Cerebus
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Steve Feinberg might regret naming his private equity firm after a fearsome three-headed mythical dog, as he once professed to employees, but it might be his only regret to date as far as Cerberus is concerned. Cerberus has steadily been rising among the Wall Street ranks to become one of the world’s most respected private equity firms. While many of its peers have bought out companies in order to strip assets and sell on for a profit, Cerberus builds its reputation on identifying firms that are undervalued, and assisting in rejuvenating them by working with current management. It has demonstrated a preference for holding profitable investments with operational upside. “They don’t go in looking for an exit,” says a person familiar with the firm. “They look to buy, fix and hold.” Take Aozora Bank, the former failed Nippon Credit Bank. Cerberus bought Softbank’s stake in the Japanese bank in 2003 when it was on the brink of insolvency, raising its holding to 62%. Under Cerberus’s guidance, Aozora expanded its risk management expertise and refocused the bank on corporate lending and specialized financing services. Restoring operational excellence at the bank increased net income and lowered non-performing loans.
In 2005, the bank earned a record ¥120 billion ($971.6 million) and, in October 2006, Cerberus took the firm public, raising ¥351 billion in Japan’s largest initial public offering since 1998. And Cerberus still owns a 37% stake – the largest holder – an indication of the firm’s confidence in the bank’s future. This also provides upside as Aozora executes on its growth strategy.
Whereas other private equity firms might assume existing management teams are of little value, Cerberus respects what current management might bring, such as institutional memory and customer relationships. Cerberus also recognizes that even the best management teams can find themselves challenged when market sentiment turns against them.
“Cerberus represents patient capital. We take a long-term view,” says John W Snow, chairman of Cerberus Capital. “Often what we find in public markets today is that they do not give management the time to implement their longer-term strategies. And Cerberus does.”
This ethos of supporting management was instilled by Feinberg from the firm’s inception in 1992 when it launched with just $10 million. Feinberg grew up in a modest family that taught him a strong work ethic. People close to Feinberg report that although he is a Princeton and Drexel Burnham alumnus the Cerberus leader describes himself as “blue collar,” noting that his heroes are his father and uncles who fought in tough campaigns during the Second World War. “Steve has a deep respect for the people who actually do the hard work,” says a source close to Cerberus.
As part of this strategy, Cerberus has built up a 150-strong team of operations experts in house comprising former top executives across different industries who can augment management capabilities, rather than replacing them. Snow perhaps best exemplifies this strategy of bringing in former heads of business. He is the former US Treasury secretary and chief executive of railroad company CSX Transportation. Among its other staff are former C-level executives from Chrysler Group, Louisiana Pacific, Prudential PLC, P&G, and Bank of America.
“Our operations team is an integral part of our investment process,” says Snow. “Through their relationships across a wide range of industries, they help to identify potential investment opportunities. They understand the industries that potential portfolio companies operate in.”
Cerberus’s expertise might be losing it friends in private equity as it increasingly snaps up deals in unexpected places. In April 2006, General Motors sold a 51% stake in its GMAC finance division to a consortium led by Cerberus, when it was largely expected that Kohlberg Kravis Roberts, which had just bought out most of GMAC’s commercial mortgage unit, would emerge as the buyer. GMAC’s $300 billion balance sheet was the largest ever acquired by a private equity firm, and the deal was named as one of Euromoney’s six deals of 2006. One person involved in the transaction says: “Feinberg made it clear to everyone working on the transaction that for Cerberus, GMAC was more than just a deal. The future of an American icon was at stake.”
Undeterred by the somewhat cursed nature of the automotive industry, Cerberus also announced the buyout of Chrysler from DaimlerChrysler in April this year, beneath the noses of many of the larger private equity firms that had been preparing bids. For $7.4 billion, Cerberus acquired an 80% stake in Chrysler, hoping to turn the business around and, some say, reshape the US automotive industry.
Snow says: “We are aware that Chrysler faces significant challenges but we are confident that they can be overcome. A private investment firm like Cerberus will provide management with the opportunity to focus on their long-term plans, rather than the pressures of short-term earnings expectations.”
While the auto industry, and US manufacturing in general, has fallen out of favour with many, Cerberus sees opportunity for future investment and value creation. “While each opportunity is evaluated on its own merits, Cerberus believes in the inherent strength of US manufacturing and of the US auto industry,” says Snow.
