NEW YORK (Reuters) - Cerberus Capital Management LP, the brash private equity firm named for a demonic dog, has been humbled in recent weeks by woes at two of its larger investments, automaker Chrysler LLC and auto and mortgage lender GMAC LLC.
Those companies' problems are merely among the most prominent in a series of bumps affecting one of the giants in private equity. Cerberus is run and founded by the reclusive Stephen Feinberg, and named for the three-headed canine that guarded the gates of the underworld in Greek mythology.
At the height of the private-equity boom, Cerberus made big returns for investors by investing in companies such as Vanguard Car Rental Group Inc, the parent of Alamo and National, which it sold to Enterprise Rent-A-Car in 2007.
Other good bets it has made have been on investments in AerCap Holdings N.V. (AER) based in the Netherlands, and Montreal-based Teleglobe International.
But it has made some contrarian bets s! uch as Chrysler, whose salvation confounded Germany's Daimler AG , causing some to wonder if Cerberus' Midas touch is fading.
The latest hits came on Friday.
GMAC and its Residential Capital LLC mortgage unit suffered large credit downgrades from Standard & Poor's. Cerberus bought a majority stake in GMAC from General Motors Corp , the largest U.S. automaker, in 2006,
Also, Scottish Re Group Ltd , a reinsurer into which Cerberus injected $300 million last May, said it would try to sell some units and cut costs to preserve capital and liquidity. The reason: its business plan does not work.
"Cerberus has among the smartest, most connected people the private equity business has ever seen," said Michael Holland, a money manager who runs Holland & Co, and is a former partner at private equity firm Blackstone Group LP . "But it shows you the enormous challenges facing private equity right now."
A Cerberus spokesman said the firm remains ! "enthusiastic" about Chrysler, which he said is on track to ex! ceed its long-term targets "on all key metrics." He also called GMAC "a resilient business platform with strong long-term growth prospects." The spokesman declined to discuss Scottish Re.
Last month, the Wall Street Journal quoted Cerberus' No. 2 executive, Mark Neporent, as saying the firm never commits more than 5 percent of its $26 billion under management to any one investment. That would limit risk.
INVESTMENTS FACE STRUGGLES
But much of the attention has focused on investments that look unwell, went sour -- or never happened.
Chrysler is a key focus, after Cerberus last August acquired an 80.1 percent stake from Daimler in a $7.4 billion transaction, taking on an estimated $18 billion of pension and health-care liabilities. It installed former Home Depot Inc chief Robert Nardelli to run the automaker.
The Wall Street Journal in December said Nardelli confirmed he told employees in a meeting that month that Chrysler, which is cutting thousand! s of jobs, was "operationally" bankrupt.
In January, Chrysler sales declined 12 percent as demand fell for pickup trucks and SUVs. On Feb 8, Chrysler President Jim Press said the automaker plans to shrink its dealer network and eliminate slow-selling models.
GMAC, which was once a profit center at GM's otherwise troubled operations, is another area of concern. Cerberus led a group that bought 51 percent of the company, which provided auto loans and mortgages.
But the U.S. housing crisis led to a $2.33 billion loss at GMAC in 2007, including a $4.35 billion loss at ResCap.
Standard & Poor's on Friday slashed GMAC's and ResCap's credit ratings to medium "junk" status, to the same levels assigned by Moody's Investors Service. S&P said ResCap might need more capital to avoid tripping its own loan covenants.
Feinberg acknowledged problems in his January 22 letter.
"GMAC is an investment about which we have significant concerns," ! he wrote. "If the credit markets continue to decline and we fi! nd ourse lves in a prolonged environment of capital market shutdown, GMAC could run into substantial difficulty."
Cerberus has stumbled before on mortgages. Last August, its Aegis Mortgage Corp unit went bankrupt, becoming one of dozens of home loan providers to exit the industry since 2006.
ACQUISITIONS FALL THROUGH
Some deals have fallen apart altogether.
Cerberus' $1 billion agreement last year to buy H&R Block Inc's Option One Mortgage Corp subprime unit as demand for risky home loans collapsed.
And in a bigger blowup, Cerberus backed out of a $4 billion agreement to buy equipment renter United Rentals Inc , a decision a Delaware court said it was within its rights to do.
"Walking away from the transaction was very difficult for us because we knew we would get criticized and there would be significant reputational fallout," Feinberg wrote. "We stuck to our guns, and the truth prevailed."
In the last six months, Blackstone, Gol! dman Sachs Group Inc private equity arm, J.C. Flowers & Co. and Kohlberg Kravis Roberts & Co are among private equity firms to also back out of mergers.
As a result, planned buyouts of such companies as student lender Sallie Mae , mortgage and vehicle fleet company PHH Corp and audio equipment maker Harman International Industries Inc never closed.
It's not just shareholders of such companies that get hurt. Investors who bought Blackstone partnership units when the firm went public last June have lost about half their investment.
But it is Cerberus that is now associated with more higher-profile, troubled acquisitions.
"You simply don't see the problems other people face because they're not as big and not as obvious, but it is throughout the industry," Holland said. "But I don't think (Cerberus is) distinguishing itself by bad choices."
(Additional reporting by Megan Davies, Editing by Maureen Bavdek)
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