Wilbur Ross dismisses many of the private equity financiers who made earlier efforts to buy up the North American auto parts supply chain.
They loaded the industry with debt through debt financing and leveraged buyouts - deals that allowed them to buy companies using large amounts of borrowed money.
The 1980s and 1990s were the decades of corporate debt financing. Many warned that bankruptcies would follow this decade.
``It's a fundamental error,'' Ross, chief executive officer of WL Ross & Co. LLC, said of cyclical companies such as auto parts makers to have heavily leveraged balance sheets. An economic shock, such as spiking steel prices, can then sink a company.
Auto parts maker Gentex Corp. has no debt on its book and for good reason, said Chief Financial Officer Enoch Jen.
``Our success has been due to the introduction of new technology and products and we recognize that we are taking a risk so we want to take financial risk off the table,'' he said in a recent interview with Automotive News.
The toll of auto parts bankruptcy filings this past year included four whose annual sales were in excess of $3.2 billion, according to Bankruptcydata.com. Delphi Corp., North America's largest supplier, filed Oct. 8 in New York.
Auto parts makers attracted the attention of buyout specialists because of the industry's robust cash flows and low values. Many parts makers can be bought for four to five times their annual cash flow, well below many industries.
A lucky few financial sponsors scored big.
Blackstone Group, of New York successfully financed air-bag and brake supplier TRW Automotive Inc. and American Axle & Manufacturing Holdings Inc.
But many others have taken a bath. That's because they were bought with nearly all debt and interest payments were so large that the company's operating cash flows were unable to meet the obligation.
One of the biggest losers was David Stockman, the former Reagan administration budget czar turned corporate financier. He and the Heartland Industrial Partners he co-founded poured half their investment fund's $1.4 billion into supplier Collins & Aikman Corp. only to have it file for Chapter 11 this past May.
Stockman's other major investment - chassis, engine and transmission parts maker Metaldyne Corp., of Plymouth, Mich. - has been losing money. It posted an $18 million loss through the first nine months of 2005, compared with a $25 million loss for the same period last year. Standard & Poor's in March downgraded the company to ``B'' with a negative outlook.
Says Ross, ``The day of the [leveraged buyout] is over.''