Inside One Very Private Equity Firm

Centerbridge Partners is one of those private equity firms that takes the “private” part just as seriously as the “equity” part. The New York firm’s partners rarely comment in the media, and even Centerbridge’s website is password protected. The radio silence is likely related to the volatile nature of Centerbridge’s deals. The distressed debt-buyout hybrid fund has become embroiled in some contentious bankruptcy proceedings, including last year’s CIT drama.

But Centerbridge is in the market with its second fund, and nothing draws a buyout pro out of media exile like fundraising. Yesterday Jeffrey Aronson, a founding partner, pulled back the curtain at the DBR Restructuring & Turnaround Summit in New York, discussing a “W-shaped” default cycle, sour grapes over CIT and long hold times.

Here are some highlights:

Aronson believes this default cycle will have a long tail. Buyouts firms were able to refinance much of their debt last year, but not all of the half-trillion dollars of LBO debt maturing between 2011 and 2015 will be repaid. Centerbridge is expecting the default rate to look like a “W,” meaning after the early 2009 spike and second-half decline, defaults will rise again, possibly to an even higher level.

  • The “Golden Age” for distressed investing has passed for coattail riders, but not for disciplined, experienced investors, he said. “Last year anyone could have bought something, all you needed was some courage,” he said. “That’s not the case today, but that doesn’t mean there’s nothing to do.” Good distressed plays are harder to find, and the easy money is over, he said.
  • Centerbridge is interested in businesses that are in a cyclical decline, but not a secular decline. Apparently that means Centerbridge believes auto parts is not experiencing secular decline, since the firm owns a stake in Dana Corp.
  • The firm believes it’s differentiated because its founding partners matched their backgrounds in distressed debt (Angelo Gordon) and operational private equity (Blackstone Group). The firm has a sophisticated understanding of markets and trading, which foreign to traditional buyout firms, Aronson said. For that reason, Centerbridge stays invested in its companies longer than most distressed debt investors. That’s true with CIT, where the firm plans to remain an investor for some time, Aronson said.
  • Centerbridge is the four largest equity holder in CIT, and it hasn’t sold any of its stock since the restructuring was completed. He said that even though some bondholders had “sour grapes” over the deal’s pricing, the key to Centerbridge was not the pricing as much as it was attractive covenants placing Centerbridge in the driver’s seat through CIT’s restructuring.
  • Centerbridge had gathered $467 million toward its second fund as of last July. The vehicle has no set target, according to an SEC filing, but it follows a $3.2 billion debut fund, raised in 2006. Park Hill is its placement agent.

Sidenote: Steve Rattner also spoke at the conference about his experience as President Obama’s car czar. He naturally shot down my series of questions on Quadrangle, Loglisci, and the pay-to-play scandal. He also didn’t give any hints as to his future plans (he’s currently enjoying funemployment, it seems). As Dan reported yesterday, Rattner and Quadrangle are still under investigation by Andrew Cuomo for involvement in the scandal that never dies. You can read about that and David Loglisci’s guilty plea here.