Marc Lasry of Avenue Capital sees opportunity in Europe’s distressed assets
By Gillian Wee,
Avenue Capital Group founder Marc Lasry and Bruce Grossman, his senior manager of investment, were on a private jet returning to New York from Harrisburg, Pa., in 2005 when they felt the plane’s cabin suddenly heat up.
Outside the window, smoke billowed from one of the engines. The two men looked at each other and remained wordless until the plane landed safely back in Harrisburg.
Grossman wanted to get home by car or train. Instead, he says, Lasry persuaded him to take another flight.
“He said, ‘If you don’t get on this plane right now, you’re going to have a much harder time getting on a plane,’ ” Grossman says. “One of his greatest strengths is that he believes things are going to work out.”
Lasry’s optimism carries over into his investing, where he specializes in picking up bankrupt or distressed assets that others shun and selling them at a profit. He started Avenue in 1995 with $7 million in capital; he now manages about $12 billion — about $9 billion in institutional money and $3 billion in hedge fund assets.
“The names in our portfolio will ultimately be worth a lot of money,” says Lasry, 52, a bankruptcy lawyer by training who shares control of Avenue with his sister Sonia Gardner. “I just need time. People have a natural aversion to investing in companies in bankruptcy.”
Down 10 percent
Things haven’t always worked out for Lasry. Last year, his hedge fund fell about 10 percent, twice the 4.9 percent average decline for the industry, according to the Bloomberg aggregate hedge fund index. Lasry saw some of his bets, including investments in a Greek casino company, lose money. He has also returned $9 billion to investors since late 2010, shrinking Avenue’s assets under management from more than $20 billion.
That hasn’t deterred Lasry, who says he sees the biggest opportunities in Europe, where he expects that the sovereign-debt crisis will cause an increase in distressed assets and defaulted loans. Avenue is raising a fund of more than $2.5 billion that will focus on Germany, the Nordic countries, Switzerland and Britain, where Lasry says the legal systems are more protective of creditors’ rights than those in southern Europe.
As of mid-January, he had raised $2.1 billion. An earlier European fund that invested more than $2.6 billion in pubs, casinos and other beaten-down assets has generated average annualized returns of 19.3 percent since it began in May 2008, ranking it in the top 25 percent of its peers, according to research group Preqin.
Avenue will have to compete against other distressed-asset investors for bargains in Europe. In 2011, private-equity firms raised 7.5 billion euros ($9.8 billion) on the continent — a record, according to Preqin. Oaktree Capital Management raised 3 billion euros last year, the biggest Europe fund on record, while Apollo Global Management raised 1.4 billion euros in 2010, Preqin says.
“Any type of turnaround or distressed strategy is the flavor of the years to come,” says Antoine Drean, chief executive and founder of global placement agent Triago in Paris, which helps firms raise money.
The son of a computer programmer and a schoolteacher, Lasry emigrated to the United States from Morocco with his family when he was 7 and spoke no English. Today, he credits his adopted country with providing the opportunities that made him a billionaire.
He says he’s giving back by supporting the Democratic Party. He gave the maximum $30,800 to President Obama’s reelection campaign last year. Lasry also is close to Bill and Hillary Rodham Clinton and employed their daughter, Chelsea, as an analyst from 2006 to 2008.
“I’ve been phenomenally successful, and this is the only country I could have done it in,” says Lasry, who attended college on a scholarship. “You’re supposed to be out there helping others. Because of the fact that we came here as immigrants, we became Democrats. We grew up that way.”
Lasry’s penchant for battered assets extends to his Park Avenue headquarters in New York; it’s located on a former Lehman Brothers trading floor. Avenue leased the space at a 50 percent discount in 2010, two years after Lehman’s bankruptcy. Lasry, a fan of superheroes since childhood, installed life-size Superman and Batman figures in the lunchroom, along with a Ping-Pong table.
His personal office is adorned with a 3-by-4-foot Andy Warhol print of Superman flying with one arm outstretched, four sets of framed Superman comic strips and pictures of his wife, Cathy, and their five children, one of whom now works in the White House.
Gardner, 49, the firm’s president and managing partner, sits around the corner. Also a lawyer, Gardner oversees the accounting, investor relations, technology and legal teams at the 280-employee firm, which has 10 branches around the world. Gardner displays a picture of her son in her office, and photos of Britain’s Prince William. She sits on the board of New York- based 100 Women in Hedge Funds, which has raised $2 million for the prince’s philanthropic causes, such as the Child Bereavement Charity.
Most of the dealmaking falls to Lasry, who took charge of the task after parting ways with Grossman, who had been at Avenue for about a decade and now runs Dillon Hill Capital, a family office in Armonk, N.Y. The split came in 2009, after Avenue’s hedge fund plunged 25 percent amid a global market meltdown and the value of its institutional investments dropped 30 percent.
Lasry and Grossman disagreed about how to invest throughout 2008, both men say. Grossman wanted to scale back on investing while the markets were unstable. Lasry, who plays poker about once a month with fellow Wall Street luminaries such as Cliff Asness, who runs hedge fund AQR Capital Management, and Morgan Stanley quant trader Peter Muller, says it was a very good time to invest.
In 2009, for instance, Avenue started buying the bank debt of Ford Motor Co. at 50 cents on the dollar. As General Motors and Chrysler filed for bankruptcy and Ford wobbled, the debt’s price went down to 40 cents and then 30 cents. Lasry kept buying, betting that the loans would rebound, according to a person familiar with the matter.
Ford pays off
He was right: Ford turned out to be the only U.S. automaker to avoid filing for bankruptcy protection that year. By the end of 2010, Lasry had more than doubled his money on the Ford bet, the person said.
Avenue also bought the debt of Punch Taverns, a British pub operator, at about 50 cents on the dollar in 2009. As Punch’s stock market value plummeted 98 percent and ratings firms downgraded its bonds, Lasry amassed a stake with a face value of more than $150 million. Since then, Punch has named a new chief executive and announced a plan to split into two companies, to sell pubs and reduce debt. As of mid-January, the bonds were trading at about 75 cents on the dollar.
Lasry’s strategy is to make hundreds of similar, relatively small investments instead of finding a few giant hits. David Bonderman, a founding partner of private-equity firm TPG Capital, helped Lasry raise his first institutional fund and met Lasry while both worked for Texas billionaire Robert Bass.
“Marc is an instinctual kind of guy,” says Bonderman, who once played cards with Lasry on an overnight flight to Morocco for a penny a point. (Bonderman lost 11 cents.) “He’s a card player. He’s good at figuring out what the odds are. He’s willing to take moderate risk.”
Lasry says he works with five portfolio managers to decide which industries to focus on and at what price to start buying. The goal is to find companies that will generate returns of about 20 percent.
Overall, Avenue’s funds have delivered gains from 8.6 percent to 20.7 percent since inception, according to investor documents. Recent years have been more volatile. Lasry’s hedge fund gained 66 percent before fees in 2009 and then 20 percent in 2010 before last year’s loss. Clients include state pension funds and Government of Singapore Investment, the sovereign-wealth fund of Singapore.
“He was not afraid to really go into and recognize some of the newer areas of opportunity,” says Maria Boyazny, founder of MB Global Partners in New York, which invests in distressed funds. She cites Lasry’s investments in Asia after its 1997 currency crisis.
“The best thing he did was to build a really solid research organization,” she says. “Marc does a really good job of breaking down complex things into simpler terms and can relate to whatever constituencies he’s talking to.”
Son of a teacher, programmer
Lasry and his two sisters grew up in a two-bedroom apartment that had a wooden fire escape in Hartford, Conn., where two of his aunts had immigrated from Marrakech. Lasry attended public school until his mother, Elise, got a job as a French teacher at the private Renbrook School and enrolled her kids there. Their father, Moise, was a computer programmer for the state of Connecticut.
At age 12, Lasry, being good at math, tended the cash register at a family friend’s pharmacy two blocks away. When business was slow, he read Superman comic books, getting lost in stories about an ordinary guy who turned into a superhero and fought villains. Lasry took his pay in cash and comic books.
Clark University in Massachusetts gave Lasry the most scholarship money for college. His younger sisters, Sonia and Ruth, with whom he had shared a room for about a decade, attended the university as well.
After graduating with a history degree, Lasry worked as a truck driver for United Parcel Service and thought about sticking with it because it paid $30,000 to $40,000 a year. Instead, his mother and his future wife persuaded him to attend law school. At New York Law School, he won a clerkship with Judge Edward Ryan, who presided over the U.S. bankruptcy court of the Southern District of New York.
After graduating in 1984, Lasry practiced bankruptcy law and then moved to distressed-securities firm Smith-Vasiliou Management, where he invested in trade claims, which are rights to payments from debtors that have filed for bankruptcy. Lasry next went to Cowen & Co., where he hired Gardner after she graduated from Yeshiva University’s Cardozo School of Law.
In 1988, the siblings started a distressed-debt brokerage whose sole client was Bass’s Acadia Partners. They managed $150 million through the brokerage, naming it Amroc Investments — an anagram of the French word for Morocco. That’s how Lasry met Bonderman, Bass’s chief investment officer, who became his mentor.
Returns of 70 percent
Lasry and Gardner parted ways with Bass in 1990, after which Lasry produced average annual returns of 70 percent. They started Avenue in 1995, bringing in sister Ruth Steinberg, 47, who trades bank debt, in 2004.
Lasry and Gardner are opposites. Lasry says he’s more extroverted, while his sister is introverted. He lives with his family in a townhouse on Manhattan’s Upper East Side, while Gardner and her son live across town on the West Side. A tennis and basketball player standing 6 feet tall who favors pullovers and eschews socks with his loafers, Lasry towers over the slender, 5-foot-5-inch Gardner, who sported a printed dress with a long aubergine jacket for a December interview.
“He sees the glass as half-full; I see the glass as half-empty, so it works,” says Gardner, who majored in philosophy at Clark. “He comes into my office and he says, ‘Hey, Smiley, what are you in a bad mood about today?’ ”
Gardner and Lasry own 80 percent of the firm. Morgan Stanley bought 15 percent of the firm valued at about $250 million to $300 million in 2006. Bonderman owns less than 5 percent. Morgan Stanley spokesman Matt Burkhard declined to comment for this article.
Lasry’s investments can look dicey. In 2009, Avenue’s Europe fund invested in Regency Entertainment, a Greek casino company, buying stakes at 40 cents on the dollar. As the European sovereign-debt crisis worsened, the casino’s bank debt plummeted to 25 cents on the dollar. Lasry also owns bonds of Hovnanian Enterprises, the worst-performing home-builder stock in 2011. Hovnanian’s bonds in mid-January were trading at 45 cents on the dollar, about the same price he paid for them last year.
Deal with Trump
Lasry also took control of Trump Entertainment Resorts as it went through its third bankruptcy in 2010, gaining a 22 percent stake. In October 2011, Lasry and Donald Trump announced plans to set up an online gambling venture — if and when the United States legalizes such betting.
“He had a good plan, and his plan turned out to be correct,” says Trump, the real estate developer who picked Lasry’s reorganization plan over one proposed by billionaire investor Carl Icahn. “We’re going to be doing a big Internet-gaming deal together. It’s got to get approvals from government. It looks like the approvals should be imminent; why shouldn’t they approve it?”
Despite his optimism, Lasry doesn’t shrink from calling it quits on businesses that don’t continue to deliver profits. The firm wound down its Asia funds, which were its most profitable from the late 1990s to around 2004, after which returns declined.
And Lasry says his bets in the United States and Europe, which account for 80 percent of assets, could hold negative surprises. “In June, nobody thought there was a likelihood of Europe defaulting or of a double dip; now, there’s a likelihood that Europe could default,” Lasry says, while U.S. growth remains sluggish.
Still, he’s plunking down money in Europe on industries ranging from banking to cable. In the United States, he’s investing in independent power producers, papermakers, media companies and home builders. Those industries have already taken such big hits, he says, that the only place for them to go is up.
The full version of this Bloomberg Markets magazine article appears in the March issue.
Bets won and lost +66 percent How much Avenue’s hedge fund gained before fees in 2009 +20 percent How much Avenue’s hedge fund gained before fees in 2010 -10 percent How much Avenue’s hedge fund fell in 2011, twice the 4.9 percent average decline for the industry, according to the Bloomberg aggregate hedge fund index.