Cerberus Capital Management LP plans to raise money in the fourth quarter to buy distressed companies and securities after losses on investments such as Chrysler LLC and GMAC LLC led to US$4.77 billion in client redemptions.
The withdrawal requests, representing 60 percent of the US$7.9 billion in its Cerberus Partners LP and Cerberus Institutional LP funds, came mostly from other managers who need to pay off investors, said Mark Neporent, the New York-based firm’s chief operating officer and general counsel. Institutions and wealthy individuals are still looking to invest with Cerberus, which oversees US$24.3 billion, including a US$1 billion fund raised last month, he said.
“These redemptions are not a reflection of a lack of confidence, but a reflection of demands of liquidity” from the funds of funds that had placed clients’ cash with Cerberus, Neporent said in an interview on Saturday.
Cerberus, founded in 1992 by former Drexel Burnham Lambert Inc banker Stephen Feinberg, stayed out of the limelight as it focused on buying troubled companies, debt and real estate.
It stumbled with its two highest-profile deals: leading separate groups that invested almost US$15 billion combined for controlling stakes in automaker Chrysler and GMAC, the former finance arm of General Motors Co.
The firm wrote off the majority of its Chrysler stake as the Auburn Hills, Michigan-based company headed into a US government-orchestrated bankruptcy. Its stake in GMAC was diluted when the Detroit-based lender was bailed out by the US and converted into a bank holding company. They were rare mistakes for Feinberg, 49, whose firm has generated average annual returns of about 20 percent since its inception, Neporent said.
Cerberus manages US$19.6 billion in distressed funds that generally buy the same assets, including corporate bonds, bank loans and private companies, said Neporent, 52. It also runs real estate and lending funds.
Neporent said the new funds will target distressed assets. He declined to provide details, including how much money the firm was seeking to raise.
Cerberus Partners and Cerberus International lost more than 20 percent last year and largely stopped making investments in the fourth quarter, Neporent said. The funds, which capped withdrawals in December, are little changed this year while the firm’s other distressed funds have gained 18 percent.
CHOICE FOR INVESTORS
The funds had permitted redemptions semiannually with six months’ notice, which is in line with many hedge funds. Its other funds have four-year lock-ups and trade out of their investments over six to eight years, which is similar to buyout firms.
“We’ve never viewed ourselves as a traditional private-equity fund,” Neporent said.
The fund that was completed in July has a four-year lock-up.
Cerberus, named after the mythical three-headed dog that guards the gates of hell, asked clients of the funds that suspended redemptions in July whether they wanted to continue their investment with a lower fee. Those who wanted to withdraw would have to wait for assets to be liquidated before getting back all their money, a process that could take as long as four years.
The firm’s partners hold about 15 percent of the funds, or US$1.18 billion, and aren’t withdrawing, Neporent said. Investors with more than 70 percent of the remaining assets said they wanted out.
FEE WAIVER
Clients of the suspended funds who want Cerberus to continue to manage their money won’t pay performance fees, typically 20 percent of profits, until their losses are recouped, Neporent said. After that, Cerberus will lower the performance fees for a period of time that hasn’t been made final.
Clients who want to withdraw will be shifted into a separate fund that will return cash as assets are sold. Cerberus will take an annual management fee of 0.5 percent of assets, according to an Aug. 27 letter to investors.
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