WL Ross & Company is asking limited partners for a fundraising extension for its fifth investment vehicle, which launched in August 2010 with a $4 billion target but has collected well under that amount, according to multiple LP and market sources, as well as filings with the US Securities and Exchange Commission.
The extension would take the fundraising period into next year, according to these sources, though exact dates were not available. Spokespeople for the firm declined to discuss fundraising.
The fund, called WLR Recovery Fund V, had collected nearly $450 million as of 12 August, according to SEC documents. A big chunk of that total, $100 million, came from one existing LP, the Oregon Public Employees’ Retirement Fund, which made the commitment in October 2010. Oregon had committed $200 million to the firm’s $4.1 billion fourth fund in 2007.
It is not clear whether the firm has received more commitments beyond the official tally.
It is also unclear whether the firm is considering shrinking the fund’s target. One person with knowledge of the firm said, “I wouldn’t steer you away from reaching that general conclusion as it relates to fundraising … there’s a number of fundraisings that have started out earlier this year or last year that have taken longer, and the ultimate [fundraising] goals have been reduced”, the person said.
Factors affecting fundraising
WL Ross’ past performance should certainly not be a hindrance to its ability to attract capital. The firm has consistently performed in the first quartile, save for its third fund, which fell into the second quartile, according to pension documents from Oregon. Fund IV, which is more than 50 percent deployed, has been generating a net internal rate of return of 10.9 percent, and a net total value multiple of 1.31x, as of 30 June, 2011, Oregon said in documents.
People with knowledge of the firm blamed the lethargic fundraising environment for the relatively slow progress of Fund V. “This is a reflection of the general market environment and not any specific concern about WL Ross’ leadership,” said one of the people.
However, two industry LPs and a general market source said investors have been hesitant to commit to Fund V because of uncertainty about Ross’ future commitment to the firm. There is also a perception among some investors that the firm does not have a strong succession plan in place, the sources said.
Ross, 73, is fully committed to the firm going forward and has no intention of stepping back from day-to-day control, a spokesman for the firm said in a recent interview. However, Oregon pension documents from last year said Ross has made a commitment to lead the firm for another five years.
Fundraising this year in general has been “brutal”, according to Sam Green, an investment officer with Oregon's state treasury. “Many limited partners are capital constrained. They are deferring private equity commitments for as long as possible and often committing less than in the prior fund cycle,” Green said. “Even with smaller target sizes, many funds are finding it difficult to achieve them, and it is taking far longer than in the past.
“Over the past year, I have seen more requests to extend the fundraising period than in the decade before it,” Green said.
The firm has put a succession process in place, creating the office of chairman to prepare for an orderly transition of management to the next generation, according to pension documents from Oregon.
The succession planning group is made up of Ross, David Storper, Steven Toy and James Lockhart. Lockhart joined WL Ross in 2009 from the Oversight Board of the Federal Housing Finance Agency, where he worked as the director and chairman.
“With his extensive government experience, deep knowledge of the US mortgage markets and strong background in public/private finance, [Lockhart] is ideally qualified to help expand the financial services portfolio of the funds we manage,” Ross said when Lockhart was hired, according to a statement.
Toy, a managing director, and Storper, a senior managing director, are both members of the investment committee.
Ross sold part of his ownership in the firm to INVESCO in 2006, retaining the investment team and “substantial
There's a number of fundraisings that have started out earlier this year or last year that have taken longer, and the ultimate [fundraising] goals have been reduced.
operating autonomy”, according to pension documents. Ross gave up “substantial portions” of the economics of the firm, but the investment team kept a majority of the carried interest, “sufficient to ensure proper incentives and alignment of interests”, the pension said. The investment team is expected to receive at least 60 percent of the carried interest in the fund, the pension said.
Sticking with what works
The firm uses a control strategy to invest in companies in bankruptcy or reorganisations, focusing on debt securities, distressed bank loans, trade claims and equity-linked securities. Average investment size is between $100 million and $200 million, though “a handful of outsized investments are to be expected”, according to Oregon pension documents.
WL Ross does not have a specific sector focus, though it has concentrated on healthcare, energy, banking and financial services, airline leasing, metals and mining and transportation sectors.
The firm has kept busy over the past year, including its recent partnering with The Yucaipa Companies to acquire a minority stake in Amalgamated Bank for $100 million. Amalgamated is the only American labor union-owned bank. In July, Ross was part of a consortium that took a 34.9 percent stake in Bank of Ireland in a deal that reportedly rescued the bank from nationalisation.
Last year, Ross pledged $1 billion to seize opportunities in the “dislocation” in the healthcare markets created by US President Barack Obama’s sweeping reform. Ross teamed up with Edwin “Mac” Crawford, former chairman of CVSCaremark, in the joint venture that was slated to co-invest and restructure healthcare companies.