Marc Lasry, founder of Avenue Capital Group LLC, is heading into the end of the year with more cash than his firm usually holds, to take advantage of a possible market selloff should U.S. lawmakers fail to agree on steps to reduce the country’s debt.
Avenue Capital has about 20 percent to 25 percent of its assets in cash, compared with the 15 percent it usually holds, Lasry said at the Bloomberg Hedge Funds Summit in New York today. The firm anticipates that volatility will increase amid the prospect of more than $600 billion in automatic tax increases and spending cuts set to take effect in January if Congress doesn’t act.
“Hopefully we’ll be able to take advantage of that by buying things on the cheap,” Lasry said. Avenue Capital managed about $12 billion as of Oct. 31, according to the New York-based firm’s website.
President Barack Obama is hardening his stance in his first post-election confrontation with Republicans, declaring in an interview on Bloomberg Television yesterday that he will make no deal on the country’s fiscal future unless congressional leaders first accept tax-rate increases on top earners.
Lasry gathered a group of Wall Street executives who met with White House officials two days ago to discuss resolution of the so-called fiscal cliff.
“You’ll find a deal get done later as opposed to early,” Lasry said today. “The problem in D.C. is that no one wants to appear weak.”
There are about four weeks left to break the logjam. The Congressional Budget Office has warned that failing to do so would pitch the U.S. economy into a recession. Compromise would mean the president and Democrats accept more spending reductions on entitlement programs such as Medicare and Republicans agree to tax increases.
Concern about the budget debate has whipsawed stocks in the past month. The Standard & Poor’s 500 Index (SPX) slid 5.3 percent from its closing level on the day of the Nov. 6 elections through Nov. 15.
The business community is looking for a “credible deal,” which means achievable numbers and a commitment to deficit reduction within a reasonable time frame, Gregory Fleming, president of Morgan Stanley Wealth Management, said at the conference today.
“They’d like to see some real give on both sides to ensure that the debate isn’t just going to get pushed into January and further into next year,” he said. Such a deal may “slingshot” the economy ahead.
Lasry said investors today have to take more risk than they did five years ago to generate 8 percent to 10 percent returns that pension funds may need to meet their obligations. He said Avenue Capital is investing in senior secured debt in Europe, where the perception of risk may exceed reality.
“You’re getting overpaid for the risk to invest in senior secured debt,” Lasry said. He said he expects Europe to “muddle through” over the next few years, which means investors are likely to do well. Lasry also said his firm is investing in Northern European countries such as the U.K., Germany and Switzerland, where the legal systems are stronger.
The legal system in Southern European countries such as Italy is a deterrent to investing in that region compared with Northern Europe, Lasry said.
“You absolutely want to visit,” Lasry said of Italy. “It’s just really hard to invest there because laws change.”
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