Behind an immense desk in his midtown Manhattan office, Wilbur Ross, hunched over a computer, cuts a slender, almost fragile figure, dwarfed by his spacious surroundings. But diminutive is hardly what comes to mind at the mention of Ross' name. Everything about Ross seems outsized, from his stature as a doyen of corporate turnarounds to the breadth of private equity assets he and his firm have managed since 2000 -- more than $10 billion worth -- to the sprawling global enterprises he has cobbled together from moribund companies in an array of industries.
In the annals of private equity distressed investing, there is no one quite like Ross. His risky, seemingly quixotic ventures into ragged Rust Belt industries such as steel, coal, textiles and auto parts have attempted to reinvent segments of the economy left for dead. His earliest gamble, amalgamating Bethlehem Steel Corp., LTV Corp. and other ailing companies into International Steel Group starting in 2002, appeared grandiose in its ambitions and was highly controversial. But its outcome, bestowing what amounted to a spectacular 1,100% profit for Ross when the business was sold to Indian mogul Lakshmi Mittal's LNM Group in 2004 for $4.5 billion, was enough to prove that Ross wasn't in fact, as some media outlets suggested at one point, entirely "crazy."
That endeavor led to a succession of industry platforms, notably International Coal Group Inc. and BankUnited FSB. Some have been more successful than others. But with the big exception of a textile industry rollup that has struggled and a business that filed for Chapter 11 about a decade ago, these investments have burnished a long and successful track record in bankruptcy and earned him respect that shows through in his dealings with unions. "He's pragmatic and very open-minded," says Bob King, president of the United Auto Workers, who has known Ross for about a decade. "Private equity and labor can work together if you've got people like Wilbur who have an inclusive vision and who aren't looking out just for themselves."
Born in Weehawken, N.J., the son of a schoolteacher and a lawyer, Ross was an aspiring writer in college. He went to Harvard Business School between serving in the military for 18 months and working at an old-line investment firm, Wood, Struthers & Winthrop, in the early '60s. The firm gave him an early start, but he honed his turnaround skills at Rothschild. He led the firm's advisory practice for several years until he was lured to the more lucrative investing side in the late '90s. In 2000 he went out on his own. He has had five opportunistic funds bearing his initials since then.
Now 74, the billionaire dispels any suggestions of retirement, saying his health is "excellent." Ross, who owns a house in Palm Beach, Fla., appears spry and energetic, despite a brutal travel schedule and long hours. He allows himself, he says, "four sets of tennis most Saturdays and Sundays."
In 2006 Ross surprised everyone, including himself, when he sold ownership of his management firm, WL Ross & Co. LLC, to Invesco Private Capital, the private equity arm of London fund manager Amvescap plc -- now Invesco Ltd. -- for up to $375 million in cash. (Management retained operating autonomy and at least 60% of the carried interest, if any, in the new fund.) The sale helped monetize the value of the business he built, but it also gave rise to concerns among limited partners that Ross might be preparing to ease himself out of the business.
Despite the fact that Ross committed to five more years with Invesco, transition questions have dogged the firm. In 2009 Ross brought in James Lockhart III, who presided over the government seizure of Fannie Mae and Freddie Mac and contributes his extensive experience with the U.S. mortgage markets and public-private finance.
To pave the way for the next generation, the firm created the office of the chairman, with Ross as chairman; Lockhart, 64, as vice chair and managing director; and Stephen Toy, 39, as chairman of the investment committee. Senior managing director David Storper, who along with Wendy Teramoto has been with Ross since the Rothschild days, is leaving in October, reportedly for personal reasons.
"I have very good backup," maintains Ross.
Still, his is a tough act to follow. WL Ross & Co.'s latest investment pool, WLR Recovery Fund V LP, set out in 2010 with a $4 billion target. Amid a challenging environment, fundraising collected just slightly more than half that, at $2.2 billion, and required an extension to complete the fund, in July. Ross' age was certainly a concern as he remains the "key man," says one LP adviser; so was performance, says another. The third fund (see below) was middling, and the fourth wasn't nearly as sterling as the first two.
For now, there's no slowing down Ross. In a recent interview, he talked unwaveringly, without pause and in characteristic monotone, about his career, his investment philosophies and themes.
|Oregon Public Employees Retirement System|
|How do his investment funds stack up?*|
|Vintage year||Partnership||Capital commitments ($M)||Total value multiple||Net internal rate of return|
|2000||WLR Recovery Fund I||$200||3.39x||34.30%|
|2002||WLR Fund II||394||2.25||73.70|
|2005||WLR Fund III||1,100||1.10||3.50|
|* as of March 31, 2012|
The Deal magazine: How did you get started in the business?
Wilbur Ross: When I first came to Wall Street, I'd been hired out of Harvard Business School by an early go-go money manager, Imre De Vegh. Between business school and work, I was in the military for 18 months. During that time, De Vegh died. On his deathbed he sold the firm to Robert Winthrop, one of his clients from Massachusetts. Shortly after I joined the firm, Winthrop merged with Wood Struthers. Part of De Vegh's portfolio had been a venture capital business. Winthrop wanted to wind that down, and since I was the youngest and most expendable person, I got the job. I spent a couple of years doing that, 1963 to 1965. Some of the assets were very good and were sold to big companies; some were very bad and needed workouts. That's where I cut my teeth.
What was it like then?
There wasn't much by way of workouts in the '60s. I was doing research and regular investment banking. During the '80s, with the advent of Drexel Burnham and the high-yield phenomenon, I was at Rothschild. Our business model was a fee for service, and it was clear Rothschild wasn't going to get into the business of underwriting high-yield bonds. To participate in the phenomenon, we decided to go into helping creditors. We organized one of the first creditor committees to deal with junk bond defaults. There were large bankruptcies, like Texaco, airlines, big retailers, steel companies, where we represented the equity holders. For years, I ran Rothschild's global restructuring practice. By 1997 we had a very big market share. We were getting a lot of money in fees, but small companies couldn't afford it. So we said we'd continue advising the large clients, but we'd invest in the small ones. We started a fund to invest in smaller bankruptcies. From 1997 to early 2000, I ran both the global advisory business and a small fund of $200 million.
On April Fools' Day 2000, I decided to go into business for myself. I concluded, and so had the team, that we'd like to be on the investment side more than the advisory side. I bought the little fund and stayed with the investments but didn't have enough money. So we went back to some institutions and they gave us more. We got $450 million. It's grown a lot from there.
How would you compare the industry then and now?
The workout environment now is a lot more professional. It's become a very big industry, whereas it was a cottage industry in those days, smaller and much less professional. That's an enormous change. There are many advisory firms that do nothing but just that, besides Rothschild. Also the bankruptcy court system has become much more sophisticated because corporate capital structures have become more sophisticated. There are many more layers of securities -- asset-backed securities, subordinated paper, payment-in-kind paper. You have all sorts of contortions to the capital structure.
But the fundamentals are still there. Someone put in too much debt and simultaneously made big mistakes. Those truisms haven't changed. I've always viewed bankruptcy as perhaps the last remaining meritocracy in the economy because you have to work your way to get into bankruptcy.
It's changed a lot from another point of view. Since [leveraged buyouts] have become such a huge business, you have a lot more variation in debt levels of companies. On one hand, you have Fortune 500 companies with very little debt. Very few of these get into serious financial trouble because with capital markets and low interest rates, their balance sheets are in good shape, and they're highly liquid. On the other hand, you have smaller companies and the LBOs. Those are where a lot of the workouts come from. Either the LBOs or the companies themselves have been over-users of high-yield bonds for acquisitions.
Capital structures now have a much wider range of debt-equity ratio or interest coverage than we ever had previously because in our markets now there's a very big audience for high-yield debt. Obviously, high-yield debt has a higher likelihood of default than there is in investment-grade debt. But the simple fact that we have a lot more high-yield paper in existence has made the business bigger and more complicated.
It's not just in the U.S. The same leveraging phenomena are occurring in Europe, though Europe is much more dependent on bank debt. Capital markets are much more highly developed in the U.S. than in Europe or in Asia. As a result, workouts are more complicated, with many more constituencies. In a typical case, you might now have four or five committees -- for retirees, equity, landlord or other contractors, senior unsecured, junior unsecured.
You also have a lot more litigation than we used to have. The industry has become much more complex. But at the end of the day, the end product is still the same. Something went wrong with the business. Generally, it has a bad balance sheet and some real business problems. That's where the distressed investor can make the most change.
It's not a very complicated process, if the balance sheet is just too highly leveraged, to figure out how to right-size it, turn some debt into equity. The real complication is how do you solve the underlying business? That hasn't changed. While the process for getting to the end result is more complicated, the ultimate objective is the same.
Your steel industry bet was a seminal deal. What did it take to fix it?
We bought Bethlehem, LTV and six others, brought them under International Steel Group. We made a radical new contract with labor unions, not by cutting everyone's wages but by combining job descriptions to make it more efficient. The steel industry had 32 job descriptions; we cut that down to five. So for example, the operator of a piece of equipment can maintain it, or vice versa. We reduced layers of management. Traditional operations had eight layers; we cut them back to three. We cut out more from management percentage-wise than we did from labor.
We became the biggest maker, with a third market share, and more importantly, the lowest-cost producer. Prior to our coming, they used 2.5 man hours to make a ton of steel; we had three-fourths of a man hour for the equivalent output. We went to the [George W. Bush] administration and said we think we can fix the steel industry, but we need protections against dumping. [The government imposed a three-year tariff on foreign imports that was lifted 20 months later.] These mills have been shut down, and it would take a while to get them up to speed. We didn't protest when the tariffs went away because the company was doing fine.
It became a very profitable business. When we sold it to Mittal, Mittal took over Arcelor and became the world's largest producer. Today it has about $30 billion in revenue, although the steel industry has been hurt by the European recession. I'm still on the board; I'm very friendly with the family.
What was your primary premise in tackling huge industry platforms?
First of all, industries generally go bad as industries. First it was steel, at another point it was all retail, then the airlines. These industries are highly leveraged, and when a traumatic event occurs, it isn't just one company that's affected; it's the entire industry. There's a logic to thinking in industry terms. Secondly, if you can change the industry and simultaneously change the company, it's a double-header. You have two sources of extra value.
Take steel. It's been a very fragmented industry. By the time we bought all these companies, we had a one-third market share. Think about a steel mill. Each mill is a huge capital investment. When you have industry players, each of which had one mill, and you can't turn off the mill or bring it down to 50% of capacity because it's either on or off, these little guys would just keep producing and dump whatever they couldn't sell at a normal cost in someone else's market. That destroys the market. We consolidated the U.S. market, as Mittal consolidated Europe. With consolidation, you can modulate production better to meet market demand and therefore have more stability in pricing.
The other thing with steel is that companies weren't vertically integrated. They didn't have their own coal or iron. They bought those outside. Mittal is very vertically integrated. That also helps insulate against costs of raw materials. By consolidation, you make industries more efficient, particularly if you do it from a little different point of view.
What about BankUnited? How much of that was good timing?
It was luck in one sense in that people in general thought Florida would fall off the face of the earth. We felt that was incorrect, particularly in South Florida, which I know well. Unlike Las Vegas, Miami is a truly international city; it's known as the capital of Latin America. We felt that the real estate glut wouldn't last very long due to inward migration, especially from Brazil, plus normal population growth. We felt it would go through the supply of excess housing quickly, and it did.
There were 22,000 unoccupied apartments in Miami when we bought the bank in May 2009. As of December, that was down to 2,000. Of that 2,000, we own about 800, so we have a big market share. Call that luck, or correct analysis of the market.
What went wrong with BankUnited? They specialized in making option adjustable rate mortgages, which are very, very toxic forms of mortgage. It was bad enough that that was the product they were selling, but they were granting the mortgages at more or less 100% loan-to-value ratios to nonresident Latin Americans. So you can imagine the collection of problems. Its balance sheet was horrible. But what it had was a very good branch system in Florida, with very good core deposits. The feeling was, from our loss-sharing arrangement, the [Federal Deposit Insurance Corp.] would take care of the bad assets. [CEO] John Kanas and his team could grow the deposits and, more importantly, replace the bad assets with good. Eighteen months after we bought it, the bank went public on the New York Stock Exchange. We sold about 35% of our shares and essentially took all our money out.
In both the steel group and BankUnited, we found the management before we found the deal. We often do that because we'd like to have management help us with due diligence, and come up with a business plan. Then we know management has truly bought into the plan. If we did it in the reverse, he'd say, love the plan, but we'd not be sure he bought into it. Secondly, we get the benefit of a second set of brains from the start.
In some ways the coal deal was better than the steel company in that it compounded at an 18% rate of return over many years. Similarly, BankUnited was roughly a triple in 18 months, so it was an extremely high IRR.
But not everything has performed to expectation. How are the textile and auto parts groups doing?
Auto parts have worked out fine. It took a little longer than we expected because nobody thought U.S. volume would go from 17 million to 9 million. But point-to-point auto parts was in a very good place. During the auto recession, we made 14 acquisitions of busted companies at very, very cheap prices. We also did a lot of what's called airlift business. We're literally moving parts from failed competitors' factories to ours so that the auto companies' production wouldn't have interruptions.
The big car companies only manufacture about 30% of vehicles; the rest are components purchased from suppliers. If any of those suppliers go down, production is affected. It was pretty clear that the auto industry was becoming oligopolistic globally. There just aren't that many automakers.
It was also clear that eventually they would start to make one car platform that would serve the global markets with just local modifications, instead of redesigning for each market. That would require a supplier that could deliver the same quality of supplies globally. The supplier universe had been highly fragmented historically. We felt that by becoming truly global we could put ourselves in a position to match the needs of customers and eliminate a lot of smaller competition. We perceived a structural change in the industry and were ahead of the curve. We also worked very constructively with unions that needed changes. We now have 22,000 employees.
In textiles, our theory was that we buy a lot of U.S. volume and migrate production to Asia. We've implemented that, but it's been more difficult than we thought. We're probably the most global of textile companies. But we had some problems in getting established in some Asian markets. Meanwhile, the domestic competitive situation has become quite terrible. There are very few textile companies left in America. So the investment is doing OK, but it's no home run.
What lessons did you derive from this?
The theory was correct, but the implementation was spotty. Mexico worked out beautifully. In Nicaragua the major customer who had requested us to put a plant there later shut down, creating a major problem. When we went to China and Vietnam, we went into plants that were too big. In retrospect we should have had smaller plants to begin with, and expanded gradually. Smaller ones might have reached higher operating rates and therefore higher profitability. The move into automotive fabrics also had problems.
The big lessons are twofold: First, it is better to invest in a mediocre idea that is brilliantly executed than in a brilliant idea that is less well executed, though I am not saying that the textile management was bad. Second, duration is the enemy. Time equals risk, and even forgetting risk, it is hard to have an individual investment compound at a high rate of return over long periods of time.
And how have telecoms and mortgage financing performed?
[360Networks Inc.] had a high rate of return when we sold it to Bell Telephone of Canada in 2004 for $200 million. [AH Mortgage Acquisition Co.] is still private, but we have taken out in dividends and repayment of preferred stock more than $850 million. This leaves us with a net cash investment of $86 million in a highly profitable company with more than $500 million of net worth. The company, now called Homeward Residential, not only services mortgages but now also originates and sells them.
Is there anyone that you'd consider to be a true mentor?
At Harvard there was a famous professor, Gen. Georges Doriot. He taught a course on manufacturing. In my second year, instead of two regular courses, I did two research electives, and we became very close. One topic was the introduction of technology to education. Doriot felt that one of the problems in America was that the public-school system wasn't working, and that putting computers in classrooms would improve teacher productivity. The other was on objets d'art as investments, which was fascinating. I went down to visit the New York museums. I collect art now.
So what philosophies did he impart?
He was very much an iconoclastic thinker in those days. For example, he was very big on thinking out of the box. When you think about it, restructuring fits the mold because some management team tried to do one thing before and failed. Another thing is to be very aware of and absorb every little detail. The way you fix a company is to save every penny here and there. You do lots of little efforts, not necessarily one big process that revolutionizes things. These proved to be true.
Companies that were under pressure for many years tend to develop a loser's mentality. You ask them, "What's wrong with the company?" They always talk about the union, China, unfair competition, class-action suits. It's always something outside of their control, never things that they can fix. They sit there having convinced themselves it's not their fault. Thinking outside the box is important to turn a company around.
Another of his philosophies that I've become a fan of is imparting a sense of urgency. Big companies, particularly those that are well run, tend to set out on a blithe path. Well, if you're bleeding, you really need to have a sense of urgency. That's why we like to bring in management early in the process, so that they run it from day one when we take control. If you're doing an LBO, it's different, when you're buying a company trying to make it a bit bigger. Maybe you have the luxury of time.
Let's talk politics for a minute. Private equity's been a favorite whipping boy these days for putting workers out of a job. What's been your experience?
I really think they don't know what they're talking about. I really don't. If you ask [international president of United Steelworkers] Leo Gerard, he'll tell you we saved the steel industry and saved 100,000 jobs. I was the first, and maybe the only, steel company executive invited to address the USW at their annual convention. When a big controversy came up over cash-for-clunkers, the UAW called me to organize auto suppliers and do a teach-in before Congress on the importance of the program.
I believe that heads of big unions very often understand the problems of industries better than management. They're realistic, and if approached in an open and honest manner, they'll do what is necessary for the company. Because a good union leader knows that the only good job -- and the only good contract -- is with a healthy company. So what we do is, first of all, is we're very open with the union. Factory managers meet with unions regularly to explain what's going on with the factory and the company. We try to resolve disputes at the factory level. We also negotiate deals mano a mano with union leadership. We give them the right to send auditors. We don't feel that it's an adversarial relationship. Instead, we feel that we're each other's prisoners, working things out to mutual benefit.
One of the things I learned from Doriot is that companies often hire a battalion of lawyers, HR people, benefits consultants, forcing unions to do the same thing. So they have these stylized battles that take forever and are inherently confrontational. We work with unions. We understand their needs and figure out how to accommodate them. We also believe in profit-sharing arrangements and incentives for blue-collar workers to try and raise productivity. In the depth of the auto recession, when volumes were down and we weren't making money, two of our 22 American factories hit their targets. Those workers got bonuses. And the industry knew this.
But the criticisms had to do more with worker attrition while private equity investors extracted huge profits.
If a factory or company is overstaffed, it's overstaffed, whether it's owned by private equity or not. Sometimes it's essential to eliminate some jobs so as to protect most jobs. The reason jobs were lost in steel, for example, even before we came in, was because steel mills were shut down. It's ridiculous to say that because you had to lay off a few people to save a company and save the industry, that that's wrong. That's right. It's just pandering to the class warfare mentality, which I think is a terrible genie that Obama has let out of the bottle. The right thing is not to tear down the people who are successful. It's absurd to say that you can fix a company that's in bankruptcy without making some changes.
Nobody made a fortune just by firing people. At the end of day, healthy companies grow, and they need more people, not fewer. The only good contract is with a healthy company. It's simply foolish to pretend otherwise.
How difficult is it to value banks, and where do you see opportunities, if any?
I believe that it is impossible to judge the validity of their book value without getting inside. Loan-loss provisions are inherently judgment calls that must be made on a granular, loan-by-loan basis. This is only possible in the context of confidentiality agreements and detailed study by experts.
Have municipal bonds become more attractive to you in recent months?
We have been looking at distressed municipal bonds but have yet to find compelling levels. It is extremely difficult to estimate how long a Chapter 9 will last. And there is little precedent as to how the pain will be distributed among taxpayers, bondholders and municipal employees. Cases like Stockton probably will clarify relative treatment to some degree, at least relative to California's legal structure. Also, municipal bonds in default are not nearly as volatile as corporate bonds.
You've been a big supporter of Ireland, and others have followed. How is that market playing out?
The country recently regained access to the long-term debt market. It's the only bailed-out country to be ahead of the targets assigned to it by the troika of the EU, ECB and IMF. People still do not understand that Ireland has become a high-tech economy that has higher direct investment by American corporations than Brazil, Russia, India and China combined.
What about the so-called Great Liquidation in Europe?
The European deluge of attractively priced bank debt that many investors expected has not materialized because most of the banks have not taken enough markdowns that they can sell loans without taking an additional loss.
Until and unless European banking regulators force more write-downs, there will not be a lot of transactions. A further complication is that many European banks do not have enough capital to absorb the hits that they would have to take.
You've said that the economy would stumble through the election. Do you still believe that?
I continue to believe it will stumble along until the fiscal cliff of tax increases, plus mandated spending cuts, is resolved. If Congress does nothing, these measures will be effective automatically on Jan. 1, and if the next Congress does not fix the problem quickly, I have no doubt that the U.S. will relapse into recession in 2013. There is some chance that it will anyway, given what is happening now in Europe and China.
With very low interest rates and such strong demand for high yield, isn't the situation more perilous now than it was during the buyout boom because people aren't assigning appropriate risks into their metrics?
Most high-yield bonds now being issued are B or lower and therefore have a higher propensity to default than higher-quality bonds. The fact that their interest coverage is weak even at today's low rates means that there is a real risk they may be unrefinanceable if rates are higher several years from now when they mature. High-yield bonds are very rarely repaid from operating cash flow. They are refinanced.
Were you disappointed over the latest fundraising outcome?
We were able to raise $2.247 billion from a combination of LP investments, separate account investment and committed co-investment. The good thing about a smaller fund like this one is that the J curve is minimized, and that should enable it to become fully invested more rapidly. As a result, I am optimistic that it may be an especially high-rate-of-return fund.