Hedge Funds

Hedge Fund Places Faith in Euro Zone

Nelson D. Schwatrz|The New York Times

Marc Lasry has never been afraid to go his own way.

The "Europe" sculpture by Belgian artist May Claerhout, showing a woman holding up the symbol of the Euro, stands outside the European Parliament building.
Adam Berry

While other Wall Streeters who supported President Obama in 2008 are rushing to distance themselves from the White House, Mr. Lasry remains one of the president’s most loyal backers.

He loaded up on Ford Motor bonds in late 2008 and early 2009 when it seemed that the company might join Chrysler and General Motors in bankruptcy, and made a bundle when it did not.

And after markets rallied in 2009 and 2010, instead of holding out for more gains, he took money off the table and returned $9 billion to investors in his hedge fund.

Now, even as Europe’s economic problems worsen and the markets punish giants like Spain and Italy, Mr. Lasry is betting on a long-term comeback for the Continent. This month, his hedge fund , Avenue Capital, finished raising nearly $3 billion for a fund that will invest in the debt of troubled European companies.

He has committed roughly $75 million of his own money to the new fund. That’s still a small part of his estimated $1.3 billion fortune, but Mr. Lasry is among a coterie of hedge fund and private equity managers who are gambling that the euro zone will stay intactand revive over the long run.

Besides Avenue, Blackstone and Kohlberg Kravis Roberts plan to buy assets in Europe and in some cases already have done so, as have other well-known money managers like Leon Black of Apollo Global Management.

Not that Mr. Lasry is expecting a quick turnaround for Europe. “It’s not a three-month bet or a six-month bet,” he said. “It’s a three- to five-year bet.”

Last week, renewed worries about Spain’s ability to keep borrowing sent stocks in Europe tumbling and sparked about a 1 percent decline Friday on Wall Street, though the major United States indexes were up slightly for the week. Mr. Lasry and Richard P. Furst, a senior portfolio manager at Avenue who directs the European strategy, say they expect worries about the Continent to keep rattling the markets, creating buying opportunities for the new fund.

So far, Mr. Lasry and Mr. Furst have put 25 percent to 30 percent of the fund to work, deploying an additional 5 percent or so each month.

“We could invest the whole fund today but you want to average in,” said Mr. Furst. “There will be relief rallies, but when the fear comes back in, we buy.”

The two money managers are using the broader fears about Europe to load up on troubled debt of companies in healthier countries in the region. The biggest chunk of the new fund’s assets have been invested in Britain, followed by France, with purchases in Sweden and other northern European nations, as well.

They are avoiding Greece, the country where the euro zone crisis began, and the home of one of their more notable mistakes, a losing bet in 2010 on the debt of a Greek casino operator in an earlier European fund. That position has steadily lost value as Greece’s outlook has deteriorated. Mr. Lasry and Mr. Furst are also steering clear of troubled giants like Spainand Italy.

Instead, they see opportunity as banks in Europe come under pressure from regulators to shrink their balance sheets and unload debt at deep discounts. Financial institutions also are focusing on home markets, prompting Italian and Spanish banks, for example, to sell off debt from other countries.

In Britain, Avenue’s bets include the debt of Punch Taverns as well as Travelodge, a hotel operator burdened by heavy borrowing from an unsuccessful 2006 $1.2 billion buyout by Dubai’s sovereign wealth fund.

“Travelodge is a good business but they’re having trouble in the current economic environment,” Mr. Lasry said. Another sizable investment is in Preem, the largest oil refiner in Sweden.

In Preem’s case, Avenue bought bonds from holders based in the United States, while Punch’s debt was purchased from British insurance companies. Travelodge’s debt was acquired from banks in Britain, Italy and Ireland.

In all three cases, Avenue’s traders benefited because investors were itching to get out of anything European, even though Sweden and Britain aren’t being directly buffeted by the problems in the euro zone and have their own currencies.

“Bad things happen in Spain and Greece, and people want to sell bonds in a refiner that’s doing well,” added Mr. Furst. “The perceived risk is greater than the actual risk.”

After founding Avenue in 1995, Mr. Lasry initially concentrated on distressed debt of American companies. He invested in Asia after the financial crisis there in the late 1990s, earning big profits when it roared back. He started an earlier European fund in 2004.

The companies Avenue aims for in Europe tend to be midsize, with valuations of $250 million to $1 billion. The first European fund has five-year returns with percentages in the high teens annually, according to Avenue.

The strategy requires investor patience — and an iron stomach when volatile markets produce roller-coaster returns for Avenue. In 2008, Avenue’s total portfolio dropped about 25 percent as investors fled all kinds of assets amid the collapse of Lehman Brothers and the overall market downturn.

When markets recovered in 2009 and big holdings like the Ford bonds soared in value, Avenue’s returns jumped by 66 percent, followed by a 20 percent gain in 2010. Returns dropped 10 percent last year, while Avenue is up 10 percent this year, according to the fund. In all, Avenue has $13 billion under management.

The "Europe" sculpture by Belgian artist May Claerhout, showing a woman holding up the symbol of the Euro, stands outside the European Parliament building.
Adam Berry

Over all, Mr. Lasry’s family and colleagues at the firm have more than $800 million in Avenue funds.

“Marc is definitely adventurous,” said David Bonderman, a fellow billionaire who helped found the buyout firm TPG Capital. Mr. Bonderman was Mr. Lasry’s boss when they managed money in the late 1980s for Robert M. Bass, whose family originally made its money in oil before diversifying. “He’s willing to take contrarian risks and he’s willing to act promptly. Avenue doesn’t have a big bureaucracy.”

“It’s still somewhat early, but if you have a feeling that Europe and the euro aren’t going to collapse, it’s appealing,” Mr. Bonderman said.

“He looks at every dollar he has under management like it’s his own dollar, and that gives him a certain credibility in terms of raising money from investors and keeping them satisfied over the long term,” said Blair W. Effron, a co-founder of Centerview Partners, a boutique investment bank.

Mr. Effron, who is also Mr. Lasry’s brother-in-law, adds that he is a competitive athlete, especially in basketball and tennis.

Mr. Lasry, 52, was born in Morocco and came to the United States as a child. He trained as a lawyer before turning to distressed investing. About once a month, he travels to London, where Avenue has a staff of about 20 that focuses on opportunities in Europe. Over all, the firm employs 275.

From 2006 to 2008, one of those employees included Chelsea Clinton, and Mr. Lasry remains close to the Clinton family as well as President Obama. One of Mr. Lasry’s five children recently worked for the White House.

While other prominent Wall Streeters like Jamie Dimon, the chief executive of JPMorgan Chase, have backed away from the president, and others complain that the White House has used bankers as a piñata, Mr. Lasry is more like the last man standing.

Last month, he held a $40,000 a plate fund-raiser for President Obama at Mr. Lasry’s Fifth Avenue home, and later this month he plans to hold another fund-raiser for the president at Nomad, a Manhattan restaurant.

Unlike his fellow Masters of the Universe, you won’t find Mr. Lasry spending summers on Raiders Row or other luxurious Hamptons hangouts. He prefers lower-key Westport, Conn.

“I’m a value guy,” he joked. “I can’t afford the Hamptons.”

As for Europe, he seems happy to wait out the waves of fear, like last week’s anxiety about Spain.

“Europe isn’t going away, and the companies aren’t going away,” Mr. Lasry said. “You can never time a bottom. What you can do is a time a cycle and five years from now, people will say, ‘Why didn’t I buy?’ ”