Cerberus launches fifth fund targeting $3.75bn

The firm has worked hard after receiving an investment period extension last year to bring its fourth fund into profitability after the headline-grabbing Chrysler bankruptcy and the government bailout of GMAC Financial.

Cerberus Capital Management has come back to market with its fifth private equity fund, attempting to cast off the stigma of the bankruptcy of Chrysler and the government bailout of GMAC Financial.

Cerberus is targeting $3.75 billion, less than the $7.5 billion the firm collected in 2007 for its fourth fund. The firm sent PPMs to existing investors last week.

Fund IV is more than 70 percent invested, according to an LP. LPs granted the firm an investment-period extension last summer on Fund IV to November 2011 to give the firm more time to find deals for the fourth fund.

One LP said the extension was necessary for Cerberus to keep working on Fund IV and get its performance up before coming back to market with a fifth fund. “Clearly, they’ve been working on that,” the LP said.

LPs say Cerberus used its extended investment period well. The firm has been able to guide its fourth fund, which looked like trouble after Chrysler’s bankruptcy and a government bailout at GMAC, into profitability, though not yet into stellar performance territory, according to another investor.

Cerberus Institutional Partners IV was producing an internal rate of return since inception of 6.51 percent, according to performance information as of 30 September, 2010, from the California State Teachers’ Retirement System. That’s compared to an almost 30 percent loss the fund was generating in 2008, according to the Wall Street Journal. Fund IV was generating a negative 10.13 percent IRR as of 30 June 2009, according to the Public Employee Retirement System of Idaho.

The firm has been successful in turning around what appeared to be financially devastating situations.

Cerberus led a consortium – including a big group of co-investors — that acquired Chrysler for $7.4 billion in 2007. Chrysler declared bankruptcy in 2009 and emerged from Chapter 11 with help from the US government. Cerberus “donated” its equity in Chrysler to help the company restructure.

However, the firm retained its ownership of Chrysler Financial, the lending and loan foreclosure business. Cerberus sold Chrysler Financial late last year for $6.3 billion to Canada’s TD Bank Group, holding onto about $1 billion of assets in the company. Sources said this deal, which closed this month, has allowed Cerberus to break even on its Chrysler investment.

Cerberus also had trouble with its investment in GMAC, the former financing arm of General Motors, into which the firm led a consortium that bought a 51 percent stake for $14 billion in 2006. GMAC, teetering under its enormous debt load, received about $16 billion of aid from the US government, and Cerberus reduced its exposure to the company, retaining a minority stake.

GMAC was renamed Ally Financial and filed for an initial public offering last month that could provide its owners – including the US Treasury — with a soft landing.

Significantly, amid the turmoil of the economic downturn and its struggling investments, Cerberus made a solid bet on residential mortgage debt, hiring a team and buying loads of residential mortgage bonds at steep discounts. Those investments paid off, giving the firm gains of $952 million in 2010 and $850 so far in 2011, according to an article in the WSJ.

It remains to be seen if LPs will stick with Cerberus this time around after the roller coaster of the past few years. One LP, while lauding the strong turnaround of Fund IV, could not say whether the institution would be back for Fund V.