Billionaire Marc Lasry, a specialist in distressed debt for more than a quarter-century, plans to pursue acquisitions to expand into stock investments.
Avenue Capital Management II LP registered a new investment advisory arm last month under the name Artus Management LP, according to documents filed with the U.S. Securities and Exchange Commission. The unit expects to purchase assets from money managers or financial institutions to bolster its strategy, described in the filing as a “favorable alternative to passive index investing.”
Avenue is joining a growing number of debt investors that are seeking to diversify into other asset classes amid signs that the three-decade rally in bonds may be ending and as distressed opportunities in the U.S. are scarce. Avenue’s debt deals have recently been focused on Europe, where sales of loan portfolios and other unwanted assets are expected to exceed half a trillion euros in the next five to 10 years, according to estimates by PricewaterhouseCoopers LLP.
“Companies have a lot of cash, it’s easy to refinance even garbage credits, and yields are low,” said Martin Sass, who ran distressed funds in the 1990s as the founder of M.D. Sass Associates Inc., a New York-based money management firm. “But that always eventually comes to an end, and you are going to see defaults soar again.”
Artus, which has six employees, anticipates increasing in size through the acquisition of “certain assets of one or more investment advisers and/or financial institutions,” according to the SEC filing. After the acquisition, the document says, New York-based Artus may also have an office in New Jersey.
Avenue has previously looked at a number of potential acquisitions over the years and so far chosen to build businesses in-house, according to a person familiar with the firm, who requested anonymity because the operations are private. Artus is a placeholder name for the new firm, the person said.
Artus said it plans to run relative-value hedge funds, serve as a subadviser to a mutual fund and provide large institutional clients with a service referred to as option overlays.
Artus’s hedge funds will employ a “quantitatively driven value model” to select medium- and large-capitalization stocks in an effort to generate “tax-advantaged long term capital gains,” according to the January SEC filing. It will then sell index call options to generate income and reduce the volatility of returns.
In addition, the firm will offer the option overlay strategy to institutional clients whose equity holdings have a net asset value of at least $100 million, the filing showed. Artus will partner with these clients by selecting index options that enhance the income of their holdings and reduce risk.
Todd Fogarty, an Avenue spokesman who works for Kekst & Co., declined to comment on the firm’s acquisition strategy.
Debt-focused firms including Michael Platt’s BlueCrest Capital Management LLP and Bill Gross’s Pacific Investment Management Co. have been adding equity strategies in recent years. BlueCrest, which in 2007 shut down an equity hedge fund amid market turmoil, last year hired at least 11 former Nomura Holdings Inc. employees, including Christian Dalban and Jonathan Larkin, to set up a team of traders focused on stocks.
Pimco started a push to expand its equity holdings four years ago and has said that fixed income returns would probably decline after the Federal Reserve cut interest rates in the U.S. to near zero. The Newport Beach, California-based bond manager has attracted less than $5 billion in assets in its four main stock mutual funds since starting the first in 2010. Michael Diekmann, the chief executive officer of Pimco parent Allianz SE, said in October that the push into stocks was proving harder than he had expected.
Lasry, 54, and his sister Sonia Gardner have managed distressed assets since at least 1989, when they set up a $100 million partnership in association with Texas investor Robert Bass, whose family made a fortune exploring for oil. Avenue Capital Group, co-founded by Lasry and Gardner in 1995, had $12.6 billion under management at the end of last year, according to its website.
Lasry broadened Avenue’s reach by starting a publicly traded closed-end credit fund in January 2011, followed by the firm’s first mutual fund in June 2012. The $1.2 billion Avenue Credit Strategies Fund returned 11 percent in 2013, besting 95 percent of other mutual funds with a comparable strategy, according to data compiled by Bloomberg. Avenue also holds a small number of stocks, primarily in companies that went through bankruptcy reorganizations, according to filings.
The firm’s focus in debt investing has recently been on Europe, where financial institutions began to accelerate divestitures of soured real estate, corporate and consumer loans in last year’s second half. Lasry said at September’s Bloomberg Markets 50 Summit in New York that “bank after bank” has offered to sell his firm assets, in part to meet new regulatory requirements.