Bullish on trouble

WL Ross & Co.'s head and namesakeWilbur, Ross, is poised to strike each time an industry enters a downturn. Ken MacFadyen sat down with him to hear what lies on the horizon for one of the best-known trouble-seekers in the investment industry.

Upon entering the New York offices of WL Ross & Co., visitors are immediately greeted by a life-size statue of a bull. Considering the firm's proclivity for buying up assets amid bear-market sentiment, it seems a little out of place.

But its presence is yet another signal that Wilbur Ross Jr. believes himself to be very different from the carcassconsuming bird that most associate with the distressed investment industry. Ross is unassuming, speaks in a leisurely, matter-of-fact tone, and, were he to take a second career in films, he could just as easily portray a 1950s family doctor as he could a carnivorous King of Bankruptcy (as he was dubbed by Fortune Magazine).

That said, Ross has wrangled with some rough beasts in the Wall Street jungle. And having taken on many of the brashest, most cunning and even bombastic players in the industry, Ross has often walked away the winner. Before launching his private equity firm in 2000, Ross headed the bankruptcy advisory business at Rothschild, the UK-based investment bank. There, he took on the likes of Carl Icahn, T. Boone Pickens and Henry Kravis and won settlements from each. He warred with Donald Trump in bankruptcy proceedings related to Trump's Taj Mahal casino. The real estate tycoon and popculture icon famously tried to “fire” Ross, pleading with bondholders to cut loose their advisor and deal with Trump directly. But Ross stayed on as advisor and a settlement was reached eventually.

After he left to launch his own firm, Ross fought Warren Buffett to gain control of Burlington Industries – a company that still sits in the WL Ross portfolio today.

Ross takes an “it's-just-business” attitude to boardroom battles. Icahn, who Ross calls the “most cunning” of all of his foes, attended Ross's 2004 wedding to Hilary Geary. As for Trump, Ross speaks of him as the “most interesting” boardroom combatant he has squared off with, but at the same time notes that “without any fanfare”, Trump was one of the first to donate to a charitable cause recently championed by Ross. Buffett, meanwhile, is simply “attracted to similar things” when it comes to investing, says Ross, and their public confrontations over deals are in no way personal.

ROSS THE ADVISOR
Ross' talent for taking a difficult situation and creating a nice outcome is core to his success as a distressed investor. His career can largely be broken into two halves. It began after he left Harvard Business School in 1964 and joined a research firm and brokerage called Faulkner, Dawkins & Sullivan in New York, a business that was ultimately swallowed by Shearson Lehman Brothers in the mid- 1970s. Ross shortly afterward began working at Rothschild, at first with a focus on mergers, then, having sensed an opening, helping to launch the firm's bankruptcy practice. It would be the first of many of his moves that revealed a profound prescience.

“Back in the late Seventies and early Eighties, we could see the [US] high yield market starting to evolve,” Ross recalls. “[High yield pioneer] Drexel [Burnham Lambert] was starting to get going, businesses were taking on more and more leverage, and I was trying to figure out how to participate in all that.”

After considering a private placement practice, Ross instead determined that the opportunity was in workouts. “We concluded that the inevitable corollary of creating all that low-quality paper would be defaults. Because of that, I tried to position myself as a fixerupper, as opposed to just another creator of more highyield paper,” he says.

The move paid major dividends for Ross and Rothschild. The firm quickly became the pre-eminent bankruptcy advisor, while Ross established himself as the most prominent bondholder advocate in the world. He wrung settlements out of Texaco, Pan Am, Orion Pictures and, ironically, Drexel Burnham Lambert. In all, Ross helped to restructure more than $200 billion of corporate liabilities during his time at Rothschild.

Our theory is that things go bad by industry. At one point in time it will be the airlines that are all broke. Another time it will be the steel industry. Right now it's the auto parts companies. We'll spend a lot of time trying to figure out who'll go bad two years from now, and then we'll plan for it.”

However, during the mid- 1990s, Ross saw another fundamental change in the market. The billion-dollar restructuring projects, the “big ones” as he calls them, were drying up. There were still a number of small workouts to advise on, but few could afford Ross and his team at Rothschild. Rather than sit idle, Ross launched a private equity fund to allow the firm to invest in smaller deals and retain the team to advise on the larger restructurings when those came in.

In 1996, Rothschild raised $200 million for a debut private equity vehicle, ahead of a $150 million target. Onlookers worried about potential conflicts of interest and some questioned how the company could wear both hats as advisor and investor, and so it was perhaps inevitable that three years later, Ross was forced to choose between the private equity fund and Rothschild.

“I came to the gradual conclusion that investing was a better business,” he says. “It was potentially much more lucrative and also much more interesting.”

BIG WINNERS
Most turnaround private equity firms do what they can to change a business. They will buy a distressed company, insert new management, cut costs, spur growth and then hold tight while waiting for an upswing in the industry. Wilbur Ross does the same thing, except he doesn't just wait for an industry upturn. Instead, he tries to help create one.

“Our theory is that things go bad by industry,” he says. “At one point in time it will be the airlines that are all broke. Another time it will be the steel industry. Right now it's the auto parts companies. We'll spend a lot of time trying to figure out who'll go bad two years from now, and then we'll plan for it.”

This approach has yielded some fairly astonishing results. When Ross first began investing in the US steel industry in 2002, the space had been left in ruins. Prohibitive labour costs forced some of the biggest names in the business into bankruptcy, while competition from abroad was flooding the US market. It was against this backdrop that Ross made his first, seemingly innocent, play in the steel sector, buying the shuttered assets of LTV Corp. out of bankruptcy. The Pittsburgh Post Gazette, in the weeks following the LTV purchase, quoted an industry insider as saying that the deal makes “completely no sense from an industry perspective”.

The deal from Ross's side was indeed a long shot. Just restarting LTV's steel plants was a gamble in itself: after LTV had gone bankrupt, the company's factories were operating in “hot idle”, and there was no guarantee the investors would be able to get the plant running again at full capacity. Moreover, Ross had to persuade the union and management to agree to a contract that didn't trammel the company against its lower-cost rivals, and there was also the gamble that a White House-sponsored tariff against foreign steel would help the industry out of the doldrums.

Through the LTV platform, renamed International Steel Group (ISG), Ross went on to buy bankrupt Bethlehem Steel and Weirton Steel, among other smaller companies, and eventually went public in a wildly successful 2003 IPO. Key to the investment was Ross's incentive-laden labour contract that ultimately served as the archetype for the rest of the industry, and once pressure from foreign competitors abated, the US steel industry was indeed able to regain its feet. In 2005, Ross sold ISG to Mittal Steel for $4.5 billion, realising a more than 10x return on equity.

The hedge funds will use leverage, so they'll work for a lower absolute rate of return. We're not a trading-oriented investor, so it won't particularly bother us

While ISG is Ross's trophy deal, he has achieved a number of other notable exits. Prior to leaving Rothschild, he had begun scouting Japanese banking, a sector mired in disrepair thanks to mountains of bad loans. At a time when Ripplewood Holdings was negotiating to buy Long Term Credit Bank, Ross was eyeing a bid for the smaller Kofuku bank. But it wasn't until 2000, after Ross' split from Rothschild, that he was finally able to take control of the asset in a $200 million deal. It took two years to engineer a return to profitability for the bank, and a sale to Sumitomo Mitsui Financial Group soon followed. Sumitomo's purchase price valued the business at roughly twice the amount Ross paid.

Ross has made similarly ambitious bets in the textiles industry, anchored by the firm's buyout of Burlington Industries, as well as the coal sector, where he has invested in Horizon Coal and launched the International Coal Group platform.

In the publishing sector, Ross backed Marquis Who's Who in a 2003 acquisition he describes as one of the better investments the firm has made. “It was a subsidiary of a subsidiary of a subsidiary, and had been declining for several years because it wasn't getting much attention,” he says of the former Reed Elsevier business. “We put a new management team in place, the company stabilised and now it's back on a growth trend.” The company has not been sold, but Ross says a deal is imminent that should lock in an impressive gain.

A TRAGIC SETBACK
The string of winners is reflected in the performance of the WL Ross funds. According to the California Public Employees' Retirement System, the firm has been among the top performers in the industry. The 1997 fund has put up a 35.6 percent IRR and returned 3.5x its invested capital. The firm's second fund, meanwhile, a 2002- vintage vehicle, has already returned 3.2x its equity and is currently showing an IRR of just over 100 percent.

More recently, however, Ross came under scrutiny not for the stellar performance of his funds, but for a tragic accident. This past January, 12 coal miners died as the result of a collapsed mineshaft at West Virginia's Sago Mine, a subsidiary of ICG that WL Ross still owns. Early critics blasted company management, and Ross personally, for having skimped on safety spending.

There is no protocol for how an investor should react in a case such as the Sago Mine disaster. The tragedy created a firestorm in the US press, and Ross was repeatedly interrogated on television about the matter. Ross, who is typically open to calls from reporters, took the approach that the best policy would be to remain open. “We had to just be ourselves,” he says. “We didn't want to hide behind some PR guy, we owed it to the family and owed it to the public at large.”

Investigators are reportedly leaning towards the conclusion that a lightning strike caused the mine to collapse. Even though such a finding would absolve Ross from any blame, it does little to lessen the tragedy's impact on him personally. “I still have nightmares about it,” he says.

WL ROSS & CO: KEY FACTS

Headquarters: New York
Related entities: Mumbai, Tokyo, Paris
Founded: 2000
Strategy: Investing in and restructuring financially
distressed companies
Funds WLR Recovery Fund III (2005)
IPE Expansion Fund (2004; a joint venture
with Paris-based Investors in Private Equity)
Taiyo Fund Management (2003; joint
venture between WL Ross and Tokyo-based
Taiyo Pacific Partners)
Asia Recovery Fund (2002)
WLR Recovery Fund II (2002)
Absolute Recovery Hedge Fund (2001)
Asia Recovery Co-Investment Partners (2000)
WLR Recovery Fund (1997; launched at
Rothschild)

INDIA, EUROPE, JAPAN
Given Ross's track record as an investor, there appears to be little that can slow him down. WL Ross, the firm, has already put together 12 separate funds in its relatively short six-year history, including a hedge fund that Ross says gives the team an inside track on industry trends. The firm has offices in New York, Paris, Tokyo and Mumbai, and has pursued deals in many places across the globe. Prior to the interview with PEI, its founder had just returned from a 10-day trip in India and China and was scheduling flights to Detroit and Fort Lauderdale in the coming days.

Ross is old enough to begin collecting social security, yet his level of activity portrays no thoughts of retirement. When the conversation shifts to succession, Ross is quick to credit his team, which he notes has been together since the Rothschild days, “right down to the mailroom guys”.

“There are obviously too many things going on for one person to be the whole act,” he says. “We have a great team that can run the business on its own,” he says.

Ross himself remains busy carving his legacy. He is currently trying to engineer turnarounds in textiles, coal and even the acrid auto parts space. Last year the firm raised $1.1 billion for its third US fund, and launched other vehicles and joint ventures to target India, Europe and Japan. Clearly the King of Bankruptcy has no intention of abdicating his turnaround throne any time soon.