September 25, 2009

Ross, Expecting More Defaults, Gets $685 Million from Goldman Sachs

Bloomberg
Originally Published on November 9, 2006

Billionaire investor Wilbur Ross obtained $685 million from a partnership formed by Goldman Sachs Group Inc. to help him fund larger buyouts of bankrupt companies as the U.S. economy weakens.

The arrangement with Goldman Sachs WLR Opportunities Fund LP is a first for the former turnaround specialist at Rothschild Inc. The Goldman fund mainly will invest alongside Ross rather than put its money in buyout funds run by New York-based WL Ross & Co. LLC, the 68-year-old financier said in an interview.

Ross anticipates better opportunities for so-called distressed investing next year as slower economic growth throttles companies loaded down with debt. The investor, who rolled up five bankrupt steel companies and sold the group to Mittal Steel Co. for $4.5 billion last year, said he's bulking up his war chest as leveraged buyouts swell in size.

"It's inevitable that we will see higher default rates than where we are today," Ross said. "We are trying to get ourselves organized to deal with that opportunity."

Goldman spokeswoman Andrea Raphael said the fund "provides a unique investment opportunity for our clients." WLR Opportunities reported it was raising money from Goldman clients in private-placement notices filed with the U.S. Securities and Exchange Commission on Oct. 25. Raphael declined to comment on whether New York-based Goldman put its own money in the fund.

In addition to steelmakers, Ross's buyout funds have purchased textile, coal and car-parts companies. The next wave of defaults will be in "a whole range of industries," said Ross, who sold his firm to U.K. mutual-fund company Amvescap Plc last month.

More Optimistic

He's more optimistic than other distressed investors. A glut of capital has driven up prices for risky companies, cutting returns. Cheaper borrowing costs have propped up companies that otherwise might have failed.

The result has been a dearth of troubled companies in which to invest as junk-bond defaults worldwide fell to a record 0.89 percent in September, according to Standard & Poor's. The 24- year average is 4.61 percent.

Some distressed investors have been predicting for several years that economic shocks would drive up default rates among highly leveraged companies, only to be proven wrong time after time.

"Higher interest rates haven't done it, higher oil prices haven't done it and, so far, a cooling of the housing market hasn't done it," said David Pauker, a managing director at Goldin Associates LLC and the chief restructuring officer for the failed futures broker Refco Inc. "About nine months ago, I decided I was going to stop predicting" when default rates would return to historic levels.

The U.S. economy grew at a 1.6 percent annual rate in the third quarter, the slowest pace in more than three years. Homebuilding slumped the most in 15 years, and energy prices are near all-time highs.

Club Deals

Ross said the Goldman fund is "a new product for us" to keep pace with so-called club deals by private-equity firms that band together to take on bigger targets. A group including Bain Capital LLC and Kohlberg Kravis Roberts & Co. agreed to pay $33 billion for hospital operator HCA Inc. in July.

The Goldman partnership will supplement Ross's two main sources of capital: the $1.15 billion raised through the WLR Recovery Fund III LP in June 2005 and fund clients who also make direct investments in his buyouts. Ross said the Goldman fund will co-invest 85 percent of its assets in his buyouts, with the rest devoted to a fourth recovery fund slated to open next year.

By forming a partnership, Goldman avoids paying management fees on Ross's funds and maintains control over the assets it acquires, Pauker said. Ross benefits because he can pursue larger buyouts without betting the entire WLR Recovery fund on one or two companies, increasing returns and diversifying risk.

"Goldman has been a longtime investor with us," Ross said. "They put together this special fund, which will only come into our very large transactions when there is room."

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