when it’s right for the company and when it’s right for the CEO. We think that if we can make 20 percent IRRs, we’re not in a rush to sell. The intention isn’t to hold companies for 25 years, but to take the fund dynamics out of the equation when it comes to selling something.
Edited for clarity.