Cerberus emerges as a PE powerhouse

Monday’s landmark GMAC acquisition has thrust the reconstituted hedge fund into the spotlight.

When Cerberus Capital Management emerged the victor in the battle for control of General Motors Acceptance Corp (GMAC) yesterday, it was a major milestone in the progression of Cerberus from small-time distressed lender to big-time private equity competitor.

The $14 billion GMAC deal by a Cerberus-led group of investors, $6 billion of it coming from Cerberus, means that the firm will now control what amounts to the seventh-largest financial institution in the US based on assets.

With the deal Cerberus has definitively positioned itself as a big player on the private equity scene, a long way from its humble origins as a small hedge fund dealing mostly in debt. Though the secretive firm still doesn’t even have a web site, it’s quickly gaining a reputation as a smart firm adept at finding opportunity in exceedingly complex transactions.

“These are people who can do difficult deals,” said Willem deVogel, president of Three Cities Research, which worked with Cerberus when the two firms jointly acquired bankrupt rail manufacturer ABC-Naco in 2002. “These are very smart people who act extremely rationally and quickly.”

The history of Cerberus is in many ways the story of one man, Stephen Feinberg. In 1992 Feinberg, along with co-founder William Richter, launched Cerberus as a fringe vulture fund with about $10 million. The name comes from that of the three-headed dog which guards the gates of Hades in Greek mythology. The firm has said the symbol was chosen because one of the heads was always awake, just as someone would always be awake to watch Cerberus’ investments. But to many the creature has become a symbol of the firm’s fierce reputation.

Cerberus spent its first decade investing in distressed debt and lending to struggling companies at high rates. Some of the firm’s early investments included adult cable channels and Penthouse magazine. Its initial acquisitions were often won at bankruptcy court, where Feinberg would swoop in to grab portions of companies whose risky debt he had purchased. He soon developed a strategy of changing management and forcing improvements, making a killing in the process. Over time, what had started as a typical hedge fund quickly evolved into a buyout firm that today looks more like an integrated multinational conglomerate than a traditional financial investor.

Today Cerberus is a large and very politically connected firm that has investments worldwide in sportswear, paper products, military services, real estate, energy, retail, glassmaking, transportation and building products. The firm has more than $18 billion of investors’ assets on its books, and according to an estimate by BusinessWeek, Cerberus controls companies that bring in a combined $30 billion in annual sales at least.

Some of Cerberus’ more high-profile companies include the National and Alamo car-rental chains, Mervyn’s department stores, a stake in Albertson’s grocery stores and cable operator Galaxy Cable.

The firm has recently raised its profile by naming as chairman former US vice president Dan Quayle, who has been successful in using his international connections to score some of Cerberus’ biggest deals, including the purchase of a 62 percent stake in Japan’s Aozora Bank in 2003.

That strategic acquisition has enabled Cerberus to become a major lender to its own companies. In fact, Aozora will contribute $1 billion of its own capital to the GMAC deal. Feinberg has proven he can quickly come up with cash in an increasingly competitive private equity market.