Shared downfall

As the summer of 2010 came to a close, the private equity world was confronted with the news of former heavyweight alternative asset manager GSC Group filing for bankruptcy.

GSC Group was once a beacon of light in the private equity industry for employees who got to own shares of the firm along with the founder and other senior executives. GSC’s ownership was one of the most widely shared of any private equity firm. Bankruptcy documents confirmed all of GSC’s 175 employees held shares in the company.

But what was once perhaps the most equitable ownership share in the industry has become a sad tale of shared loss. Bankruptcy documents run for pages listing the names and addresses of every GSC employee with shares in the company – all now creditors in the process.

Even with 175 owners looking out for the firm, the end came through the shriveling credit markets, especially as collateralised debt obligations unraveled in the downturn.

After the firm doubled both its assets under management and its number of employees within two years, Eckert wanted to see all GSC’s employees enjoy the growth and success. In September 2006, Eckert announced in a company statement the firm had changed both its ownership structure as well as its name – from GSC Partners to GSC Group.

“In addition, we have an inclusive ownership structure capable of attracting and retaining talented investment professionals of the highest calibre and developing the next generation of leadership,” Eckert said at the time.

The firm had also streamlined its business lines into three different divisions: corporate credit, distressed investing and real estate. “We have redesigned the structure of the firm to take maximum advantage of changes in alternative asset investing,” Eckert said. “As a corporation, we have created a single institution within global reach and the rational management structures that one would associate with a sophisticated financial institution,” he said.

Unfortunately, GSC continually ramped up its exposure to collateralised debt obligations, which proved to be fatal to the firm once the credit markets seized. One of the more recent funds raised by GSC was a European CDO fund, which closed on
€300 million in 2007. GSC European CDO V targeted 90 percent senior and 10 percent subordinated debt and invested primarily in private equity-backed deals. GSO had also raised at least 11 CDO funds for the US.

“[GSC’s] real problem was the CDO funds it managed, for which they used debt at the holding company level,” says partner at Probitas Partners Kelly de Ponte. “This is not the way private equity funds tend to run their operations.”

GSC’s broad ownership structure stands in contrast to many other private investment firms which still have not made a full transition from founder domination to broader employee ownership. It’s a transition that many firms are struggling with.

These days, all that’s left of GSC is being bargained for in bankruptcy court. Founder and head guru Eckert is moving on – having secured an employment agreement with distressed specialist Black Diamond Capital, which is the main bidder for GSC’s remaining assets.