Perhaps no investor is better known for turning around struggling companies and industries than Wilbur Ross, chairman and CEO of
Buyouts: Why are you supportive of the Public-Private Investment Plan when not many other private equity firms are?
WR: The PPIP is fundamentally different from TARP [refers to the Troubled Asset Relief Program, which is the federal government’s plan to purchase troubled assets from banks to strengthen their balance sheets]. In TARP, the government is putting money into institutions that are teetering on insolvency to keep them from failing. With PPIP, private investors are helping the government. We’re going to be able to pay something like a 10-points higher price for the paper because of the [6x] leverage that we can apply. The way it works is that an unleveraged 9 percent rate of return becomes a 26 percent rate of return with the leverage, after the fees. So it’s pretty powerful from that point of view. But the more important thing is it isn’t the government coming to our support; rather, we’re joining the government to solve a problem it has with banks. We’re easing the burden on the banks that are selling the paper, and consequently on the government. And the request for proposals that the Treasury put out specifically says that the TARP-type compensation restrictions will not apply. Could Congress change that? Who knows? It’s unchartered territory.
Buyouts: Aside from that new effort, how much of your latest $4b turnaround fund, closed in January 2008, has been invested?
WR: We’re only a little bit over a third invested.
Buyouts: You worked a lot with the federal government earlier this decade when you were trying to get steel tariffs. What’s it like working with government today?
WR: We dealt with government in the steel industry on the tariffs; we deal with it in the automotive industry when it comes to getting the receivables guaranteed for suppliers. At the end of the day, I don’t think government will be totally irrational. For example, there was hullaballoo over AIG and the bonuses, and suddenly the House of Representatives put in this 90 percent tax on bonuses. Well, guess what? It never went into effect. So while government, particularly Congress, sometimes has a way of over-reacting to immediate stimuli, at the end of the day, we think they’re going to make rational decisions. And I don’t think it’s useful just to view government as the mortal enemy. That doesn’t get you anywhere.
Buyouts: What did you make of reports about the Obama administration coercing Chrysler’s creditors to accept a deal?
WR: Let’s talk about Chrysler. For quite a while now, it’s been very difficult getting debtor-in-possession financing. In the case of Chrysler, as far as I can tell, there is no other party who could’ve possibly done the DIP financing. If government had not come in, Chrysler would’ve been liquidated in a very disorderly fashion. I don’t think that these creditors would have come out very well in that circumstance, because there’s no shortage of auto plants in the United States right now; in fact, there’s a great excess of plants, and I think it would’ve been a terrible thing to destroy the franchise value of Jeep and the other products that Chrysler has.
Buyouts: Where do you see the car industry in a few years?
WR: Well, right now it’s a very hard time because it’s more or less a 9 million car year in the United States. Our company, International Automotive Components Group, is obviously having its issues, just as everybody is. But the automotive industry is still a huge business. Take 9 million cars, and take $20,000 as a rough approximation of the selling price of the car. That’s a $180 billion industry, even at these depressed levels. So the car industry is going to be around forever. Where the car industry goes from here? Volume can’t stay down at 9 million, for a very simple reason: Every year around 12.5 million cars are scrapped. So unless you think the total car population in the United States is going to shrink, you’re going to have to average selling at least 12.5 million cars a year just to keep the number of cars constant. Plus you have population growth. So arguably, steady state would be something like 13, 13.5 million cars. That can produce a decent end result both for the original equipment manufacturers and for suppliers like ourselves. International Auto Components, on a global basis, has no net debt, so we’ll be a survivor of this. But it is painful.
Buyouts: When do you expect the economy to start growing again?
WR: The key to economic growth is residential housing. Our take on things is that what really caused this recession is the demise of middle-class America. And what I mean by that is that from 2000 to 2006, inflation-adjusted median family income actually declined slightly in this country. At the same time, every family wants to live a little bit better than it did the year before, and the solution has been to borrow. What we’re going through now is the de-leveraging of the American consumer, and that’s getting translated into losses to the banks and [the] securitization holders that lent them money. That’s a painful process, and it’s not going to get solved in 10 minutes. So our belief is that if we’re lucky the economy will start getting a little better around the second quarter of next year. But unemployment tends to lag, so unemployment could keep going up well into 2010. We think that the Obama Administration has, much more correctly than the Bush Administration, realized that this is a huge problem, and that they have to throw huge resources at it. I don’t agree with all the ways they’ve spent the money, but just putting that much money out is going to help.
Buyouts: You bought a small bank earlier this year and you’ve expressed interest in buying more banks. How is this banking crises different from other industry crises you’ve worked in?
WR: In the Japanese banking crisis, we bought a failed bank from the Japanese government, Kofuku, in Osaka. We renamed it Kansai Sawayaka—Kansai is the region, Sawayaka means rebirth. We put a whole new management team in. We got it to where it was earning 17 percent on equity in a year, and we eventually merged it with the Kansai affiliate of Sumitomo Matsui bank. To this day, it’s one of the more successful banks in Japan. In the United States, the problems are very similar. The Japanese banks failed because of bad real estate loans. That’s more or less what’s happening here. And we’re putting a big emphasis on operations in Florida. We think that there’s room to create a quite large institution focused there because it has a very good deposit base thanks to retired people. So while there’s a tremendous glut of excess residential capacity in Florida, over time it will correct itself and it will be a vibrant place.
Buyouts: How many would you like to buy?
WR: Well, most all of the banks in Florida have troubles, and most all of them will either fail or at least need capital, so there’s not going to be any lack of supply.
Buyouts: What other industries do you think will be struggling a year or two from now?
WR: Well, an area we’re focusing a lot on right now is gaming. That’s starting to go through the ringer in a big way. We’re looking at a lot of the metals industries. We’re looking more at automotive; we think there are more opportunities within automotive. A lot of the exploration and production companies are pretty heavy users of junk bonds, and we’re looking at those too. We like natural resource companies. And eventually we’ll be in mortgage originations as well as the mortgage servicing that we’re in now. The question is how to do it and when to do it.
Buyouts: You originally wanted to be a writer. Did your early experience with writing have any influence on your business career?
WR: I know one thing, we’re very unlikely to buy any newspaper publishers. Ink on paper is a fairly inefficient way to transmit ideas and news. Clearly electronic media are going to be the delivering mechanism. That doesn’t mean you won’t need writers—you will need writers to create the copy—but I think the delivery system will be quite different from what we have right now.
Buyouts: Do you have any succession plans?
WR: Well, we have a good bench here. Of our investment committee, four people have been here more than 10 years, so we have a very good next generation team. The DNA of the organization is pretty well inculcated in them. So one of them would be the logical successor. But I have no immediate plans to do anything.
Buyouts: How has the Invesco partnership worked out so far?
WR: It’s going fine. They bring some resources that we didn’t have. Invesco manages $26 billion of real estate equities. They’ve had a very good record in the asset-backed securities field, particularly in subprime mortgages thing: By late 2006, they were cutting back in the quantity that they had invested, they were getting shorter maturities, and they were staying in super triple-A paper. As a result, in groups of one, three and five-year bases, they have positive returns from those securitizations. You combine that with our abilities in distressed, and it’s an interesting marriage. And we brought in Richard LeFrak who is a major developer and property operator [to share his insights into potential investments]. We think we’ve put together a very unique set of intellectual resources here. As the various government programs unfold, we can play in every single aspect of them, whether it’s residential mortgage-backed securities, commercial mortgage-backed securities, residential loans or commercial loans.
Edited for clarity
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