For a company named after a mythical, multi-headed hound, Cerberus is definitely in the dog house with its investors. The huge private equity firm is being deserted by many of its key clients, continuing a trend of fund flight that has intensified in the last year. Several media outlets reported that 71 percent of the investors in the firm's two large funds want their capital returned. The money these clients have with Cerberus totals $5.5 billion, putting the New York-based investment manager in a tough position.
Clients are requesting that their money be moved to a newly created pool of assets that will be sold off as market conditions improve. According to The New York Times, "the loss of fee income on more than $5.5 billion in capital could prompt talented traders and investment professionals to leave for better-paying firms, one Cerberus investor said." The firm might survive the drain of funds, but would end up being a much, much smaller operation.
Cerberus attempted to make money by buying into the domestic auto business at what it perceived to be the bottom, buying control of Chrysler and assets in car parts companies. Unfortunately for Cerberus clients, Detroit's demise had only begun.
"We have been surprised by this response," Cerberus chief Stephen Feinberg and co-founder William Richter wrote in a letter delivered to clients late Thursday, according to a report in the Wall Street Journal. The Journal said Cerberus began a restructuring plan that gave investors an option to leave the fund, but hoped to persuade them to move their assets to a new fund within Cerberus. The Journal said Feinberg wrote in his letter that "investors still support Cerberus' investment strategy and its long-term performance."
Cerberus lost nearly 25 percent of its assets last year, which was not bad, given the market's performance. Apparently, however, its customers don't see it that way.
Douglas A. McIntyre is an editor at 24/7 Wall St.