Cerberus Shares Chrysler, GMAC Pain by Shifting Equity to Investors, Report Says; Cerberus Denies It

Cerberus Shares Chrysler, GMAC Pain by Shifting Equity to Investors, Report Says; Cerberus Denies It

By Michelle Krebs June 2, 2008

The fallout from troubles at Chrysler and GMAC could extend beyond Cerberus Capital Management which owns the bulk of both as Cerberus has sold "significantly" more than half its equity to about 90 investors, the Financial Times reported Monday.

However, Cerberus quickly Monday morning insisted the report is not true. "Cerberus has not sold any equity in Chrysler," a Chrysler official speaking on condition of anonymity told trade publication Automotive News. "There are always co-investors at the time of the transactions so when they originally purchased 80.1 percent of Chrysler, there were co-investors at that time. They still own 80.1 percent."

Although Cerberus invested $7.4 billion in both transactions, it has since sold on the majority of its equity, people familiar with the situation told the London newspaper. By selling equity to others, Cerberus reduced its risks and earned fees from investors, who paid as much as $1 billion for stakes in one or both of the companies.

However, even with the sales, the fate of both companies remains crucially important for Cerberus, which has $27 billion under management, the paper reported. And both deals have been a disappointment to Cerberus. GMAC's mortgage financing arm, ResCap, has been hit hard by the credit crunch. Chrysler has been buffeted by deteriorating sales due to a slumping U.S. economy spurred by soaring gas prices.

Those buying stakes included some of Cerberus's own investors as well as banks, hedge funds and other asset managers, the paper said. The buying group included Citigroup's private equity arm, Cerberus-controlled Aozora Bank of Japan, Avenue Capital, Cyrus Capital Partners, DB Zwirn, Franklin Templeton Investments,  Oak Hill Advisors, Oak Hill Capital Partners, Satellite Capital, Seneca Capital and York Capital, people familiar with the investments told the paper. Investors who declined to take part in the deals included Golden Tree Asset Management and Oaktree Capital Management.

Cerberus also spread the risks from deals across several of its funds since no one investment can account for more than 5 percent of any single Cerberus fund, a spokesman for the private equity firm told the paper.

Most of those joining the GMAC deal in 2006 did not have much time to do their due diligence.

Instead, Cerberus invited about 50 hedge funds to its Park Avenue office for a presentation by its chief administrative officer, Seth Plattus. "It was a 'trust me' kind of trade," one unidentified investor who bought a small piece of GMAC told the paper. "You had no time to do real due diligence. But it was a hot deal and everybody wanted in as part of the gang."

Many of the people who took part in the deal were friends of Steve Feinberg, founder of Cerberus, and said they invested as a sign of faith in him, the paper reported. "They had the wind at their back and got carried away by the momentum," the unnamed head of one fund of funds that declined to take part told the paper. "There was an element of the greater fool theory to it."

 

 

Michelle Krebs:  is Editor-in-Chief of AutoObserver.com. Follow @AutoObserver on Twitter.