Private Markets 360° | Episode 31: A Conviction in Industrials with American Securities

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Jocelyn Lewis [00:00:00]:
Welcome to Private Markets 360, your insider's guide to the world of private investments. Today we're joined by Scott Wolff, President and Managing Director at American Securities. Scott is currently chair of three American Securities portfolio companies, Hexion, Meridian Adhesives and Vibrantz, all specialty chemical businesses. With more than two decades at the firm, Scott has played a pivotal role in shaping American Securities investment strategies, particularly across the industrial sector. His early background in investment banking and long tenure at American Securities have equipped him with a strong foundation in finance, enabling him to uncover and capitalize on the most compelling growth opportunities in today's market. Today, Scott will share insights into American Securities strategic approach in house application of AI solutions, and his outlook on emerging industrials sector trends. Scott, welcome to Private Markets360. It's a pleasure to have you with us today.

Scott Wolff [00:01:08]:
Well, thanks for having me. I am doing great and excited to be here.

Chris Sparenberg [00:01:12]:
Well, great. Let's start off today's discussion with some background on your career journey. We're thrilled to hear about how you got started in the business and what led you to your role today as President and Managing Director at American Securities.

Scott Wolff [00:01:24]:
Sure, I'm happy to give a little background on my career. So I originally came to American Securities in 2002 after starting my career as an investment banker focused on M and A. As I was an M and A banker, I spent a lot of time working with private equity firms as an advisor and I was excited to be on the other side as an investor. And so at the time I joined in 2002, we were investing our third fund, which is a $650 million fund. After two years I left to go to business school and then I came back in 2006. So coming up on 20 years during business school I considered other opportunities but quickly decided that American Securities was the right place for me. When I rejoined, I was largely focused on industrials investing and eventually I started to focus on specialty chemicals within industrials somewhere around 2009. Since 2009 we've invested in 10 platform companies within chemicals and many more in industrials more broadly.

Scott Wolff [00:02:24]:
I became a partner at the firm about 13 years ago and eventually began taking on additional responsibilities, joining our investment committee and other day to day responsibilities of the firm and then became the president of the firm in January of this year. Although I still continue to focus on new industrial investments as well. And throughout my time here, I've always been passionate about our investment strategy and our focus on value creation. But as importantly, I think we have a unique culture focused on collaboration and mentorship, which was what brought me back to American Securities after business school. And my goal as president is to continue to drive top returns while also making sure we maintain that special culture.

Jocelyn Lewis [00:03:04]:
Thank you for sharing your journey, Scott. It's really impressive to see how your career has evolved alongside the growth of American Securities. And now that we've heard about your path to leadership, could you elaborate on American Security's place in the market and the investment strategy that guides your decisions?

Scott Wolff [00:03:26]:
I think it's helpful to start with just a little bit of history to put things in context. We originally grew out of a family office that was started in the 1940s. I promise not to go year by year from there, but that office was started by the Rosenwald family. Julius Rosenbald was an early investor and an operator at Sears Roebuck and his son Julius started the office to invest the family fortune. They eventually had friends of theirs. Other wealthy families asked to invest alongside of them and as that became a bigger part of their business, they started outside partnerships in different asset classes. One of those was the first private equity fund which was led by Michael Fish who continues to be our CEO. The first fund was less than a hundred million dollars and it was raised in 1994.

Scott Wolff [00:04:10]:
And if you fast forward to today, we are now investing our ninth fund and have over $23 billion of capital under management as well as a much more diverse base of investors. I mention that history because our investment philosophy is still strongly influenced by those early investors. They were highly focused on capital preservation, of course all of us are, but they were protecting generational wealth they had created and today that focus influences the businesses we buy. We look for special businesses that have a right to win in their market and operate in growing industries. If we get that right, it's hard to lose money. Clearly though, our focus is to grow businesses to create value for our investors and we do that in a couple of different ways. First, we bring insights and pattern recognition from our deep expertise and our focus industries to partner with management teams to accelerate growth and build enduring value. And then we take a hands on approach to driving value creation initiatives utilizing our Resources group, which I will elaborate on in just a second.

Scott Wolff [00:05:20]:
We have two key parts to our organization Investment team that's responsible for sourcing new opportunities, leading diligence on those opportunities and working closely with our management teams. BAT team's focus on industrials and B2B services businesses with specific sector expertise in chemicals, building products, power and energy, niche manufacturing, IT services and government services. We have partners leading our efforts in each of those areas that have developed expertise over many years and we believe we are well suited to identifying special opportunities and value creation opportunities in those areas. We also have a team that brings expertise in the capital markets and builds relationships with our lenders to help drive best execution. And then we have a resources group that consists of over 40 full time people who are functional experts in areas like strategy, procurement, pricing, digital transformation, operations, it, human capital and others. And that includes an office in Shanghai which is supporting our companies on Asia strategy and Asia sourcing. Again, these resources are all full time and they're offered as a free resource to our portfolio companies. And we utilize those resources to help find opportunities during diligence and to execute on value creation projects with our management teams.

Scott Wolff [00:06:48]:
Post close and together we focus on opportunities where we think we have a real right to win. Again, that's targeting North American industrials and B2B services companies with anticipated long term demand growth. And that's enhanced by our operational capabilities to drive sustainable value creation. And the right to win really comes from the industry. Insights from our deep sector or subsector knowledge and our relationships within industry executives or relationships developed over many years with owners of founder owned businesses. Or it could be corporate carve outs where the resources group gives us unique capabilities to stand up companies and also public to privates, where we see value creation opportunities that are best executed as a private company. Overall, we have 30 plus years of history investing in industries where approximately 85% of the firm's investments have come from and where we have a long history of helping to accelerate growth and build enduring value.

Jocelyn Lewis [00:07:45]:
Quite a long history indeed. That's quite a record. So congratulations on that. I really appreciate the comprehensive overview of American Securities market position and your strategic approach. Building on that foundation now let's explore how American Securities translates that strategy into tangible value for your portfolio companies. Scott, could you comment on how American Securities facilitates value creation and prepares your companies for exit, particularly in terms of consulting and skill development?

Scott Wolff [00:08:27]:
Yeah, thanks Jocelyn. I'd be happy to. So very early in our ownership, or sometimes even before we actually close, we begin our partnership with management, something that we call shared Vision. It's basically a medium term strategic plan, call it two to three years that the management team and American Securities align around. And the outcome of that shared vision is typically five key initiatives that we all agree will create meaningful value in the years to come. And we all commit to achieving those goals. And underneath those initiatives, it's the specific work plan that help us achieve that vision, including Where American Securities can help. The shared version for each company is bespoke based on specific growth initiatives.

Scott Wolff [00:09:10]:
It's a combination of opportunities that we have identified during diligence and opportunities that management is currently pursuing. And that could include entering a new market or geography where our strategy team could help support market work and go to market strategies. It could include cost takeout and procurement or operations where we have members of the resources group with decades of experience to support that initiative. It could be strategic M and A where the investment team has deep relationships and and knows the key M and A targets. It may include new product innovation where management has unique capabilities. Sometimes it's digital marketing and I could go on and on as the list is vast but wanted to give you a sense for some of the things we're talking about. One thing I would add is that it's rare that we American Securities are doing things on our own. Instead, we're supporting management with experienced in house talent to drive earnings growth.

Scott Wolff [00:10:03]:
Importantly, our goal is to make those portfolio companies self sustaining. So part of of this is training or bringing new talent to those companies. We then use that shared vision as the starting agenda for our board meetings. If you know those are the key value creation opportunities, that's what we should all be talking about at the board level. And then as it relates to exit, we're consistently updating that shared vision around every 18 to 24 months. And eventually that serves as a blueprint at exit for the next buyer as they evaluate the opportunities for growth available to them. And with that comes a team with a broader skill set that we have helped them develop over our ownership.

Chris Sparenberg [00:10:44]:
Certainly a very comprehensive approach. And I think it's great to pivot from what happens post deal as you've acquired these companies and all the work that goes into it to talk about the deal environment and your strategic focus. So with that in mind, can you take us through American Security's perspective on the current deal environment, your sector focus and certainly as we think about all of that in the context of recent economic conditions.

Scott Wolff [00:11:11]:
Thanks Chris, happy to do that. It is a bit of a tricky environment right now. The new deals continue to be constrained as they have been for the last couple of years. In fact, in 2024, over 60% of the deals we looked at didn't close. And that's obviously not just by us, but by anyone. And that compares to about 20% in what I would call a normal year. And the primary reason is the gap between buyers and sellers on valuation expectation. That gap has a lot to do with the broader economic uncertainty as well as higher interest rates.

Scott Wolff [00:11:47]:
The good news is that we are starting to see some positive signs. We track a lot of data in our pipeline, our deal funnel and I see a lot of exciting opportunities in what we call our early stage priority deals. Those are opportunities that aren't actual quite yet, but where we have developed relationships with founders, public company CEOs and boards, corporates, where there are carbon opportunities and others that provide us an edge that we call again right to win that I talked about earlier. And that early stage pipeline, particularly within industrials, is more active than I've seen it in quite a while. Of course not all of those deals will come to fruition, but it's a good sign for the remainder of 2025 and into 2026. In terms of our sector focus right now, as I mentioned earlier, each of our partners has a sector focus that they are deep in and are tracking specific themes and dynamics. And I personally can probably speak best to areas we're focused on within industrials right now and broadly. I'd say it's an exciting time to be looking at industrials where there are a number of themes that we're currently trying to invest behind us.

Scott Wolff [00:12:56]:
Power demand is projected to grow for the first time in years, partially driven by data center builds. And we're pursuing services companies, aftermarket suppliers and niche manufacturers that will benefit from that growth. Onshoring and nearshoring in the US it's been talked about for quite a while now, but I, I think we're in the early stage of this actually happening. American manufacturers have been incentivized to increase local production rather than rely on previously low cost overseas markets due to international tariffs and geopolitical concerns. And that's serving as a catalyst for further industrials growth. Of course there's still uncertainty on where tariffs will end up, but we are seeing the early signs of manufacturers adding capacity need that doesn't happen overnight. So I expect this trend to be ongoing for the medium term and for there to continue to be opportunities to invest behind it. And then from a construction perspective, which you know is cyclical, particularly for new single family homes, has been in a cyclical trough for a while now and while we can't predict exactly when that will change, we believe that pent up demand and potentially lower interest rates will start to drive improvement.

Scott Wolff [00:14:12]:
We have a good history of investing in building products, so it's a space that we know well. Importantly, our focus in this space is on companies that are gaining share because of new business Models with our investment being more than just a bet on a cyclical rebound. So those are a few examples. I could give many more, but wanted to at least highlight a few that we're currently looking to invest behind.

Chris Sparenberg [00:14:34]:
That's great. And I think kind of bringing it all together, it would be great to then move into some marquee deals. So. And things you think that are great signature deals for American Securities that better exemplify this approach and maybe kind of weave together what you're looking for now in the market with deals you've done in the past.

Scott Wolff [00:14:50]:
Sure. Always nice to highlight some of our marquee deals. Most recently, we signed an agreement for the sale of foundation billing materials to Lowe's in a $8.8 billion exit. And that was led by two of my partners, Kevin Penn and Aaron Meng. And it was a fantastic win for the firm. FBM was a public to private, where Kevin and Aaron built a relationship with the company's CEO, Ruben Mendoza, over an extended period of time before we invested. And part of our thesis was to execute on transformational M and A. And at closing, we and the management team had a bunch of ideas of the specific targets we were going to go after.

Scott Wolff [00:15:29]:
And in fact, the company completed four large and strategic acquisitions since 2023, which created a bigger and more diversified business, growing from $2 billion of revenues when we acquired it to approximately 6.5 billion when we announced the sale. And that demonstrates our conviction within building products and our ability to execute on strategic M and A and transformational M and A to drive value within chemicals. I can describe a couple of notable investments. We've been focused on the adhesive space for many years now, for about a decade. And when I say adhesives, this isn't your. This is adhesives going into automotive, going into aerospace, going into electronics, where there's been high growth over the past decade. And that's driven by replacement of mechanical fasteners, related to light weighting, related to miniaturization of electronics, where a drop of adhesive serves a lot better than a tiny screw or nail. And we've been able to invest behind that in a couple of different ways.

Scott Wolff [00:16:36]:
We, a while ago now bought a company called Royal Adhesives. They were a business that had multiple segments. They were focused on roofing, which was the biggest segment, as well as aerospace and defense and others. And after a few years, we had a number of strategic buyers approach us that were interested in buying the company. And we had a very successful exit by selling Royal to HP Fuller a public adhesives company. At the same time, we still believed in the adhesives thesis and we're looking for the next step. And we ended up investing in 2022 in a company called Meridian Adhesives, which we still own today. Meridian is again a combination of different segments.

Scott Wolff [00:17:18]:
The business segments at the time we made our investment were electronics and flooring, as well as product assembly and infrastructure. We recently sold our flooring business to Avery Dennison and we are focused on growing our electronics business both organically and inorganically. There are a lot of small businesses that we think fit nicely into our portfolio and the company has a. A long history of M and A. So we're excited to be back in the adhesive space and looking to maximize the growth of that business today. And then just one more I'll mention quickly is a business called Hexion, which is in our portfolio today. We started looking at Hexion back in, I think it was 2016. We tried to buy the company at the time, got to know the CEO and some board members well, but our price wasn't enough for the board.

Scott Wolff [00:18:09]:
But we kept in contact with the CEO in particular, and after they sold off a few divisions that we were less interested in by keeping our dog available, keeping our dog with the CEO, we asked them if they were interested in potentially looking at a transaction with us, and we started a deep dialogue there on. On buying the company, which eventually did result in us making an investment in 2022. And part of our thesis, there was a lot of both cost takeout given how the business had been run. But more importantly, there was ability to inflect growth by focusing on new products and focusing on M and A. We brought in a new team. There's led by our CEO Michael Leffenfeld. They set up a transformation office and that's created over a hundred million dollars of EBITDA growth in that business. And we're currently looking at a lot of MA opportunities that we think will we'll be able to integrate into our current business and continue to drive growth.

Jocelyn Lewis [00:19:08]:
That's all great. Sounds very busy and sounds like you have worked on some quite interesting transactions. And building on that work with some of your marquee companies, we're now exploring how AI can further enhance client outcomes, streamline operations, and proactively address data challenges. Scott, could you now talk a little bit about how American Securities is leveraging AI and automation to enhance your investment strategies and operational efficiencies?

Scott Wolff [00:19:46]:
Sure. You know our AI approaches use cases, but maybe this to kind of come back to where we started Almost two years ago. We invited a University of Toronto professor, Ajay Agrawal, to our annual partner off site. And Ajay is a leading figure in the economics of AI, having founded the Creative Destruction Lab. And we were so impressed with his experience and his practical approach that we ended up bringing him to our next CEO retreat to meet all of our CEOs in our portfolio. And after that, he began working closely with several of our companies on custom projects ranging from innovation to pricing to workplace efficiencies. And that resulted in a number of cost savings projects across those companies with real results. We then had those CEOs come back to the next CEO retreat and report back on what they were able to do and sharing best practices.

Scott Wolff [00:20:43]:
And then the next set of companies started their journey. And so it's been a wide range of different things because it's really bespoke to the company. I think importantly, within American Securities, we've developed a AI driven procurement tool that really can be used across our different companies. That tool really enhances negotiation processes. It utilizes data. The company has past negotiations, emails, call scripts and other data to help make recommendations during current negotiations. So a procurement individual at one of the companies can input what they're trying to do. Time to buy raw material.

Scott Wolff [00:21:25]:
I need to negotiate pricing or terms. The SEI tool, the copilot, what recommendations they would make. And it may start with a starting price or a starting ask. As negotiation is ongoing, they continue to report back to that tool. And the tool may say based on the time to respond or based on the words in the email, you know, the recommendation is to do X. And yeah, the person at the company doesn't have to obviously fully utilize the recommendation, but it's another objective tool to think through how to work in that negotiation. Internally, our associates are using more personalized copilots to improve email efficiency and tone. We're regularly using deep research to quickly get smart on new industries.

Scott Wolff [00:22:18]:
We're using copilot tools to make feedback more specific and more efficient throughout the year. And there's a number of other examples, but we're really building into our everyday lives. We're bringing in AI experts across the firm to make us even better and sharing things with our portfolio companies. We actually hosted a AI Super Users conference in Chicago with participants from all of our portfolio companies to share ideas and best practices and to brainstorm on new opportunities. And that just happened earlier this week. So we're still early and I know that our journey will continue to be exciting from here. But we're really focused on driving AI both internally and within all of our business.

Chris Sparenberg [00:23:01]:
It's fascinating to think about how much you're doing already and how much further you can really take this. And I'm sure you guys are working on that every day. And it's really helpful for your portfolio companies. On the other side of that, you've got all of your LPs. It would be great to hear more about the conversations you're having with investors regarding the portfolio, your outlook for the future, maybe even some of these value creation techniques and how they're evolving.

Scott Wolff [00:23:27]:
Yeah, and I think the private equity world is evolving. And just coming back to the last part on AI, it's actually one of the first questions that LPs often ask me. You know, what are we doing with AI? What are our companies doing with AI? It's become obviously a hot topic. And usually I describe what we're doing and where we are on our journey. There's very positive feedback. If I come back to kind of where we are within pe. I do think the PE world is becoming more bifurcate between focus funds and asset gatherers. If you're, you know, willing to group the firms into those two categories, and obviously there's more than that, but I'll do that for a second.

Scott Wolff [00:23:59]:
And in my mind, the asset gatherers are the large household names that are investing across a wide range of different strategies and are constantly raising additional capital. And the smaller funds like American Securities, are staying more focused on what they know best. And there's not a right or wrong strategy within there. You just have to know where to focus within your strategies. And for funds like us, LPs are constantly telling us that they want us to really drive down on where we have been successful historically and where we have a right to win going forward. And for us, that means staying with our one strategy approach of staying as a core buyout fund and resisting the urge to get involved in other areas. It means continuing to be specialized in industrials and B2B services, where we've built expertise in the subsectors I mentioned earlier, where we have deep relationships, insights and angles. And importantly, it means continuing to focus on operational value add, where we hold a demonstrated track record of success, supporting our management teams to grow their businesses with our resources group and to add value given pattern recognition at the entire investment team level, having invested in these subsectors for decades now.

Scott Wolff [00:25:14]:
So that's a little bit about where we are now in private equity, but I think really being able to detail your strategy. Articulate your strategy and focus, and then sticking to that strategy, I think is critical more than ever for firms like us. Absolutely. That's right.

Chris Sparenberg [00:25:31]:
Thank you for joining us for this episode of Private Markets360, where we had the pleasure of speaking with Scott Wolf, president and managing director at American Securities. Scott provided invaluable insights into the firm's strategic focus on the industrial sector. We explored the challenges of the current deal environment, the innovative use of AI in enhancing operational efficiencies, and the importance of developing internal talent within portfolio companies. Scott's extensive experience and perspective truly illuminated the complexities and potential of private investments in today's market. We appreciate you tuning in and hope you found this discussion as enlightening as we did. Don't forget to subscribe to Private Markets360 for more expert insights and trends in the world of private investments.

Scott Wolff [00:26:14]:
Until next time.