WL Ross & Co aims to pay well under 10x EBITDA

Firm: WL Ross & Co LLC

Headquarters: New York City

Year founded: 2000

AUM: About $8 Bln

Employees: 48

Key personnel: Wilbur L Ross Jr, 76, chairman and chief strategy officer; Stephen Toy, 42, and Greg Stoeckle, 50, both senior managing directors and co-leaders of the firm

Owner: Unit of Invesco Ltd, Atlanta-based manager, AUM $790 billion, including $96 billion of alternatives, as of Sept 30

Investment style: Value-oriented private equity, including distressed debt and turnaround investments

Key deals: Bank of Ireland, ISG International Steel Group, Navigator Holdings Ltd

Current investment themes: Energy, financial services, heavy building materials, metals & mining and transportation.

Competitors: Apollo Global Management, Centerbridge Partners, KPS Capital Partners, Oaktree Capital Management

LPs: CalPERS, Hamilton Lane, Houston Police Officer’s Pension System, New Jersey State Investment Council, Siguler Guff & Co, the State of Wisconsin Investment Board and Alfred I. DuPont Testamentary Trust

But in their first interview since taking up day-to-day responsibility for the firm in May, Stephen Toy, 42, and Greg Stoeckle, 50, both senior managing directors and co-leaders of the firm, said two recent deals for Bank of Cyprus and a roll-up called Permian Basin Materials LLC fit the themes woven into the DNA of WL Ross & Co. The firm follows a well-researched macro-economic thesis, pays well under 10x EBITDA, embraces complexity and taps not just its checkbook but the firm’s intellectual capital.

The investments come as Wilbur L Ross Jr, 76,  the founder of WL Ross & Co in 2000 with $440 million in capital after making his name as a distress and turnaround banker at Rothschild Inc in the 1980s and 1990s, turns over more responsibility to Stoeckle and Toy, the latest step in the evolution of WL Ross & Co since it was acquired by Invesco back in 2006.

Stoeckle chairs the management committee and focuses on business operations, investor relations and product development. Earlier this year, he came over to WL Ross & Co from its parent Invesco, where he worked as president and managing director of Invesco Senior Secured Management Inc, building the leveraged finance business to $30 billion in assets under management from less than $1 billion when he joined Invesco in 1999.

Toy chairs the firm’s investment committee and focuses on its portfolio. He’s a founding member of WL Ross & Co. LLC, having started in 1996 as an analyst at Rothschild under Wilbur Ross.

“It’s a collaborative effort as day-to-day heads, with Wilbur Ross as our chairman,” Stoeckle said of himself and Toy. Ross is “still very much involved but recognizes that we need to take the steps to institutionalize the success factors we’ve had over the course of our history. We’re addressing the ‘key man’ issues that some have raised around Wilbur. We think we’ve done that successfully.”

Stoeckle said WL Ross & Co continues to position itself as a value-oriented private equity firm familiar with distressed and turnaround deals in transportation, metals and mining, financial services, energy and building products sectors.

“We have a 17-year history of doing private equity style transactions in a fund format,” Stoeckle said. “The platform has evolved where distressed and turnaround is a core component of that value oriented strategy, but there are other ways to express a value orientation, like a contrarian buyout, or it could be a complex carve-out or special situation.”

For his part, Ross told Buyouts that both Toy and Stoeckle were already known names among investors prior to their current roles.

“The three of us are jointly responsible (for the firm) but this new structure gives me the time to focus on what I like to do—the big strategic moves,” said Ross, adding that he has no plans to retire. He said he remains active in his personal life as well, including winning a recent member/guest tennis tournament at the Everglades Club in Palm Beach. “I’m in very good health,” he said. “It’s not that I’m going to an old people’s home or anything like that.”

Ross said he’s been focusing on the firm’s first special purpose acquisition corporation called WL Ross Holding Corp as a blank check company that raised more than $500 million in June to acquire another company. He’s also focused on researching macro trends to form the foundation for future deals. 

Bank of Cyprus

In one of its latest deals, WL Ross & Co moved to lead a consortium to invest about $500 million into Bank of Cyprus.

Fitting the firm’s bent toward bargain prices, WL Ross & Co paid 24 euro cents per share, less than a quarter of the price of one euro per share paid in a 2013 bail-in transaction by creditors to write off a portion of their debt to help shore up the bank. The investment closed on Sept 18 in the form of a private placement restricted to major institutional investors. 

The Bank of Cyprus should benefit from a modest rebound in the region and a recovery in the European banking sector, according to the firm, which also sees the bank benefiting down the road from potential energy development of offshore natural gas fields near Cyprus.

“Banking institutions tend to be a levered proxy against the macroeconomic activity of a region,” Toy said. “It’s a referendum of our thoughts around what a specific country is going to do to turn around the general economy. We felt investing in a material or a significant bank in that economy is a way to deliver returns against that view.”

In an early sign that WL Ross may have made the right bet, the Bank of Cyprus recently passed a European Central Bank stress test with about $125 million more capital than it needed to do so, Ross said. He formally congratulated the bank on Oct. 26 and said its move to pre-emptively raise about $1.25 billion of equity capital this year was correct.

In the next milestone for the Bank of Cyprus, Ross is supporting a slate of 11 directors to replace the bank’s board at a shareholder meeting on Nov 20. Among them, Josef Ackermann, the former chief executive officer of Deutsche Bank AG, has been proposed as non-executive chairman.

The deal followed the firm’s success investing in the Bank of Ireland at the height of the currency crisis in 2011. That deal has paid a return of about 3x.

Cement And Sand

Along with banking, energy ranks among the major investment themes at WL Ross & Co.

To be sure, valuations of oil-producing operations and acreage in the United States shale basins have been rising as private equity firms pump billions into the sector. But Stoeckle, Toy and Ross managed to build Permian Basin Materials LLC into a mid-market portfolio company benefiting from the energy boom at a lower price.

WL Ross & Co started out by finding three separate companies in the infrastructure-hungry Permian Basin region of western Texas and eastern New Mexico. In a deal that closed late last year, each of the three was valued at a discount because of its small size: Crockett County Mining Ltd, Highland Concrete Co and Wallach Concrete Inc.  More recently, Permian Basin Materials added a fourth company, Damron Sand & Gravel, in a deal that closed on Oct 31.

WL Ross has now crafted a regional producer of sand, gravel, limestone with mines and ready-concrete plants in an area that “will experience dynamic growth,” Toy said in a statement marking the transaction. 

Fitting WL Ross & Co’s affinity for complex deals, the transaction included a challenging negotiation with the sellers in which WL Ross insisted it would only buy each of the companies if it got all three at once, Ross said. ”Putting the three together gave us a critical mass,” he said.

Toy said the Bank of Cyprus and Permian Basin deals reflect WL Ross & Co’s interest in a wide variety of acquisitions that allow the firm to deploy its intellectual capital and financial capital to create value and turn businesses around or grow them.

“We want to have the available capital that’s flexible enough to do mid-market deals and we also want the flexibility to move up to pursue larger transactions like we did with Bank of Ireland or the Bank of Cyprus,” Toy said. ”That ability to play in the full spectrum, having each type of investment be meaningful in term of its ability to move the needle on returns, is an important part of the strategy in how we invest money and (how) we seek to deliver returns for our investors.”

New Fund

WL Ross & Co reportedly plans to raise up to $2 billion for WLR Recovery Fund VI, the follow-up to its 2011 predecessor. Citing regulatory restrictions, executives at the firm declined to talk about fundraising. But they did mention that they’ve been meeting with their LPs to talk about their new leadership roles.

The firm has netted about $1.8 billion of monetizations thus far in 2014, compared to less than $500 million in new investments. The firm has also set up potential exits through a series of initial public offerings, including Talmer Bancorp Inc and Navigator Holding Ltd.

Overall, LPs appear to be warming toward distressed investing after several years of rocky but steady economic expansion.

“Interest in distressed debt and turnaround funds is increasing as investors are becoming more worried that we are nearing the top of a cycle,” said Kelly DePonte, a placement agent with Probitas Partners in San Francisco.