Cerberus Drags Private Equity Firms into Spotlight

The troubled U.S. auto giant Chrysler is being bought by an investment group that most people have never heard of: Cerberus Capital Management. In recent years, Cerberus has been on a tear, buying up billions of dollars worth of companies that employ hundreds of thousands of people. Other so-called "private equity groups" have been doing the same, making private equity one of the most powerful forces in the financial world. But some experts say there is cause for concern.

Three-Headed Dog

"Cerberus" might sound like one of those vague business names that doesn't mean anything. But the name refers to the mythical three-headed dog that guards the gates to hell. It's not very touchy-feely — but neither is the ultra-secretive and bare-knuckle world of private equity.

"It certainly creates a great image," says Harvard Business School Professor Josh Lerner, who studies private equity.

Lerner says Cerberus got its start in the distressed-debt business, which means it bought companies that were in serious trouble and owed people a lot of money.

"This is a lot more like playing rugby than watching tennis," Lerner says. Private equity groups like Cerberus don't shy away from making major layoffs when they think they have to, he says.

"These are companies which are pretty messed up by any measure. So in some cases, it may be a matter of doing the tough, unpleasant-but-necessary cost-cutting — shutting down factories, moving production overseas," he says.

Secretive Culture

Cerberus is secretive, even by private equity standards. Founder Stephen Feinberg doesn't grant interviews, and few people even know what he looks like.

At the same time, Cerberus wants to have some public image. It has hired former Treasury Secretary John Snow as chairman. Former Vice President Dan Quayle works at the firm.

But private equity is still definitely more about big profits than big names. Lerner says these groups have very little tolerance for bureaucracy and inaction. Private equity firms will fire and replace top managers at the companies they acquire. Lerner says they'll push people off the board, "putting up a very different kind of mentality in terms of the organization, in terms of very specific goals, and pushing people day in and day out to meet those goals. It's a form of crisis management."

No New Layoffs Planned at Chrysler

In Chrysler's case, the current president of Chrysler, Tom LaSorda, will stay in place if the deal goes through. He says there are no new plans for layoffs. The union is backing the deal.

Cerberus has had successful turnarounds. In 2003, the firm bought the parent company of Alamo and National Rent-a-Car. It spent $293 million; this year, it sold off the European operations alone for $860 million — nearly three times the purchase amount.

Deals like that make Cerberus' investors happy.

"Certainly Cerberus has a super reputation in terms of performance," says Henry Hu, a corporate law professor at University of Texas.

Like many other private equity groups, Cerberus' success has attracted a wave of money from institutional investors such as pension funds.

Hu says he has been watching these groups buy bigger and bigger companies. Cerberus alone has bought large or outright controlling stakes in Alamo, Albertsons, Air Canada, Mervyns and GMAC, the huge financing arm of GM.

"You have this private equity fund that very few people out in the street have heard of," Hu says. "And yet they control, as of a few months ago, 45 companies with a quarter of a million employees."

Cerberus bought a 51 percent stake in GMAC last year. A GMAC spokeswoman said the company has been pleased with Cerberus' approach since the acquisition. She says that GMAC has not had major layoffs, and the new ownership has resulted in a better credit rating and easier access to capital for the giant lender.

Too Much Debt?

A focused private equity group coming in to a company and helping to turn it around can certainly be a good thing for its workers and the economy overall, Lerner says.

But he and others also see reasons for concern.

"To be honest, the big thing every private equity firm is terrified of right now — and they should be — is that there's going to be a burst of the credit markets," says Dan Primack, an editor with the trade journal Private Equity Week.

That means they're scared of interest rates rising sharply. Many private equity groups borrow heavily in many of the deals. That leverage increases their returns, but it could come back to hurt a lot of companies if economic conditions change. If interest rates jump, a lot of companies could have trouble paying their loans. Some could end up in bankruptcy.

Comments

 

Please keep your community civil. All comments must follow the NPR.org Community rules and terms of use, and will be moderated prior to posting. NPR reserves the right to use the comments we receive, in whole or in part, and to use the commenter's name and location, in any medium. See also the Terms of Use, Privacy Policy and Community FAQ.