WL Ross: Expect More Shopping
Don't expect Wilbur L. Ross to get any more conservative, now that the private-equity firm he created six years ago is becoming part of Atlanta financial giant Amvescap (AVZ). Though Amvescap has $414 billion under management—and WL Ross & Co. has only $3.5 billion—Ross says he's not going to be changing the buyout strategy he has been riding to 10%-plus annual returns for investors.
Adding to a spate of big deals in private equity—from July 24's announcement that Bain Capital, Kohlberg Kravis Roberts, and other private-equity firms agreed to pay $32.7 billion for hospital giant HCA (HCA) to the Blackstone Group's recent closing of a $15.6 billion fund—Ross agreed to sell his firm to Amvescap. He'll get $130 million in cash over the next two years and the chance at another $245 million if his funds do well. Amvescap, which owns both the AIM mutual funds and manages institutional funds under the Invesco name, will also give Ross an existing venture-capital pool of $2.3 billion to manage. Shares of Amvescap were up 92 cents, or just above 5 percent, to $18.07, at the market close on July 24.
For Ross, the Amvescap deal gives him a chance to cash out part of his own stake in the business, but still keep his business intact and keep himself in the game. Hot demand for well-performing private-equity firms has made raising money the easy part. But even at the firm's current size, the next generation of leadership there would have struggled to pay him off on their own. "Joining Amvescap is our answer to that mega phenomenon. Otherwise, at some point in time, the next generation of management here would be faced with the problem of buying out my interest," says Ross. Don't take that to mean Ross is retiring, however. At 68, he says he intends to stay at the helm at least five more years.
WHERE HE'S LOOKING.
His core investment approach and areas of interest are not changing, either. The list of top priorities he ticks off are familiar to Ross watchers as ones in which he's already been on the prowl: reinsurance, auto parts, and textiles.
Auto parts have definitely been his greatest focus of late. As he did with steel and coal, and is doing in textiles, Ross has pursued a rollup strategy in the fragmented and largely unprofitable auto-parts business. His company, International Auto Components Group, which already included the former European assets of Collins & Aikman, most recently bought almost all of Lear's European systems division.
Ross also has affiliated investments in Brazil's Plascar Participacoes Industriais, which is traded on the Sao Paolo exchange and is now targeting Asia and North America. The U.S. assets that Ross is rumored to be looking at include Lear's domestic business and possibly some portion of the Visteon business that Ford Motor (F) took back from that supplier.
THRIVING ON CHAOS.
The sector is a mess, which makes it ideal territory for Ross, who worked most of his career as a bankruptcy adviser before moving into investing. Globally, there's enough capacity to make 80 million components per year but demand for only 60 million says David Cole, director of the Center for Auto Research. With too much debt and little profitability, it's a casebook example of a sector ripe for consolidation.
Ross' focus at International Auto Components has been on firms that make interior trim, things like instrument panels and arm rests. It's a relatively easy business to get into—and that means many companies did. Now with Detroit's Big Three automakers struggling, their suppliers are being squeezed. Jim Gillette, director of supplier analysis at CSM Worldwide, an industry research and consulting firm, says that a pair of sun visors with a vanity mirror that would have cost $21 to $22 15 years ago today go for $6 to $7.
The obvious answer to that: Make it in China. And Gillette says this lower end of the parts business is destined to move increasingly toward Asia. Ross, too, has the once-hidden Middle Kingdom on his mind. One thing he says he's happy to get from his deal with Amvescap is some of the luster of that investment firm's joint venture with Great Wall Securities, the first Sino-American fund-management venture, which was launched in June, 2003. "They're one of the few outside financial firms that does have money in mainland China," says Ross. "China is very much a relationship-based society. You can never have enough relationships."
"TAKING INTELLIGENT RISK."
Auto-parts companies may be getting cheap, but there's plenty of risk in the sector as unsuccessful investors like David Stockman can attest. But industry experts say Ross' focus on debt loads and selective approach to the market look smart. So does the fact that many of his acquisitions do much of their business with global players, not just Detroit's unhappy Big Three. "Ross is good at taking intelligent risk," says Cole.
Ross has already been doing plenty of exploring in China and other low-cost manufacturing sites. His plants in China include facilities to make textiles for his Cone Denim and Burlington home furnishings and apparel. In June, his International Textiles Group began building an $80 million factory in Da Nang, Vietnam, and he's also constructing a large denim factory in Nicaragua.
SOME UPS AND DOWNS.
For all his success, Ross has had some setbacks. His International Coal Group (ICO) owns the Sago mine, where 12 West Virginia coal miners were trapped and died this past January. In releasing his report on the accident on July 19, J. Davitt McAteer, special adviser to West Virginia Governor Joe Manchin, partly laid the blame for the deaths on problems with the mine shaft seals. The company contests that finding, but its stock, as high as $15 a share last October, is trading at around $6 today.
He certainly hasn't dialed down his willingness to take chances. He's raised $300 million to invest in distressed properties in India, and in June put $100 million into Montpelier Re Holdings (MRH). An underwriter of extreme risk, Montpelier is certainly a contrarian play at a time when rising storm activity has driven up premiums 40% to 80%.
But Ross figures that at those rates, in 8 out of 10 years you should make "good money". He plans to put more money into reinsurance, and says he has the stomach for the ups and downs. "We have a lot of stomach," he jokes.