The Comeback

It was going to be a late night.

The accounting department of GSC Group had just notified Deborah Lombardi that the firm’s quarterly earnings report would be ready at five o’clock that evening. She wouldn’t be making it home on time to relieve the babysitter who was keeping an eye on her seven year-old daughter.

Lombardi was a vice president of marketing and investor relations at GSC. One of her main responsibilities was to structure the accountants’ quarterly reports into a more digestible format for the firm’s investors. Delivering those reports in a timely manner was a responsibility she took seriously – largely because of the example set by the firm’s founder, Alfred C. Eckert III.  

“He wanted our reporting out as early as possible. So I knew the day that accounting released the reports to me, I had to turn around and put them into letter format or put it in the template the investors were using. I had to get it out that night. Postmarked, FedExed, emailed, faxed, however the investor wanted it,” she says. “I could never be the bottleneck.”

In this instance, swift release would require the babysitter to stay for another three or four hours. Lombardi, by her own admission, has a loud voice. Even from within the confines of her office, her colleagues overheard her tell the babysitter that she would be working late. Eckert, who had been in a meeting down the hall, also overheard the conversation.

“I hang up with the babysitter [and] I go to the ladies room,” Lombardi recalls. “I come back and there’s three $20 bills on my desk. And at first I thought, ‘Did I leave this here? Did they fall from somewhere?’ I knew they were not my $20s.”

She went outside to ask her co-workers if anyone had left money in her office earlier. No, they replied. But Eckert had been in there after she had stepped out, and he had definitely heard she would be working late. As it turned out, the cash was his.

“My point to all this; he never lost sight of the worker bees,” she tells Private Debt Investor. “He always realised, these guys work hard. They have lives.”

Even as GSC collapsed into bankruptcy around them, Eckert always had his employees’ best interests in mind, Lombardi adds. “It killed him to walk into work every day [and] look at these people still doing what they’re supposed to do, knowing it wasn’t going to work out.”

“I saw him at his worst. He’s undergone illness and bankruptcy,” Lombardi says. “He cared about GSC and the employees and that really took a toll on him.”

‘Not GSC II’ 

The fallout from GSC’s demise was big and widely spread, but today, three years after the business collapsed, the damage to Eckert personally is no longer readily apparent. Lombardi is once again working for the GSC founder, and according to her, the Fred Eckert who called her not long ago to join his new firm – Phoenix Star Capital – made her believe “the world went back 15 years”.

Eckert launched Phoenix Star alongside partner Russ Gerson in May. The two have known each other for years, and Gerson acted as a consultant to GSC during its rapid expansion in the early 2000s. A recruitment specialist formerly working for AT Kearney before founding the Gerson Group in 2005, Gerson says he’s impressed with Eckert’s handling enormous adversity over the last three years, as well as with his determination to return to the investment world.

Most importantly, Eckert himself finally feels confident again as well.

“This isn’t going to be GSC II,” Eckert tells Private Debt Investor. “We’re not going to have 200 people. We’re not going to be managing $25 billion in assets – a lot of which was institutional and did very well. This is going to be a boutique.”

To get started, Phoenix Star is targeting $100 million from investors. Instead of raising money through a traditional private equity-style fund structure, the founders have opted for more of a partnership-style approach, in which early-stage investors own a direct interest in the parent company. This will give them access to Phoenix Star’s various lines of businesses as it expands, Gerson says. Any income generated will then be shared with the investors on a pro-rata basis.

“It’s fairly simple in some ways, complicated in others,” Eckert says. “Phoenix Star Capital LLC is going to be capitalised with $100 million sometime in the very early part of next year. It will have the mandate to invest in anything related to our core strategy.” As an example, Eckert says Phoenix Star might go into the business of buying shares of Business Development Companies (BDCs) in the marketplace. “So if we did that, we’d set up a separate company, and it’d be owned by the parent, and it would perhaps borrow against its assets. And we could envision in five years having half a dozen of those entities. And it’s certainly possible that in one of those entities or more we would sell minority interests to other outside investors.”

The point being: “Every dollar that comes in from every source of income relating to the firm’s activities goes into the pot, and that pot is owned by the people who put up $100 million.”

New opportunities 

Eckert envisions Phoenix Star doing more than just acquiring stakes in BDCs, however. Over the course of several conversations with Private Debt Investor, he also mentions CLOs, distressed municipalities, the life settlement business and opportunities caused by corporate dislocations that are subject to the UK bankruptcy code (which in time might merit the addition of a London office) as core elements of the firm’s investment mandate. And in the UK and Europe in particular, Eckert is intrigued by how future regulatory changes that have been proposed may allow his new firm to expand.

“The UK and Europe are implementing US type bankruptcy laws,” he says, which will allow for the restructuring of ‘good’ companies as opposed to liquidation. “The idea of being involved in London in this business appeals to me personally and professionally. I think what’s going to happen here – because of regulation – is going to create some very interesting opportunities that relate directly to what we’re good at.”

The breadth of what Eckert and Gerson are envisioning is striking and may seem ambitious, especially if you consider that as recently as 18 months ago, Eckert had essentially been written off by many as a casualty of the financial crisis – albeit one of greater profile and personal pedigree than most. In the 1980s, he had been instrumental in getting Goldman Sachs into the LBO business. Later the rise of GSC was meteoric, and Eckert’s reputation for professional brilliance combined with personal largesse and a lavish life-style grew alongside the firm he led. Then came the fall.

Now Eckert is working on his comeback, and whatever mix of activities Phoenix Star will eventually get involved in, the market for US CLOs looks likely to be something of an anchor strategy. In a May press release announcing the formation of Phoenix Star, Eckert said that the firm’s “immediate focus is to structure and market our first CLO in the early part of 2014 followed by additional CLOs and the purchase of equity in existing CLOs and BDCs”. In August, the firm announced that it had hired Richard D’Addario – formerly of Avenue Capital – to manage its CLO business.

“[The firm’s structure] gives us more flexibility as to what we’re going to do,” Eckert says. “Stage one is to get asset-based, fee-paying businesses so that the overhead’s comfortably covered and we have the funds to invest in doing the more labour-intensive [work] – you need a bigger team to do distressed investing.”

It may seem that Eckert’s plans for  Phoenix Star do contain some of GSC’s old DNA. The hiring of well-established managers and talent and the emphasis on a broad selection of credit-related strategies certainly bear a passing resemblance to the hallmarks of his previous firm. But like he says, the ambition is not to build Phoenix Star into a new GSC, which at this stage in Eckert’s career (he’s 65 years old) would hardly seem realistic in any case.

Still, even with a considerably smaller size and scale in mind, it’s unlikely that Phoenix Star will attract support unless Eckert acknowledges what went wrong at his former firm, something he has been more than willing to do in his discussions with PDI.

The fall of GSC 

“It was always my worst nightmare that I would have to write a letter such as the one that follows,” starts the letter Eckert wrote to the GSC diaspora last spring after his former firm declared bankruptcy. “Having emerged from a cloud caused by my illness and the incredible stress of the last four years, I am now at a point where I am able to write objectively, without being emotionally overwhelmed by the aftereffects of GSC’s (and my own) slide into insolvency.”

Eckert took his time to explain what happened at GSC. He needed it – the firm’s bankruptcy preceded more personal catastrophes. The problems at GSC were the primary cause of his personal bankruptcy. He later spent two months in a coma after collapsing outside a Morristown, New Jersey steakhouse; an event that may have been triggered by a combination of alcohol and prescription medication, he told The New York Times.

He realises that the firm’s failure to survive the financial crisis would have put a significant dent in his reputation with investors. And he knows that people will ask him about it as he fundraises with Phoenix Star. Why wouldn’t they? GSC should have been Eckert’s crowning achievement.

Eckert founded what was initially known as Greenwich Street Capital Partners as a subsidiary of Travelers Group in 1994 (the firm spun out in 1998). The firm specialised in debt-oriented private equity transactions, though it eventually expanded its product line to include a CLO/CDO business, European mezzanine lending and asset backed CDOs. At its peak in the mid-2000s, the firm had $28 billion in assets under management.

The Lehman Brothers bankruptcy and its aftermath led to a dramatic reversal of fortune. “GSC suffered a significant loss of asset value based on the significant decline of the investments held in the funds they managed,” according to a bankruptcy filing. “Based on the overall market conditions and the performance of certain funds, GSC resigned as a manager to certain funds while other funds opted for early termination.”

The firm also experienced significant losses in CDO vehicles that had invested in securities affected by the subprime mortgage meltdown. “Due to economic conditions beyond its control, it was unable to monetise certain investments requiring GSC to maintain positions in illiquid assets.”

The global credit freeze was bound to have some sort of effect on GSC. Many firms suffered from weak performance in the aftermath of the financial crisis, and those with large exposures to subprime mortgages took the biggest hits. By March 2010, overall AUM had fallen to just $8.4 billion across 28 separately managed investment funds, according to a filing.

The firm’s biggest problems, however, did not occur at the fund level. Prior to the financial crisis, GSC borrowed approximately $250 million of syndicated bank debt – half in 2005 and half in 2007 – in order to finance its expansion in anticipation of an eventual IPO. “When GSC decided to borrow the second half of the credit facility in 2007 – a decision I now regret – GSC had ample reason for the borrowing. At the time based on independent opinions of multiple, prominent investment banks, we were advised that a public offering in the near term would value GSC between $800 million and $1.1 billion,” Eckert wrote.

That IPO never happened. Two years after drawing on the second portion of the loan, the negative effects of the downturn damaged the quality of assets held by the firm to the point that the stream of fees GSC needed to remain solvent was no longer sufficient.

In an effort to avoid bankruptcy, Eckert offered GSC’s creditors an ownership stake in exchange for a reduced debt load and maturity extension. “Unfortunately, [the creditors’] lawyer (for motives that I have never understood) did not educate his clients to the reality of the situation, and the bank group repeatedly and rashly denied our offer,” he later wrote.

According to Eckert’s letter, the banks then demanded that GSC accelerate its payment on the full debt. Such a move would have caused the firm to slowly deteriorate as it would have been prohibitive for new fund offerings and employee retention, he wrote. “GSC instead decided to send the banks a bold signal that it would not be ‘picked to death’. We stopped paying them any interest.”

No matter the intended outcome for that course of action, the end result was more or less the same. The firm was unable to stabilise itself through third-party equity infusions or an asset sale.

Almost a year after halting payment on its interest, GSC declared bankruptcy. Black Diamond Capital Management purchased a controlling interest in the firm’s credit facility and the firm’s assets were auctioned off as a means of repayment for the bank loan. In his letter, Eckert labeled the auction of the firm’s assets a success.

“Sadly, the biggest victims of the collapse were the dedicated employees who built GSC and through no fault of their own lost a portion of their capital and careers,” Eckert wrote. “For that I am deeply sorry.”

The comeback 

GSC’s bankruptcy engendered a lot of anger and resentment among some of its former employees, according to people with inside knowledge of the story. It also tarnished Eckert’s image within the investment community. As much as the post-Lehman crisis represented a “perfect storm”, why did GSC fail when others managed to survive?

Perhaps more pertinent to Phoenix Star: with all the information on GSC’s collapse publicly available, who would invest with Eckert now?

“Fred burned a lot of friends,” one former associate tells PDI. “There’re so many great managers – even if Fred was the best manager, how do you get over the reputational issues?”

“It would be foolish of us not to at least consider the recent personal challenges related to his high-profile lifestyle, in addition to long-term performance of his funds,” says one institutional investor. “Headline risk can balloon into portfolio risk and should not be dismissed as a non-factor.”

Eckert says that the GSC community for the most part has responded positively to the letter. And despite whatever pain the bankruptcy inflicted on his employees, he takes pride in the fact that the firm’s investment vehicles avoided bankruptcy.

“A savvy investor would want to make sure if there were things I should’ve learned from that, I have. It was the perfect storm. They want to make sure they understand that,” he says. “I think they also want to make sure that there aren’t any contingent liabilities; that all of a sudden somebody can’t come out of the woodwork and attach liability to Phoenix Star because of something that happened at GSC.”

However, Eckert knows that his recent track record would raise a number of red flags for institutional investors. That being the case, Phoenix Star Capital will not market itself to pension funds to reach its initial $100 million target.

“To go to a pension fund investor today and to ask him to put $50 million into a fund, that would probably result in the guy approving it being fired and a new consultant. [That’s] because they use checklists – and I wouldn’t score very highly on a pension fund consultant’s checklist,” he says.

He thinks the $100 million the firm is targeting through its limited liability company structure, as opposed to a limited partnership, won’t appeal to the majority of public-sector institutions. With that consideration in mind, high net worth individuals and family offices appear to be better suited for the type of network Eckert envisions for Phoenix Star’s early days.

That isn’t to say he would be opposed to seeking institutional capital in the future. “It is my strong view that once we have done a CLO or two, that all goes away. And, having the backing of the people who will be investing – these are names you would recognise, they’re known people – who have done business with me for a long time and are obviously willing to invest with me. That answers a lot of the checklist questions.”

The fundraising process has not been entirely easy. A close on $10 million seed financing that had been expected for late June or early July was not filed with the US Securities and Exchange Commission until 3 September.

It’s an important step in the right direction, and Eckert asserts that the firm found traction sooner than he had expected.

“The things that I hoped would develop over the last [few] months have exceeded my expectations, and the things I was most worried about haven’t happened,” he says. “I was worried about most things. I was worried people would say what investors said to our IR person – ‘Why would I ever invest with him again? Look what he did’. I was fearful that would be the vast majority of response, obviously that hasn’t happened. Or to a minor extent [they] have happened, but have not derailed in any way what the firm is going to do.”

This statement adds humility to a flash of the exuberance that had been his calling card, first at Goldman Sachs and later at GSC. The important thing is that he’s back now, and that he feels good about it. Better, even. 

“Terrific,” he says, smiling. “Having gone from where I was a year ago, a year and a half ago, to today? Terrific is an understatement.”

Back on the Field 

Lambeau Field in Green Bay, Wisconsin is a cathedral to American football. As a lifelong Green Bay Packers fan, Eckert calls it his mecca.

He believes his career mirrors that of a Hall of Fame-calibre quarterback; someone who shouldered his team to victory again and again. For years Eckert was a Brett Favre or Peyton Manning of finance – an expert at reading the opposing team’s defense and threading the perfect pass , which in his case meant interpreting distressed markets.

But with GSC, his last throw was brutally intercepted, and it cost him and his team everything. “Would you retire if the last pass you threw was an interception?” he asks. “My last play is not going to be this way. It’s not.”