Answer extracted from the How I Invest with David Weisburd podcast — listen to the full episode below.
How has the private equity market evolved since the 1980s in terms of deal structure and valuation philosophy?
Early private equity investors in the 1980s diverged sharply from public company acquirers by analyzing deals through cash flow rather than earnings per share. While public firms obsessed over whether an acquisition would be accretive to EPS, leveraged buyout specialists spotted hidden value—particularly in companies with recent capital expenditures that generated depreciation charges, reducing reported earnings but not actual cash available for debt repayment.
The Accretion Trap vs. the Cash Flow Lens
When Michael joined Goldman Sachs' mergers and acquisitions group in 1983, the department had just 33 people and the M&A market barely existed. Most acquisitions by public companies hinged on a single financial metric: would this deal increase earnings per share or dilute it? If the acquisition diluted EPS, the analysis stopped—deal rejected or repriced lower.
The bootstrappers—early private equity practitioners—operated by a completely different calculus. Consider two chemical companies with identical revenues and net income. One had just built a brand-new plant using cash, generating depreciation charges that suppressed reported earnings. The competitor owned an aging plant with no recent depreciation, showing higher net income on the same operational reality. A public company buyer might price both identically, blind to the cash flow advantage embedded in the new plant. But a private equity investor saw something else: "I don't need to pay for a new plant for 5, 10, or 20 years—and that depreciation charge is actually cash in my pocket."
This was, as Michael describes it, a philosophical divide explained in depth in the episode—not merely a different formula, but an entirely different investment religion. The private equity lens ignored the P&L fiction of depreciation and focused on what actually moved: free cash flow available for debt service and returns.
From Boutique to Trillion-Dollar Industry
The scale of this evolution is staggering. In 1983, the entire global institutional private equity market was worth less than $1 billion, with fewer than two hands' worth of serious players. The industry was so nascent that even the terminology was uncertain—these practitioners didn't yet call themselves "private equity firms" in any organized way.
By the time Michael founded American Securities Capital Partners in 1994 with a $71.4 million first fund, the ecosystem was maturing but still intimate. Today, with $23 billion in assets under management and thousands of private equity firms competing globally, the market has expanded to multiple trillions. The valuation philosophy born in those early 1980s—cash flow over earnings, asset longevity over near-term P&L optics—became the industry standard, enabling a new class of financial engineers to extract value from mature, cash-generative businesses that public market investors overlooked.
Michael — Founder and CEO of American Securities Capital Partners. Michael has steered the firm from its 1994 inception with $71.4 million to $23 billion AUM, investing exclusively in U.S. industrial and service-related businesses. He spent his early career at Goldman Sachs in mergers and acquisitions during the nascent era of leveraged buyouts, working alongside colleagues with whom he has maintained partnerships spanning over three decades.
The full episode explores how this foundational insight rippled through decades of deal-making, including Michael's perspective on investment discipline and staying within one's "investment sweet spot", a discipline that has defined American Securities' steady, contrarian success in an industry increasingly prone to auction-driven excess.
Key takeaways
- Public acquirers fixated on earnings-per-share accretion; private equity pioneers measured cash flow available for debt service and returns.
- Depreciation on newly purchased assets—economically irrelevant—suppressed reported earnings, creating pricing disparities that savvy PE investors exploited.
- In 1983, the global private equity market was worth less than $1 billion with minimal institutional presence; today it exceeds multiple trillions.
- This valuation philosophy became the industry standard, enabling PE firms to acquire mature, cash-generative businesses public markets undervalued.
See also
How can LPs distinguish between a bad outcome and a bad investment decision when a fund underperforms?
LPs that have done deep work understanding the fund manager's process and sector context can separate temporary underperformance driven by environment from structural flaws in the investment thesis.
What criteria should limited partners establish to identify fund managers worth backing?
LPs should look for alignment between the investment team and LP capital, clarity in how the manager communicates their strategy, and a true fiduciary mindset that prioritizes LP interests above all.
What is the relationship between investment rootedness and volatile asset performance?
Having rootedness in your investment thesis keeps you from making emotional decisions during volatility. Without rootedness, an investor who bought an asset may panic-sell at the worst moment.