Finance & economicsJul 31st 2010 edition
Out of the doghouse?
After a few conspicuous flops, a private-equity firm gets back to its roots
"PEOPLE were prematurely writing the epitaph of our investments and our firm," says Mark Neporent of Cerberus, a private-equity firm and hedge fund. "Hopefully it's pretty apparent to people that we're back." The firm, named after the three-headed dog in Greek mythology that guards the gates of the underworld, has spent the past two years trying to claw its way out of hell. Two of its largest and best known investments tanked. Chrysler, a carmaker, filed for bankruptcy and GMAC, General Motors' financing arm, had to be rescued by the American government, which now owns most of it. For Cerberus, an intensely private firm, these were very public embarrassments.
Some wondered whether the embattled firm would go the way of those two investments. But Cerberus's flagship private-equity fund rebounded last year, making up for its 25% fall in 2008. (Its main hedge fund was still down by around 4% in 2009.) Its recent sale of Talecris Biotherapeutics, a blood-plasma company it bought in 2005 for $600m, to a Spanish health-care company for $3.4 billion has added to a sense of revival. Nor has the firm given up hope on Chrysler. Cerberus still has control of Chrysler Financial, the company's finance arm, and there is talk of turning it into a diversified financial firm. Some say Cerberus may be able to recoup its money or even record a profit on its $7.4 billion investment in Chrysler if it plays its card right on Chrysler Financial.
Cerberus will still be a different animal in future, however. Steve Feinberg, its notoriously reclusive boss, co-founded the firm in 1992 as a hedge fund that traded distressed debt. Only later did it begin to buy distressed companies, gradually growing into one of the world's largest private-equity firms with $23 billion under management. As its investments in GMAC and Chrysler faltered, however, the firm started to go back to its roots. In late 2008 it saw an opportunity to profit from mortgage-backed securities, hiring around 30 people to focus on that. Insiders say that over the past two years the firm has paid more attention to its credit and distressed-debt businesses than buy-outs. Last year it raised a $1 billion distressed-debt fund.
The public scrutiny and press coverage the firm has received over the past few years has also changed the size of the buy-out deals it will consider. Like other private-equity firms, the firm has little choice right now but to focus on buying middle-market companies. But whereas some private-equity firms may eventually go back to the high-profile "mega-deals" of the boom days, Cerberus is unlikely to do so. "We despise all the public attention we are getting," the firm wrote in a letter to investors in January 2008. As Cerberus has learned to its cost, it is hard to stay out of the spotlight with buy-outs of iconic companies.
Despite its painful brush with the American government, which injected $31 billion of aid into Chrysler and GMAC, Cerberus is looking in that direction for growth. In March it bought Caritas Christi Health Care, a chain of non-profit hospitals, for $830m, anticipating that health-care reform would drive demand for services for the sick. And in April Cerberus bought DynCorp, a defence contractor, for $1.5 billion. Cerberus already counts several ex-government officials in its ranks: John Snow, a former treasury secretary, is chairman, and Dan Quayle, a former vice-president, heads its international arm. "We're making a bet that government is going to increasingly rely on the private sector to fulfil more of its functions," says Mr Neporent.
Whether investors can be persuaded to put money their way depends on more than the clarity of Cerberus's strategy, however. Faced with a flood of redemption requests in 2008 by investors who needed liquidity or simply wanted out, Cerberus suspended withdrawals. Last year it gave investors the option of putting their money in a new fund with lower fees or withdrawing their money with the caveat that the process could take years. Some investors are fed up with the firm's culture of secrecy and say they want more disclosure. "The two things investors want from hedge funds now are transparency and liquidity," says one investor. Cerberus, he says, "fails on both." The firm is currently raising another fund; it has to show that such criticisms are toothless before it can truly claim to be back.
This article appeared in the Finance & economics section of the print edition under the headline "Out of the doghouse?"
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