CalPERS gives Cerberus a big boost

The $232bn system has formed a new relationship with Cerberus with a $400m commitment into the firm’s fifth fund, a sign of confidence as the firm works to hit its $3.75bn target.

Cerberus Capital Management received a big vote of confidence from the California Public Employees’ Retirement System, which recently committed $400 million to the firm’s fifth fund, targeting $3.75 billion.

The commitment is significant for its size, and also because it represents CalPERS’ first to Cerberus, meaning the system has formed a new relationship at a time when it has worked to pare down the number of relationships it has in its private equity portfolio.

The $400 million was also included in the first closing of Fund V, which occurred in April on $1.1 billion, lending even more weight to the commitment.

Over all, this signal from CalPERS of its trust in Cerberus could be just the spark the firm needed to drive the fundraising to its final target or even to the hard-cap.

The firm has come far since last year, when it launched Fund V with the challenge of having to convince skeptical LPs that the firm could generate quality returns despite a few past investments that ended up making headlines when they had to be bailed out by the US government — Chrysler and GMAC Financial.

The mid-market is a good area for us, that's where we want to stay.

Stephen Feinberg

Cerberus ultimately broke even on its investment in Chrysler after selling the company’s lending and loan foreclosure business to Canada’s TD Bank Group, holding onto about $1 billion of assets from the company. GMAC received about $16 billion of aid from the US government after teetering under its debt load and Cerberus reduced its stake, retaining a minority position.

Fund IV, a vintage 2006 vehicle, was generating a net internal rate of return of 6.4 percent and an investment multiple of 1.25x as of 30 September, 2011, according to documents from the Pennsylvania Public School Employees' Retirement System.

Importantly, firm head Stephen Feinberg has been open about some of the lessons he learned through the tough times. He said at an industry conference last year the firm bought too many “cyclical” businesses, which hurt fund performance after the markets turned down in 2008. Cerberus going forward would stick strictly to the mid-market when doing deals and not have as many businesses so sensitive to the broader economy, he said.

“The mid-market is a good area for us, that’s where we want to stay,” Feinberg said. “We’ll be focusing on less

Stephen
Feinberg

economically sensitive businesses … our strength is in operational improvements and execution, we want to take out as much of the macro risk as possible.”

Fund V has a broad mandate to invest in control-oriented private equity as well as operational turnarounds, distressed corporate debt, European non-performing loans and distressed mortgage investment.

Cerberus has been raising more than just Fund V – the firm closed on its latest mid-market lending fund late last year on about $1.1 billion and also is raising a real estate fund. Cerberus also has raised more than $1 billion in the last eight months for a fund targeting investments in residential mortgage-backed securities.