Sense on Cents

Oh how the mighty have fallen.

Cerberus was once one of the highest profile private equity and hedge fund players on Wall Street. Today, Cerberus is being seriously humbled.

Cerberus entered the public realm late last year given the problems within the automotive industry. Cerberus had taken a controlling stake in Chrysler. I opened the doors on this private equity machine last December 11th by writing, “Who and What is Cerberus…??” I wrote:

While the debate in Washington over a potential rescue package of the domestic auto industry seems to be ending and a short term “bridge loan” is being arranged, I empathize with the innocent laborers and families within these companies and across the industry who have truly suffered from the imprudent management of this business model. One outfit that is heavily involved in this industry, though, deserves no sympathy. Everybody knows General Motors, Ford, and Chrysler, but not many people know of Cerberus Capital Management.

GM and Ford are publicly traded entities. Chrysler, however, is 80% owned by one of the largest private equity funds in the business. If any company understands risk, the cost of capital, business models, restructurings, leveraged buyouts, asset liquidations, return on equity, etc it is Cerberus Capital Management.

Fast forward 9 months and a large percentage of investors in Cerberus have seen enough and want their money back. The Wall Street Journal highlights this development in writing Cerberus Investors Choose to Withdraw:

Clients of Cerberus Capital Management’s core hedge funds have opted to withdraw the majority of money from the funds, marking a sharp rebuke to the weakened firm and its boss Stephen Feinberg.

Clients owning more than $4 billion of the $7.7 billion in assets in the Cerberus Partners hedge funds have opted to liquidate their holdings, rather than allow Cerberus to collect its typical fees and continue making new investments, say people familiar with the matter.

Mr. Feinberg, striking an apologetic tone, personally called Cerberus clients this week to share the tally, which was current as of Friday and could still change, according to people familiar with the discussions. Cerberus executives hope that some investors who have opted for withdrawals can be convinced to change their minds, people familiar with the matter said.

Investors had been told they had until this week to vote on the fate of their hedge-fund holdings, a choice that was fraught, the people say. The tradeoff: liquidate now for an uncertain payout, or stay with Cerberus and roll the dice on a new fund.

That a significant portion of investors decided to walk is a comedown for Mr. Feinberg and Cerberus, long one of the biggest and most successful private equity and hedge-fund firms and best known of late for its two failed investments in Chrysler LLC and GMAC LLC. Just a few years ago, investors clamored to get into Mr. Feinberg’s funds, as the firm benefited from a boom in hedge funds and its own strong track record.

The development also shows the difficulties hedge-fund investors have getting out of so-called illiquid assets, which often are heavily concentrated in a few companies or involve stakes in private companies and which have been hard to sell except at steep discounts during the financial crisis.

Will these withdrawals signal the end of Cerberus as a viable entity? Not necessarily so. That said, the rally in the markets does not necessarily mean that Cerberus investors will benefit. Why? The cost of liquidity can be extremely high during challenging markets. Rest assured, despite the ongoing rally in the major market averages, the markets overall remain challenged.

Just ask Stephen Feinberg and his partners at Cerberus.

LD

This entry was posted on Monday, August 24th, 2009 at 12:38 PM and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.