Old Pro Plans to Clean Up When Market Crumbles
Mark DeCambre
07/05/07 - 12:35 PM EDT
Wall Street is wringing its hands over the credit markets, and many observers are anticipating a spillover from the subprime trauma that has befallen a pair of
Bear Stearns (BSC Quote) hedge funds.
But one man's doom and gloom is another man's opportunity. That's where Michael Heisley comes in. Heisley, the owner of the National Basketball Association's Memphis Grizzlies and a longtime investor in distressed assets, is betting that the market is headed for a fall, and he's about to put some of his funds to work.
"When you get way closer to the top and miles from the bottom, you're going to see a correction," Heisley tells
TheStreet.com.
Fueled by cheap debt and easy lending terms, leveraged buyouts have helped drive a wave of mergers and acquisitions, but Heisley thinks the party is about to end.
"I've been doing this for 30 years, and this time it's no different," Heisley comments.
The veteran investor, who is among the 400 richest men in America according to
Forbes, has formed Stony Lane Partners, with offices in New York and Chicago, to scout out future opportunities. He has also hired Jeff McDermott, the co-head of investment banking at
UBS (UBS Quote), to help identify deals.
Heisley is planning to have as much as $1 billion to put to work in manufacturing and industrial companies. The investment vehicle represents his first concerted platform for investing in distressed opportunities since he formed Heico Companies in 1979.
He could put as much as 10% of his own money in the venture, which is going to begin raising cash in mid-July with an eye toward getting up and running some time in the fall. McDermott resigned from UBS last week and plans to start work at Stony Lane after Independence Day.
Heisley wouldn't go as far as to predict when the collapse of the market might happen, but he said he wanted to be ready to collect the pieces. "There's just people out there writing deals that don't make sense," he adds.
McDermott says there's about $2.5 trillion in combined leveraged loans and high-yield debt in the market, and using average default rates, he estimates about $90 billion of the total could end up distressed.
Distressed-oriented hedge funds are capable of tackling $80 billion in deals, McDermott speculates. However, many of the investment vehicles also will find themselves under water should the markets collapse, because those funds will have to sell the debt securities they already own at a loss and attempt to raise fresh capital.
"If we just hit the average[default rate], we are going to have plenty of great opportunities," McDermott says. "I think this is a fantastic opportunity to put capital to work," he adds.
Heisley, a former computer salesman, made the biggest bet of his life a few decades ago when he sold his house for $150,000, then took out loans and purchased the industrial company Conco. Now, his net worth is about $1 billion, according to
Forbes.
He has known McDermott for nearly 20 years. Their relationship began when McDermott, then working at the infamous junk bond house Drexel Burnham Lambert in Los Angeles, called Heisley in 1989 to inquire about the investor's attempt to gain control of financially troubled industrial outfit Eastmet Corp.
"I just was just wondering how this guy got control in such an innovative way," McDermott said, explaining that he called up Heisley to introduce himself and his firm, only to be met by, "Who's Drexel?"
Heisley recounts that first meeting slightly differently, noting that McDermott began to wax technical about the multiple of earnings before interest, taxes, depreciation and amortization that he had paid to win a company. "He started going on about EBITDA, and I said, 'What the ---- is EBITDA?'" Heisley says. "I've learned a lot since then."
McDermott has been in investment banking for the past 23 years and views the move to Heisley's team as a unique opportunity to work on the other side of the deal.
"We're not smart enough to say when the [downward] cycle will start, but like subprime, it could be slow but inevitable," McDermott says.
