The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds (16 page)

Avenue has dedicated investment teams focused on its U.S., European, and Asian distressed strategies, in addition to its Real Estate, CLO, and Fund of Funds groups. In the U.S. distressed strategy alone, Lasry has 30 investment professionals, including five portfolio managers. Unlike many hedge funds, Avenue is further organized by sector. The team following the auto industry, benefitting from more than 30 years of collective experience, quickly concluded that the U.S. government couldn’t afford to let General Motors and Chrysler fail. Moreover, their belief was the White House and Congress, would not disappoint organized labor, a major constituent. And members of both parties, the Avenue team reasoned, eventually would come to understand that allowing the automakers to liquidate would send huge shock waves through the economy, driving up unemployment, and crushing entire communities that were tied to the industry. If GM and Chrysler failed, they would take many auto parts suppliers with them, disrupting the businesses of the Japanese and European transplants and contributing further to the nation’s unemployment rate.

Once the Avenue team felt confident that an uncontrolled collapse of the auto industry was unlikely, it zeroed in on an opportunistic point of entry for its investment, and selected Ford. The nation’s No. 2 automaker, the team determined, offered the best combination of a strong balance sheet, an aggressive restructuring plan, and a good product mix. Because Ford had raised capital in 2006, it had the liquidity to navigate a weak sales environment. The company’s management, under CEO Alan Mulally, was successfully transforming its culture, focusing on core brands and selling assets like Jaguar, Land Rover, and Volvo. While most investors were fleeing financial services companies, Avenue believed that Ford’s captive finance company could be an advantage in a tough credit environment.

Lasry and his team made their move. They began aggressively accumulating Ford senior secured bank debt in December 2008–February 2009 at significant discounts to face value. According to pricing information obtained from UBS, the market at the time was in the 30s and 40s. By the peak of its investment, Avenue had acquired more than $500 million, face value, of Ford bank debt.

As Avenue’s team had predicted, both GM and Chrysler went through government-sponsored Chapter 11 filings, which allowed the industry’s suppliers to survive. The government’s “Cash for Clunkers” program helped stimulate sales. Meanwhile, Ford continued to bolster its balance sheet and managed to avoid a government bailout, giving its image a boost in the eyes of consumers. The company rolled out a steady stream of successful new products, and Ford’s credit arm allowed the company to offer buyers leasing and financing options at a time when the credit markets were frozen. By the beginning of 2010 Ford’s senior secured bank debt had recovered substantially to high 80s and low 90s (source UBS) when Avenue sold its Ford positions. As previously noted, the Avenue U.S hedge funds generated gross returns over 60 percent in 2009, one of the best annual performances in the firm’s history.

The Ford deal encapsulates Avenue’s strategy at its best: spotting an opportunity in a deeply troubled sector, conducting a thorough top-down, bottom-up analysis of both the industry and the individual company, and, before making a move, thinking through the downside. Working with Avenue’s highly experienced analysts as they dig into a potential opportunity, Lasry always looks to identify worst-case scenarios and specific risks to every investment. Lasry, who, with typical understatement, describes his style as conservative, adds that most investors don’t like to get hurt. To that end, the firm focuses on the top of distressed companies’ capital structures, buying mostly secured bank debt so they are first in line to get paid if the companies default or file for bankruptcy protection.

That conservative formula has made Avenue into one of the world’s biggest investors in distressed debt, with more than 275 employees across offices in the United States, Asia, and Europe, including New York, London, Luxembourg, Munich, Beijing, Singapore, Hong Kong, and Jakarta. As of January 31, 2012, Avenue’s assets under management stood at about $12.5 billion, below the $20 billion the firm had managed earlier. This was largely the result of the firm returning $9 billion in capital and profits to investors, following Avenue’s decision in early 2011 to exit previously distressed investments that had significantly moved up in price when the market was strong.

Brother-and-Sister Partnership

The successful formula also has distinguished the unlikely brother-and-sister founders of the firm among the distressed industry’s leading investors. Lasry and Gardner were born in Marrakech, Morocco, the family home for generations. Their parents left Morocco in 1966 and moved into a two-bedroom apartment in Hartford, Connecticut, where Marc and Sonia, then seven and four, shared a bedroom with their younger sister. Their father was a computer programmer for the state of Connecticut, while their mother taught French at a private school the Lasry children later attended. (When the siblings arrived in the United States, they spoke no English, only French.) At night, their parents worked a second job selling Moroccan clothing to boutique stores.

With the help of scholarships and loans, Marc and Sonia both attended Clark University in Worcester, Massachusetts. It was there Lasry met his future wife, Cathy, a friend of Sonia’s who lived across the hall in their freshman dorm. Lasry graduated in 1981 with a BA in history. The summer before he was to start at New York Law School, he worked as a UPS truck driver and considered ditching his academic plans. “These drivers make a lot of money. I thought I could get into management,” he told a group of students in a speech at his alma mater in 2007. “But my wife didn’t want me to be a truck driver. She wanted me to go to law school.” So he gave up his dream of driving a big brown truck, and received his JD in 1984.

Lasry’s down-to-earth style—he’s plainspoken and partial to casual sweaters and slacks—and his company’s simple-sounding philosophy cloak a profound understanding of distressed-asset investing. After law school, Lasry clerked for Edward Ryan, chief bankruptcy judge for the Southern District of New York. He spent the following year practicing law at Angel & Frankel, which also focused on bankruptcies. Going through all the filings and financials, Lasry became an expert on distressed companies and how to profit from them. He realized he was looking at a large and relatively untapped market with very little competition.

Lasry soon left Angel & Frankel for a job as the director of the private debt department at R. D. Smith (now Smith Vasilou Management). It was there he first got involved in “trade claims,” the market in purchasing and selling to investors the unsecured claims of vendors and other creditors against a debtor. A year later, in 1987, he landed a big position at Cowen & Company, managing $50 million in partners’ capital. It was right around the time that his sister Sonia had graduated from law school and Lasry’s new department at Cowen needed a lawyer. “We got into business together completely by accident,” says Gardner. “And I don’t think it’s something we ever would have planned. I had just graduated and was looking for a job, and Marc said, ‘Do this with me—I need someone I can trust.’” At the time, investing in distressed debt was a relatively esoteric business practiced by few, and Lasry wanted someone he could depend upon to help run Cowen’s trade-claims department—without hiring a competitor in training. Gardner agreed to take the job, thinking of it as a temporary gig. They’ve worked together ever since.

At first, Gardner found the switch from law school to Wall Street anything but glamorous. “Early on, we were investing in Storage Technology, a company that had filed for bankruptcy in Denver, so I used to fly to Colorado for a week at a time with bags of quarters in order to make copies of the list of creditors who had accounts receivable due from the debtor. These schedules were hundreds of pages, so it would take days to make copies; back then, it wasn’t possible to get the lists online as we do now. People thought we were crazy for flying to Denver to make copies ourselves, because our competitors would simply order the lists and receive them by mail weeks or months later when the Court got around to making the copies. But the extra effort gave us a tremendous advantage, as we ended up being the first ones in the market buying the claims. I would fly back to New York, and we would make calls to each of the creditors to buy their claims and negotiate the contracts individually. Of course, there were many days when I wondered to myself, ‘Did I go to law school so I could stand at a copy machine for 12 hours a day?’ ” Gardner recalls, laughing.

Those early experiences helped establish what would later become one of the firm’s defining characteristics: an understanding that certain markets are inefficient and a dedication to performing careful homework combined with a willingness to do whatever it takes to get the job done. “Trade claims was a great business because it was an untapped market with little competition, and we knew how to do the research, find the trade creditors quicker than others, and negotiate the contracts,” Gardner says.

Trade creditors typically have no interest in receiving stocks or bonds, and do not want to wait out the bankruptcy process to get paid on their claims. Instead, they often prefer to sell their claims for immediate cash, even at a steep discount. When Bloomingdale’s filed for bankruptcy, for example, a trade creditor may have sold merchandise to the retailer for $100,000, but its cost was perhaps only $40,000. If Lasry offered them 50 cents on the dollar in immediate cash—or $50,000—in most cases it was worth striking a deal. In bankruptcy situations, trade creditors are concerned about recovering the cost of the merchandise first and foremost. “So as long as they got back their cost and could book a profit,” Lasry explains, “it made sense for them to sell.”

Catching the Eye of Robert Bass

It was while working at Cowen that Lasry caught the eye of legendary Texas billionaire investor Robert Bass. When Cowen decided to raise money for a fund, the Robert M. Bass Group, then a client of the firm, offered to provide Cowen with virtually all of the capital. After Cowen refused to take all of the Bass capital, the siblings decided to leave the firm and go work for Bass. “Once we got to the Bass organization, we realized it was a pretty unique place. It’s difficult now to fathom, but back then the only people who really had capital were wealthy family offices,” remembers Lasry.

The Robert M. Bass Group, later called Keystone, Inc., had been known as a breeding ground for some of the world’s top private equity investors, including David Bonderman, who went on to found Texas Pacific Group (TPG), and Richard Rainwater. When Marc and Sonia joined the Bass Group, they were given a portfolio of $75 million to invest in trade claims, bank debt and senior bonds. They reported to Bonderman, then the Bass Group’s chief operating officer. Lasry was 30; Gardner was 27. From the beginning, Bonderman recalls how Lasry came onto the scene and blew the guys at Bass away. “He didn’t always speak up,” Bonderman says. “But when he did he always had a vision for the investments that no one else saw. He always brought fresh perspective to the table.”

The siblings wanted to call the entity “Maroc” after their birthplace, Morocco, but a Bass colleague advised them to pick a name starting with the letter “A” so they would be on top of all the distribution lists. They flipped the first two letters and settled on Amroc Investments. Aside from Amroc’s flagship $75 million fund, they also had the ability to draw down an additional $75 million, giving them access to $150 million in capital, which made them one of the largest distressed funds in the United States at the time.

“I met all these exceptionally smart guys at Bass,” says Lasry. “David Bonderman, Jim Coulter, Tom Barrack, and many others. It was a phenomenal period, and I quickly realized I was dealing with guys who are off-the-wall smart and really good guys—nice, smart people.”

Even though they were doing very well under the Bass umbrella, after about two years, the siblings were ready to really strike out on their own. “I think it was a little bit of hubris probably,” Lasry admits. He had learned a lot from the superstars at Bass and felt ready to invest his money on his own. What’s more, Drexel Burnham Lambert had collapsed in the wake of Michael Milken’s indictment for securities fraud, which plunged many companies with low junk bond credit ratings deeper in the red. Suddenly, there were massive opportunities for distressed investors. “You know, when you look back on it, I left what probably was one of the best jobs in America, running money for one of the world’s first billionaires,” Lasry says. “And back then there weren’t that many. But I don’t regret it.”

Lasry and Gardner opened their own boutique distressed brokerage firm in 1990 with $1 million of their own capital, keeping the name, Amroc Investments, and their affiliation with the Robert Bass Group. Gardner remembers the pride she felt in building a business. “It was just the two of us and a secretary when we started—we were both working 14-hour days, 7 days a week. We slowly built one of the largest private distressed debt brokerage firms that existed at the time, and expanded Amroc to more than 50 employees.”

Lasry was keeping up a grueling schedule, meeting with clients and bankers establishing relationships, and brokering billions of dollars of debt for their clients. “At the same time, for five years, we also ran our own money, just my sister and me,” says Lasry. They stuck to their winning formula, managing Amroc and continuing to invest their personal capital, and generated compound annual returns in excess of 50 percent.