After three decades sniffing out value in industries left for dead and spinning sackcloth into gold, private-equity player Wilbur Ross knows a thing or two about buying low and selling high. So people took notice last July, when he sold his own private-equity firm, WL Ross & Co., to the massive British investment firm Amvescap for approximately $375 million. Ross, who will continue to lead the firm, spoke with Senior WriterKit R. Roane about the outlook for private equity.
Why did you decide to partner with Amvescap?
Amvescap has about $440 billion in assets. They are very big and even big compared to the big private-equity firms. But it isn't just access to money. Amvescap will give us access to a broader range of investors. Also, a couple of countries are very important to us. Amvescap has 80 people on the ground and manages about $6 billion from Japanese institutions. They also have asset management that manages a couple of billion dollars in the Chinese domestic market.
Are you surprised by the growth of the private-equity industry over the past 30 years?
Originally, this was a cottage industry. If someone had $1 billion in capital, it was a big deal in the leveraged buyout industry. That is no longer true. Now you have funds that have $15 billion in them, and since they can be leveraged to maybe $60 billion, that is quite extraordinary. In today's environment, the scarce resource is not capital; it is having a good idea.
Are you concerned about the amount of leverage being used?
The LBO community is more awash in equity capital than it has ever been. There is no question that people, in general, are paying higher multiples because borrowing rates are lower. They are saying, "I can still make my interest payments and my target rate of return." But they are factoring in interest rates that are much lower than they have been historically. And when it comes time to refinance that business or sell it, the environment could be markedly different than it is today. So some of these LBO firms have been building in a time bomb.
You don't believe default rates can remain as low as they have been?
We have had very permissive equity and debt markets and a strong economy and low interest rates. In 2005 and 2006, the default rate has been close to the vanishing point, around 1 percent or so. But I see no reason in the world why the long-term average default rate on high-yield bonds will be any different from the 4.5 or 5 percent that it has been historically. Sometime in the near future, we could be back to 7 or 8 or 9 percent default rates. I think that is quite inevitable.
Do you see other private-equity firms looking to do deals similar to yours with Amvescap?
I think the day will come very soon where you will see one or more of the big LBO firms go public. Historically, private-equity firms have always raised capital of limited duration, maybe six to eight years but not permanent. You have to raise money, then run around and invest it. There is a desire to transition to permanent capital. That is another step in the evolution of the industry. I think it is a constructive step.
Shareholders have complained about being shortchanged in several management-led buyouts. Is this justified?
The criticism should be of the seller. If somebody sold a dollar bill for 80 cents, shame on him. But you can't criticize the LBO guy for buying it for 80 cents. That is his job.
This story appears in the December 25, 2006 print edition of U.S. News & World Report.