Given the serious issues that face suppliers, it's amazing that an outside investor such as Wilbur Ross may bring a flood of private equity capital to the troubled parts industry, perhaps even investing in cast-off Visteon manufacturing operations. The fresh infusion of capital will be welcome, but there will be costs.
Ross is chairman of WL Ross & Co. LLC, a New York investment firm that manages more than $2 billion in assets. The company has bought $750 million, roughly 10 percent, of the bank debt of Collins & Aikman Corp., which has sought bankruptcy protection under Chapter 11.
What Ross did in the U.S. steel industry may be a template for what he'll do with auto suppliers. To generate an acceptable return on investment, he likely will acquire several troubled operations, combine them where possible and then strip out costs by eliminating facilities, benefits and employees. That will enrich him, impoverish communities and individuals, and leave taxpayers on the hook to cover residual pension liabilities and other social costs.
The track record of investors using private equity to roll up troubled suppliers has been spotty at best. Collins & Aikman was once a gleam in financier David Stockman's eye. Peregrine Inc. and Oxford Automotive also imploded.
By some estimates, hedge funds and other sources of private equity have as much as $20 billion looking for investment opportunities in the auto industry. That could buy a lot of fixer-uppers. Unfortunately, private equity capital doesn't always have the patience or character to accomplish what Metaldyne Corp. and American Axle & Manufacturing Holdings Inc. have achieved. Those suppliers used private capital to build successful businesses.
That's what the industry really needs.